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
We started last week in a panic over Chinese real estate conglomerate Evergrande’s impending doom and ended the week back in our happy place as Wednesday’s FOMC meeting pronouncement and press conference soothed nerves. In addition, the Chinese government took some steps to keep Evergrande from a “Lehman-Style Event”. Stocks plunged Monday and Treasury notes caught a flight to quality bid. By Friday, stocks had recovered nearly all their losses while Treasury yields moved sharply higher. Go figure.
The FOMC announcement was relatively dovish as the Fed acknowledged the recent improvement in the economy since the last meeting, but issued a caveat that the rise in COVID-19 cases has slowed the recovery. The statement and subsequent press conference gave a measured response toward the beginning of a quantitative easing taper. In short, the Fed will be data-dependent with their tapering schedule. With regard to the policy rate, the “Dot Plot” showed more FOMC members coalescing around one additional rate hike in 2022 (perhaps two as opposed to one), and two to three more in 2023. This caused a rather sharp rise in Treasury yields at week’s end. Personally, in times like these, I think looking at dot plots two years into the future is a fool’s errand.
- The S&P 500 rose .50%. The average daily move was 0.82%.
- The NASDAQ was nearly unchanged for the week. The average daily move for the week was 0.9%.
- The two-year Treasury yield rose five basis points for the week closing .27% on Friday. Year-to-date high yield .27%, low yield .10%.
- The 10-year Treasury yield increased nine basis points for the week, closing at 1.45% Friday. Year-to-date high yield 1.74%, low yield .91%.
- The VIX Index was dropped 15% for the week, closing at 17.75 Friday. Year-to-date high 37.21 and low 15.07.
- The MOVE rose 4% for the week, closing at 58.46 on Friday. Year-to-date high 75.66, and low 42.53.
- Five-year Investment Grade Corporates (as measured by Markit CDX) widened four basis points for the week closing at 51 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 two basis points, closing at 275 basis points on Friday. High spread year-to-date 319, low 269.
- US Dollar Index strengthened 0.14% for the week, closing at 93.327 on Friday. High reading Year-to-date 93.57, low 89.44.
- WTI Crude advanced 2.9% for the week using the November WTI Futures contract, closing at 73.98 Friday. High price for the front contract year-to-date 75.25, low 47.62.
- Gold, as measured by the December 2021 futures contract, was unchanged for the week closing at 1,751 on Friday. High price for the front contract year-to-date 1,954, low 1,678.
- Bitcoin fell 8.5% for the week, closing at 42,982 Friday. High price year-to-date 63,410, low 29,865.
The Week Ahead
We come in this morning with global equities mixed and Treasury yields up sharply. The curve steepening sell-off in Treasuries continues from last week. So far, the equity markets remain unperturbed. That may not last too much longer if bond yields continue to rise.
Last week, yields broke out of their tight range as the piercing of 1.38% on 10s set up the move to the mid-1.40s, where we find ourselves now. This week is heavy with economic data ranging from durable goods spending to home sales, Core PCE, personal spending, and consumer and business sentiment. Hold on tight because it may be a wild week.
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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