Market Commentary: Week of September 19, 2022

Last Week

It was a “Nowhere to Hide” week last week, as stocks, corporate credit, emerging markets, and precious metals were blasted while Treasury yields exploded higher. The big news came on Tuesday as the Bureau of Labor Statistics released its CPI reading for August.

Many were betting that inflation would peak over the previous two months and start cooling in August. It didn’t. While the headline number went from 8.5% year-over-year to 8.3%, the CPI Less Food and Energy increased 0.6% for the month (0.3% was the expected number) and increased 6.3% year-over-year (6.1% was expected there). The price increases were broad, with shelter costs leading the way. Upon the release, the S&P 500 and the NASDAQ Composite fell 4.3% and 5.16% respectively, while Treasury yields jumped higher, led by the 2-year Treasury note. Prior to the number’s release, the yield on the 2-year note was 3.50%, by days end Tuesday it was 3.76%. 

Longer-term rates were also hit hard. The Freddie Mac weekly Primary Mortgage Market Survey (PMMS) printed at 6.02%, the highest since September 2008. Housing is already in a recession and in normal times, we might be able to look at the cooling of this vital sector and be a bit optimistic about the inflation fight. Unfortunately, these are not normal times. 

• The S&P 500 dropped 4.8% for the week. The average daily move was 1.51%.  
• The NASDAQ plunged 5.5% for the week. The average daily move for the week was 1.90%. 
• The 2-year Treasury yield sprang up 31 basis points closing at 3.87% on Friday, a new year-over-year high. High year over year 3.87%, low yield 0.20%.
• The 10-year Treasury yield rose 14 basis points for the week, closing at 3.45% on Friday. Year over year high yield 3.47%, low yield 1.24%.
• The VIX Index jumped 15% for the week, closing at 26.3 Friday. Year over year high of 36.45 and a low of 15.01.
• The MOVE Index rose 2.8% for the week, closing at 124.95 on Friday. Year over year high 156.16 and low 51.73.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 8 basis points for the week closing at 89 basis points Friday. High spread Year over year high 102 and low of 46.  
• High Yield corporate debt (as measured by Markit CDX) widened by 58 basis points, closing at 528 basis points on Friday. Year over year high of 588, and a low of 273. 
• US Dollar Index rose 0.7% for the week closing at 109.76 on Friday. Year over year high at 110.21 and low at 92.54.    
• WTI Crude fell 0.7% using the October WTI Futures contract, closing at 85.11 Friday. Year over year 123.70, and a low of 65.57.   
• Gold, as measured by the December 2022 futures contract, dropped 2.6% for the week closing at 1,683 on Friday. On Thursday, gold set a new year-over-year low, 1,677. The high price for the front contract year over year is 2,043 and the low is 1,677.
• Bitcoin fell 7.3%, closing at 19,751 on Friday. High price year over year 67,734 and low 17,785 

The Week Ahead

We came in this morning where we left off last week, with nowhere to hide. The 2-year note has breached 3.90% convincingly, while 10-year yields over 3.5%, the highest since 2011. Looking at Fed Fund futures and OIS swaps, 75 basis points is fully priced in for Wednesday’s FOMC, while the probability of 100 basis points has fallen some. However, another 75 basis points for the November 1-2 FOMC is fully priced in. Stocks are also getting hit hard with futures off about 1%.

The big event this week of course is the FOMC statement and press conference on Wednesday. As previously noted, a 75-basis point hike is fully priced in for the meeting and a funds rate of 4.5% (currently the upper band is 2.5%) is priced in for March 2023. I expect Chairman Powell to stay on message, the Fed will “keep at it” until the job is done. The combination of inflation, equity market losses, and home price depreciation (albeit depreciation from historically high levels) should start doing some of the Fed’s work for it. However, if they take the foot off the pedal too soon, it will be all for naught. Let’s see what happens Wednesday.

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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