Market Commentary: Week of May 8, 2023

Last Week

Last week was filled with action. On the monetary policy front, the Fed concluded its May FOMC meeting on Wednesday. As was expected, the Fed raised its policy rate by 25 basis points and hinted at what has been called a “Hawkish Pause.”

While the financial markets still believe this pause will turn into significant cuts later in 2023, Chairman Powell stated, yet again, that as of now the committee still believes that easing of monetary policy is still far off. This view certainly seemed justified as, while the JOLT report on Tuesday showed some signs of “easing,” the metrics are still way too high for the Fed’s liking.

On Wednesday, the Employment Cost Index report came out with a sharp increase in the cost of labor and a sharp decrease in productivity. Then, on Friday, the BLS April Non-Farm Payroll report came out stronger than expected in just about every measure. The employment picture is still very strong.

Running parallel to this all week was the growing regional banking crisis. After the bailout of First Republic, the markets looked for other weak prey and found Pac West and Western Alliance as the next on the short-selling menu. Horrible interest rate duration mismatches coupled with commercial real estate trouble spell a very bad time for much of the banking sector. The Savings & Loan crisis times two, perhaps?

• The S&P 500 fell 0.79% for the week. The average daily move was 0.89%.
• The NASDAQ ended nearly unchanged for the week. The average daily move for the week was 0.89%.
• The 2-year Treasury yield fell 8 basis points, closing at 3.92% on Friday. High year-over-year 5.07%, low yield 2.48%.
• The 10-year Treasury yield rose 2 basis points for the week, closing at 3.44% on Friday. Year-over-year high yield 4.24%, low yield 2.58%.
• The VIX Index increased 8.93% for the week, closing at 17.19 on Friday. Year-over-year high 34.45 and low 15.78.
• The MOVE Index rose 6.32% for the week, closing at 130.21 on Friday. Year-over-year high 198.71 and low 97.33.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 6 basis points closing at 81 basis points on Friday. High spread Year-over-year high 111 and low of 67.
• 5-year High Yield corporate debt (as measured by Markit CDX) spreads increased 27 basis points, closing at 493 basis points on Friday. Year-over-year high 627, and low 408.
• US Dollar Index declined 0.43% to 101.21 on Friday. Year-over-year high 114.11 and low 101.01.
• WTI Crude fell 7.09% for the week, using the June WTI Futures contract, closing at 71.34 Friday. Year-over-year high 122.11, and low 66.74.   
• Gold, as measured by the June futures contract, rose 1.3% for the week closing at 2,024 on Friday. On Thursday the commodity hit a new year-over-year high of 2,056. High price for the front contract year-over-year 2,056 and low 1,623.
• Bitcoin rose 0.58% for the week closing at 29,525 on Friday. High price year-over-year 46,312 and low 15,632.

The Week Ahead  

We come in this week with Treasury rates up, with the front end leading the way while equities are up a touch. On Friday, we had a sharp short squeeze of the battered banking sector. I believe we will see renewed selling this week as the prognosis for the regional banking sector remains grim.

The week is full of inflation data releases with the highlight being April CPI. Over the weekend, market prognosticators began to use the dreaded term “Stagflation” as a combination of tight monetary policy, a banking credit crunch, and stubbornly high inflation creates an evil brew. I believe this is certainly plausible.

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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