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...
In the 1990 NFC Championship Game, the New York Giants faced off against the San Francisco 49ers. Back in an era for the NFL where defensive players could do just about anything they wanted, a 275-pound freight train by the name of Leonard Marshall drove his helmet straight into the back of 49er quarterback Joe Montana. Montana could barely walk as he was helped off the field. About 10 minutes later, announcer Pat Summerall stated, “The word on Montana from the 49er sideline is, ‘Everything hurts.’” That is the best way I can describe the financial markets last week.
Equity and rates markets lurched violently trying to interpret the communication coming out of the Fed as it wrapped up its May FOMC meeting mid-week. Initially, equity and credit markets cheered when Chairman Powell seemed to take 75 basis point policy rate hikes off the table, but then, upon reflection, markets reversed course and sold off violently.
On Thursday and Friday, we had a full-on flight to quality moves as investors seem to dump everything but U.S. dollars.
Stagflation became a very popular Google search as folks born after 1970 took a crash course on that brutal economic condition. The possibility of stagflation seems to be greater and greater each week.
With regard to surging long-term rates, retail is heading for the exits on rate duration and suddenly, in all the G7 countries, the gigantic non-economic buyers (Central Banks) are stepping away. Foreign buyers are also stepping away from U.S. Treasury debt (and some actually selling) as it costs them too much to hedge currency risk (Japan being the biggest).
Meanwhile, relative value seeing real yields just a little bit positive on 10s and still negative on 5s. Not enough.
- S&P 500, fell slightly 0.2% for the week. However, the average daily move was 1.63%.
- The NASDAQ dropped 1.53% for the week. The average daily move for the week was 2.29%.
- The 2-year Treasury yield rose 2 basis points for the week. On Tuesday the note’s yield closed at 2.78%, a new year-over-year high. High year-over-year 2.78%, low yield .10%.
- The 10-year Treasury yield rose 19 basis points for the week, closing at 3.13% Friday a new year-over-year high. Year-over-year high yield 3.13%, low yield .91%.
- The VIX Index fell 10% for the week, closing at 30.19 Friday. Year-over-year high 36.45 and low 15.07.
- The MOVE Index decreased 5.4% for the week, closing at 121.42 on Friday. Year-over-year high 140.03 and low 42.53.
- 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened three basis points for the week closing at 87 basis points Friday, a new year-over-year high. High spread Year over year high 87 and low of 46.56.
- High Yield corporate debt (as measured by Markit CDX) widened by 18 basis points, closing at 479 basis points on Friday, a new year-over-year high. Year-over-year high 479, and low 269.
- US Dollar Index rose 0.7% for the week closing at 103.66 on Friday. On Thursday the index closed at a new year-over-year high of 103.75. Year-over-year high 103.75 and low 89.44.
- WTI Crude increased 4.9% for the week using the June WTI Futures contract, closing at 109.77 Friday. Year-over-year 123.70, and low 47.62.
- Gold, as measured by the June 2022 futures contract, declined 1.5% for the week closing at 1,883 on Friday. High price for the front contract year over year is 2,043 and low 1,678.
- Bitcoin fell 6.4%, closing at 36,077 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 3.13%. The news from all corners continues to be unpleasant and if these opening sentences look like last week’s, they are!
In some corners last week, there was talk of equity market capitulation, but it seems we still have a way to go. However, it does appear that “dip-buyers” are a little more hesitant. Morgan Stanley did a study of “new investors,” which I assume means the Robinhood day-traders, and concluded that this large and influential investor group has given back all the money it made in 2020-2021. Not a good technical.
This week, we get April CPI and PPI (Wednesday and Thursday respectively). The market consensus is for both readings to come off slightly. Let’s hope so because if we get upside surprises, things can get even uglier.
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.