Market Commentary: Week of March 27, 2023

Last Week

The Fed stayed on message following their FOMC meeting on Wednesday, dot plot showed that none of the eighteen members of the FOMC saw rate cuts in 2023. In fact, at the Chairman’s press conference, Powell stated emphatically that Fed officials, “Just don’t see rate cuts this year.” The markets, however, believe otherwise as Fed Funds Futures and OIS swaps have between three to four cuts this year.

Two-year Treasury rates spent another week gyrating violently and ended up lower on the week by 8 basis points. The yield curve continued to steepen (become less inverted). Stocks rose sharply, choosing to focus on lower rates as opposed to the reasons why rates are lower: flight to quality from the banking crisis and the noisy unwinding of short front-end yield curve bets.

• The S&P 500 rose 1.4% for the week. The average daily move was 0.94%.
• The NASDAQ increased by 1.66% for the week. The average daily move for the week was 0.98%.
• The 2-year Treasury yield declined 8 basis points, closing at 3.77% on Friday. High year-over-year 5.07%, low yield 2.31%.
• The 10-year Treasury yield dropped 5 basis points for the week, closing at 3.38% on Friday. Year-over-year high yield 4.24%, low yield 2.34%.
• The VIX Index declined 14.8% for the week, closing at 21.74 Friday. Year-over-year high 36.45 and low 17.87.
• The MOVE Index declined 3.58% for the week, closing at 173.66 on Friday. Year-over-year high 198.71 and low 97.33.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 3 basis points for the week closing at 85 basis points Friday. High spread Year-over-year high of 111 and low of 64.
• High Yield corporate debt (as measured by Markit CDX) spreads declined 12 basis points, closing at 518 basis points on Friday. Year-over-year high 627 and low 362.
• US Dollar Index ended the week down 0.57% at 103.12 on Friday. Year-over-year high 114.11 and low 97.79.
• WTI Crude rose 3.48% for the week, using the May WTI Futures contract, closing at 69.26 Friday. Year-over-year high 123.70, and low 66.74.
• Gold, as measured by the April futures contract, rose 0.51% for the week closing at 1,984 on Friday. High price for the front contract year-over-year is 1,996 and the low is 1,623.
• Bitcoin increased 2.97% for the week closing at 27,618 on Friday. High price year-over-year 47,967 and low 15,632.

The Week Ahead

We come in this morning with the front end of the yield curve getting hit hard with the Two-year note up about 20 basis points. Stocks are up about 0.5%.

Over the weekend we had the news that Citizens Bank bought Silicon Valley Bank, removing that problem from the board. However, there is still great uncertainty regarding the deposit flight/duration issue for banks and credit unions. The Fed and Treasury have a lot of work to do to restore confidence, perhaps with an expansion of the FDIC insurance cap?

I believe the Fed is showing us that they can fight inflation with their monetary policy tools while backstopping depository liquidity with their various funding vehicles, both existing and yet to be created. They can get together with Treasury and create a neat program to buy billions of dollars of low coupon, extend-o-matic CMOs. Lord knows they have gotten a lot of practice over the last three decades!

The main data this week will be Consumer Confidence (data point after the SVB-banking crisis) on Tuesday and then the Fed’s preferred inflation rate measure, PCE on 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 the 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 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 & Telecommunications. 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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