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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5 min read
Last Week
Yet another wild one, last week. The week started with further angst over the new COVID-19 variant, Omicron. While equities rallied Monday after the steep selloff on Black Friday, you could feel that the market was spooked and ready to sell-off.
On Tuesday, Fed Chairman Powell joined Treasury Secretary Yellen on Capitol Hill. The Chairman stated that it was time to retire the word transitory from the inflation outlook and promised to be aggressive in fighting inflation by speeding up the QE taper if needed. Since the Fed has promised not to begin raising policy rates until the taper has ended, the odds of earlier than expected Fed tightening began to be priced into the Treasury yield curve. Moreover, the markets took the Chairman’s words to mean inflation would be slain inside of about two years, thus triggering a tremendous flattening of the yield curve.
The spread between two-year and 10-year treasuries flattened some 16 basis points while inflation breakevens collapsed. The five-year breakeven fell 20 basis points. Meanwhile, risk markets went risk-off, unnerved by the specter of a more hawkish Fed.
On Friday, we received a confusing employment report where a big miss on payroll adds was offset a bit by an increase in the labor force participation rate, which in turn caused the U3 unemployment rate to fall further than expected. By mid-day Friday, treasuries caught a rather crazy bid, especially in the long end, leaving most scratching their heads by day's end. The price action smelled of capitulation on some big trades gone awry.
- Last week the S&P 500 dropped 1.2%. The average daily move was 1.33%.
- The NASDAQ fell 2.6%. The average daily move for the week was 1.6%.
- The 2-year Treasury yield rose 9 basis points for the week closing .59% on Friday. Year-to-date high yield .64%, low yield .10%
- The 10-year Treasury yield fell 13 basis points for the week, closing at 1.35% Friday. Year-to-date high yield 1.74%, low yield .91%.
- The VIX Index rose 7% for the week, closing at 30.67 Friday. Year-to-date high 37.21 and low 15.07.
- The MOVE Index increased 12% for the week, closing at 79.14 on Friday. Year-to-date high 89.45 and low 42.53.
- Five-year Investment Grade Corporates (as measured by Markit CDX) widened 1 basis point for the week closing at 58 basis points Friday. High spread Year-to-date 58.07 and low of 46.56.
- High Yield corporate debt (as measured by Markit CDX) widened 3 basis points, closing at 330 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 96.12 on Friday. High reading Year-to-date 96.88 low 89.44.
- WTI Crude fell 3 for the week using the January WTI Futures contract, closing at 66.26 Friday. High price for the front contract year to date 83.76, low 47.62.
- Gold, as measured by the February 2022 futures contract declined .20% 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 0.7%, closing at 53,655 Friday. High price year-to-date 67,734, low 29,865.
The Week Ahead
We come in this morning with a bit of reversal from Friday’s carnage (much like how we started last week). S&P futures are up about .40% and Treasury yields are up three to four basis points (with the 10-year point of the curve leading the way). However, risk markets have a bad feel to them, and the Treasury curve may just be taking a pause before flattening further. The flattener appears to be the pain trade, so that is probably what is going to happen. We have a relatively quiet economic calendar this week at least until Friday, when we get November CPI.
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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