Market Commentary: Week of May 2, 2022

Last Week

It is hard to imagine anybody went home for the weekend happy. The rout in both the equity markets and the bond market continues to pick up intensity. Global inflation continues to build as the supply of just about everything needed to make the world clothed, sheltered, and fed is experiencing major problems.

In the U.S., the “supply” of labor continues to constrict, causing one of the Fed’s favorite indices, the Employment Cost Index (ECI) to increase the most since its inception in 1996. Investors looked ahead with trepidation to the Fed’s upcoming FOMC. The Fed now seems to be steeling itself to do whatever it takes to recapture the inflation horse. We have seen the Fed’s shock and awe when doing “whatever it takes” to prop the economy and financial markets up in a demand crisis like March 2020 and now we get to see the complete opposite. Currently, the Fed Funds futures and OIS Swap markets are putting about a 50% chance that the Fed raises the Funds Rate by 75 basis points at next week’s meeting.

Meanwhile, in equities, led by the Mega-Cap tech stocks, the markets were simply pummeled. The highlight was Amazon’s earnings where the company that put the Mega in “Mega” reported its first loss since 2015. Many corporate earnings calls are telling a story that the day of passing price increases on to consumers with ease is coming to an end.

About the only financial asset that received consistent love was the U.S. Dollar, smashing other G7 currencies, especially the Yen. A strengthening dollar, skyrocketing costs of food, and global (save Japan) rate hikes spell disaster for emerging markets.

• S&P 500, fell 3.28% for the week. The average daily move was 1.94%.
• The NASDAQ plunged 3.93% for the week. The average daily move for the week was 2.5%.
• The 2-year Treasury yield rose 5 basis points for the week closing at 2.72% on Friday, a new year over year high. High year-over-year 2.72%, low yield .10%
• The 10-year Treasury yield rose 4 basis points for the week, closing at 2.94% Friday. Year-over-year high yield 2.94%, low yield .91%.
• The VIX Index rose 18% for the week, closing at 33.4 Friday. Year-over-year high 36.45 and low 15.07.
• The MOVE Index increased 0.2% for the week, closing at 128.4 on Friday. Year-over-year high 140.03 and low 42.53.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 4 basis points for the week closing at 84 basis points Friday, a new year-over-year high. High spread Year over year high 84 and low of 46.56.
• High Yield corporate debt (as measured by Markit CDX) widened by 26 basis points, closing at 461 basis points on Friday, a new year-over-year high. Year-over-year high 461, and low 269.
• US Dollar Index rose 1.7% for the week closing at 102.62 on Friday. On Thursday, the index closed at a new year-over-year high of 103.62. Year-over-year high 103.62 and low 89.44.
• WTI Crude increased 2.6% for the week using the June WTI Futures contract, closing at 104.69 Friday. Year-over-year 123.70, and low 47.62.
• Gold, as measured by the June 2022 futures contract declined 1.1% for the week closing at 1,911 on Friday. High price for the front contract year-over-year 2,043 and low 1,678.
• Bitcoin fell 2.7%, closing at 38,560 Friday. High price year-over-year 67,734 and low 29,865.

The Week Ahead

We come in this morning with risk markets looking shaky after last week’s pounding. Treasury yields continue to rise with the 10-year Treasury currently yielding 2.96%.

The news from all corners continues to be unpleasant. In China, the “Covid-Zero” policy continues to drag economic output to "zero," which isn’t good for anybody.

The main event this week is the Fed’s FOMC meeting which begins Tuesday and concludes with the FOMC statement and press conference. At this meeting, the Fed is going to probably do what it has never done before, raise policy rates and reduce the balance sheet at the same time. Remember not too long ago when most of the Fed, including Chairman Powell, stated that they would not address balance sheet reduction until they nearly done raising the funds rate target? It was only a few meetings ago, which should illustrate how far we’ve come in just a few months. Stay tuned!

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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