As we have been saying for several of our previous quarterly economic updates, as inflation goes, so goes the U.S. economy. A quick and rapid descent of inflation will take pressure off the Fed to con...
Capital Markets
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4 min read
Last Week
Equity markets decided to look at the glass as half full, last week—keying in on initial reports that the Omicron Covid variant might be very contagious but not as lethal as Delta—and got their rally on. The tech-heavy NASDAQ managed to defy the narrative that it trades with positive interest rate duration, heading up 3.6% in the face of rising rates. Corporate debt “rebounded” pretty strongly as well.
Meanwhile, in the rates markets, I swear I could hear George Jetson screaming every day, “Jane, stop this crazy thing!” The Treasury yield curve managed over the course of the week to bull-flatten, bull-steepen, bear-flatten, and bear-steepen, before closing the week with the bear-steepener. Inflation breakevens (yield differential between nominal and TIPs) gyrated all week as well. Insanity. The big data event for the week was November CPI. The year-over-year and month-over-month numbers came in mostly as expected, red-hot.
- S&P 500 jumped 3.8% hitting a new all-time high Friday. The average daily move was 1.04%.
- The NASDAQ surged 3.6%. The average daily move for the week was 1.41%.
- The 2-year Treasury yield rose 7 basis points for the week closing .66% on Friday. Year-to-date high yield .64%, low yield .10%.
- The 10-year Treasury yield rose 14 basis points for the week, closing at 1.49% Friday. Year-to-date high yield 1.74%, low yield .91%.
- The VIX Index crashed 39% for the week, closing at 18.69 Friday. Year-to-date high 37.21 and low 15.07.
- The MOVE Index fell 6% for the week, closing at 74.36 on Friday. Year-to-date high 89.45 and low 42.53.
- Five-year Investment Grade Corporates (as measured by Markit CDX) tightened basis points for the week closing at 53 basis points Friday. High spread year-to-date 58.07 and low of 46.56.
- High Yield corporate debt (as measured by Markit CDX) tightened 25 basis points, closing at 305 basis points on Friday, a new year-to-date high. High spread year-to-date 330, low 269.
- U.S. Dollar Index closed the week nearly unchanged at 96.10 on Friday. High reading year-to-date 96.88 low 89.44.
- WTI Crude rose 8% for the week using the January WTI Futures contract, closing at 71.67 Friday. High price for the front contract year-to-date 83.76, low 47.62.
- Gold, as measured by the February 2022 futures contract, was unchanged for the week closing at 1,785 on Friday. High price for the front contract year-to-date 1,954, low 1,678.
- Bitcoin fell 11%, closing at 47,952 Friday. High price year-to-date 67,734, low 29,865.
The Week Ahead
We come in with equities up slightly and the Treasury curve flattening a bit. This will be an action-packed week with November PPI on Tuesday and then the big FOMC statement and Powell presser on Wednesday. It is expected by many that Chairman Powell will throw himself at the mercy of the court, apologize for using the word “transitory” and perhaps announce that the QE taper pace will quicken, and raise policy rates sooner than previously expected. On the other hand, maybe not! Buckle in.
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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