Volatility was on full display this week as rates tested new cycle highs after the Trump election victory. On Thursday, the FOMC rate decision was announced calling for a 25-basis point cut followed b...
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Last Week
Equities were mixed last week as earnings season got into its full swing. The red hot NASDQ took a breather as bell-weather Netflix earnings disappointed. The index is still up 34% year to date and while the Street is mixed on whether the rally can continue, I believe the “animal spirits” of the fear of missing out are still front and center. The fact that this rally has taken place with risk-free alternatives yielding well over 5% is impressive. In the same vein, corporate bond and loan spreads continued to tighten. In rates, the Treasury yield curve flattened another 7 basis points, 2s-10s. Retail Sales continued to post up strong numbers while Jobless Claims pointed to a continued sturdy labor market. The Fed was in its quiet period in front of the July FOMC meeting.
- The S&P 500 rose 0.68% for the week. The average daily move was 0.41%.
- The NASDQ declined 0.58% for the week. The average daily move for the week was 0.80%.
- The 2-year Treasury yield increased 7 basis points, closing at 4.84% on Friday. High year-over-year 5.07%, low yield 2.87%.
- The 10-year Treasury yield was flat for the week, closing at 3.83% on Friday. Year-over-year high yield 4.24%, low yield 2.58%.
- The VIX Index advanced 1.95% for the week, closing at 13.60 on Friday. Year-over-year high 34.45 and low 12.91.
- The MOVE Index declined 5.17% for the week, closing at 106.66 on Friday. Year-over-year high 198.71 and low 97.33.
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 2 basis points, closing at 65 basis points on Friday. High spread Year-over-year high 111 and low of 64.
- 5-year High Yield corporate debt (as measured by Markit CDX) spreads tightened 10 basis points, closing at 420 basis points on Friday. Year-over-year high 627, and low 408.
- US Dollar Index increased 1.16% closing at 101.07 on Friday. Year-over-year high 114.11 and low 99.77.
- WTI Crude increased 2.32% for the week, using the September WTI Futures contract, closing at 77.07 on Friday. Year-over-year high 104.22, and low 66.74.
- Gold, as measured by the August futures contract, rose 0.15% for the week, closing at 1,967 on Friday. High price for the front contract year-over-year 2,056 and low 1,624.
- Bitcoin declined 0.96% for the week closing at 29,884 on Friday. High price year-over-year 31,386 and low 15,632.
The Week Ahead
We come in this morning with stocks up small and Treasury yields down a few basis points. It’s FOMC week! After the June “Hawkish Pause” many are calling for a “Dovish Hike” which will in turn take the September meeting off the table for another hike. I think that view is premature and I don’t think it serves the Fed’s interests to come out of the July meeting this Wednesday with that view dominating the market. Chairman Powell will bring the pain again at the presser on Wednesday afternoon. Also, this week we get the Bank of Japan Thursday night. It is anticipated that the BOJ will ramp up inflation expectations for the remainder of 2023 and into 2024. The market seems to have forgotten about the BOJ’s massive Yield Curve Control operation. Currently, the BOJ has set a yield cap of 50 basis points on 10-year Japanese Government Bonds (JGBs). At some point, the BOJ will have to begin unraveling this massive program and that could put extreme pressure upward on long dated sovereign yields. This week we also get Employment Cost Index for June as well as Fed favorite June PCE Friday.
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.Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
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