Market Commentary: Week of July 11, 2022

Last Week

High anxiety ruled the financial markets last week. For treasury yields, the 2-year note did its best impression of a ping-pong ball surging 27 basis points to get back to well over 3% after crashing down into the 2.80s the week prior. Equities rebounded from the previous week’s thrashing, but there does not seem to be too much bullish conviction. Corporate spreads also tightened but the trade flow was similarly cautious. The big economic news items last week were Wednesday’s release of the June FOMC minutes, and the June employment figures. The minutes underscored the Fed’s resolve to not repeat the 1970s and curtail tightening upon the first real sign of an economic slowdown. In the 1970s, the Fed abandoned its inflation fight multiple times to respond to economic weakness and the net result was further embedding of the high inflation psyche that ended up needing Paul Volcker. Friday’s June employment numbers showed no real let up in the tightness of the labor market, another sign to the Fed that they will have to stay aggressive. This realization caused the USD to surge for yet another week. Parity with the Euro seems all but certain now and the Japanese Yen continues to weaken to levels not seen since 1998. The strength of the USD and global recession fears took most commodities to the woodshed.

• The S&P 500 rose 1.9% for the week. The average daily move was .53%.
• The NASDQ increased 4.57% for the week. The average daily move for the week was 1.1%.
• The 2-year Treasury yield rebounded 27 basis points closing at 3.11% on Friday. High year-over-year 3.43%, low yield .10%.
• The 10-year Treasury yield rose 20 basis points for the week, closing at 3.08% on Friday. Year-over-year high yield 3.47%, low yield .91%.
• The VIX Index fell 8% for the week, closing at 24.64 Friday. Year-over-year high 36.45 and low 15.01.
• The MOVE Index rose .8% for the week, closing at 145.25 on Friday. On Monday, the index hit a new year-over-year high of 156.16. Year-over-year high 156.16 and low 51.73.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads narrowed 11 basis points for the week closing at 90 basis points Friday. High spread Year-over-year high 102 and low of 46.56.
• High Yield corporate debt (as measured by Markit CDX) tightened 60 basis points, closing at 517 basis points on Friday. Year-over-year high 588, and low 269.
• US Dollar Index continued to surge, up 1.8%% for the week closing at 107.01 on Friday, a new year-over-year high. Year-over-year high 107.01 and low 91.86.
• WTI Crude fell 3.4% using the August WTI Futures contract, closing at 104.79 Friday. Year-over-year 123.70, and low 47.62.
• Gold, as measured by the August 2022 futures contract fell 3.3% for the week closing at 1,742 on Friday. High price for the front contract year-over-year 2,043 and low 1,729.
• Bitcoin rebounded 12.6%, closing at 21,846 Friday. High price year-over-year 67,734 and low 17,785.

The Week Ahead

We come in this morning with equities down across most major market sectors and Treasury yields down a fair amount. Over the weekend there were numerous articles, including one from the latest “Fed Whisperer” Nick Timiraos of the Wall Street Journal, reminding us of the central bank “stop and go” mistakes of the 1970s and stating (correctly in my opinion) that there are lessons learned to this Fed. If you think the Fed will reverse course and start easing in 2023 you may be in for a very rude awakening. Earning season kicks off this week and everyone seems to be really nervous to see how inflation impacted second quarter earnings as well as how it will affect future projections. On Wednesday we get June CPI. Right now, market economists think that year-over-year core will slightly decline from last month’s 6% shocker. My thoughts are limited upside and lots of downside if the number is either much lower or much higher from projections. Tough trade.

Definitions

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

• The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.
• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
• The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.
• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.
• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.
• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.
• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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