Last week was another week of violent mood swings in the markets. The prior week’s inflation gasp driven by the 9.1% CPI print caused the front end of the yield curve to spike higher as the possibility of a 100-basis point hike by the Federal Reserve’s July 27 FOMC meeting was given considerable weight. However, this week the market chose to focus on the rapidly weakening global economy, taking the possibility of 100 basis point back out. By the end of the week, Fed Fund futures and OIS swaps are putting roughly a 9% chance of a 100-basis point move and the 2-year Treasury note’s yield dropped below three percent.
Moreover, looking out into 2023, the futures and OIS curves have begun pricing in the Fed reversing course and cutting rates. Personally, I think the market is misreading the Fed’s resolve. We have just begun to see weak economic data that on a relative basis is mildly recessionary. The Fed is not going to make the mistake of the 1970’s and stop/start policy and risk putting the economy into a decade long period of high inflation.
Meanwhile, equities had a monster rally on Tuesday as Wall Street analysts began to speak of investor capitulation. However, as the week went on, economic data and corporate earnings painted enough of a recession picture for stocks and corporate credit to sell off sharply by Friday.
- The S&P 500 rose 2.6% for the week. The average daily move was 1.2%.
- The NASDQ rose 3.3% for the week. The average daily move for the week was 1.8%.
- The 2-year Treasury yield dropped basis points closing at 2.97% on Friday. High year over year 3.43%, low yield .10%
- The 10-year Treasury yield dropped 17 basis points for the week, closing at 2.75% on Friday. Year over year high yield 3.47%, low yield .91%
- The VIX Index fell 5% for the week, closing at 23.03 Friday. Year over year high 36.45 and low 15.01
- The MOVE Index dropped 5% for the week, closing at 123.7 on Friday. Year over year high 156.16 and low 51.73
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 5 basis points for the week closing at 85 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 30 basis points, closing at 500 basis points on Friday. Year over year high 588, and low 269
- US Dollar Index fell 1.2% for the week closing at 106.73 on Friday. Year over year high 108.54 and low 91.86
- WTI Crude was flat for the week using the September WTI Futures contract, closing at 94.70 Friday. Year over year 123.70, and low 62.32
- Gold, as measured by the August 2022 futures contract rose 1.4% for the week closing at 1,727 on Friday. High price for the front contract year over year 2,043 and low 1,704
- Bitcoin rebounded 8%, closing at 22,605 Friday. High price year over year 67,734 and low 17,785
The Week Ahead
We came in this morning with stocks relatively flat and Treasury yields higher after last week’s sharp decline. It’s Fed FOMC week! The big event starts tomorrow and culminates on Wednesday with Chairman Powell’s press conference at 2:30 p.m.
Currently Fed Funds futures and OIS swaps have a 100% chance of a 75-basis point hike and about an 11% chance of 100 basis points. As I said before, I don’t think the Fed will make the mistake that was made in the 70s, stop and go tightening, and even some loosening along the way. While those Feds fiddled, inflation became more and more entrenched and eventually we needed Paul Volcker to carpet bomb the economy to really whip inflation.
Therefore, even if the Fed only goes 75 basis points, at the press conference, I think we will see some fire and brimstone from the Chairman. The front end of the yield curve is currently set up for the Fed to begin easing in the second half of 2023. Corporate earnings releases roll on with this week bringing the mega-tech results and forecasts. It could be a very messy week.
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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