On Wednesday, one portion of the Federal Reserve’s Federal Open Market Committee (FOMC) statement immediately caught my eye, a very significant change from the May FOMC statement. In May, the statemen...
Equities and credit sensitive bonds jumped sharply last week leaving investors wondering over the long weekend if the worst is over or whether it is a chance to exit at higher levels. The “good” news over the week was that both the U.S. and global economy is weakening faster than expectations, which in turn could allow central bankers to curtail monetary policy tightening sooner that previously thought. Personally, I believe that last week’s surge in credit has all the fingerprints of a bear market rally, a type of rally that viciously rips the face off of shorts before retreating to its cave. It is wishful thinking to believe that monetary policy might be less hawkish when we have barely even gotten started. Inflation is what is taking a bite out of economic performance which should actually mean that if anything, the Fed should increase their inflation fighting resolve. Most Americans are getting their first, real look at how insidious and corrosive inflation is and have just begun to react. As we move into the summer months, the reaction will only sharpen as rising prices for just about everything either plateau at abnormally high levels or continue to climb. The $6 gallon of gasoline is a very real prospect very soon. As the economy begins to take the hits it gives the Fed a preview of what can happen and if they don’t inflict pain now economic growth can be crippled for a long time. The Fed is going to do whatever it takes in my opinion so I would fade the latest moves in bond yields and credit risk instruments.
- The S&P 500 surged higher by 6.59% for the week. The average daily move was 1.61%.
- The NASDQ jumped 6.84% for the week. The average daily move for the week was 1.92%.
- The 2-year Treasury yield, fell 10 basis points closing at 2.48%. High year-over-year 2.78%, low yield .10%.
- The 10-year Treasury yield dropped 4 basis points for the week, closing at 2.74%. Year-over-year high yield 3.13%, low yield .91%.
- The VIX Index fell 13% for the week, closing at 25.72 Friday. Year-over-year high 36.45 and low 15.07.
- The MOVE Index decreased 11% for the week, closing at 98.48 on Friday. Year-over-year high 140.03 and low 42.53.
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads tightened 12 basis points for the week closing at 80 basis points Friday. High spread year-over-year high 91 and low of 46.56.
- High Yield corporate debt (as measured by Markit CDX) tightened 66 basis points, closing at 457 basis points on Friday. Year-over-year high 523, and low 269.
- US Dollar Index fell 1.4% for the week closing at 101.69 on Friday. Year-over-year high 104.85 and low 89.44.
- WTI Crude increased 4.3% for the week using the July WTI Futures contract, closing at 115.07 Friday. Year-over-year 123.70, and low 47.62.
- Gold, as measured by the August 2022 futures contract, rose .5% for the week closing at 1,857 on Friday. High price for the front contract year-over-year 2,043 and low 1,678.
- Bitcoin dropped 1.3%, closing at 28,729 Friday. High price year-over-year 67,734 and low 28,402.
The Week Ahead
We come in this morning with treasury yields sharply higher and equities under pressure. Apparently, inflation fears are back, and I wonder where they went in the first place. The Eurozone just posted all-time highs on consumer inflation and bonds are getting smashed. The 10-year German Bund is now safely over 1% and unless the ECB delivers some shock and awe soon, European government debt yields have a very long way to go, in the wrong direction. At least we may not have to discuss the perversion of negative nominal interest rates for a decade or two! We have a big data week, culminating in Friday’s BLS payroll report for May.
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.
Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.
John Tuohy is CEO of SWBC Investment Services, LLC, a Broker/Dealer and SWBC Investment Company, an SEC Registered Investment Advisor (RIA). In his role, John is responsible for identifying, developing, and executing the division's strategic plan and all business development, sales, and marketing activities.