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Weekly Market Recap

Weekly Recap

Markets were down sharply again last week as the Fed ratcheted up its efforts to tame inflation. The FOMC started by raising overnight interest rates by 75bp, a move that had already been priced into fixed income markets following the release of higher-than-expected CPI data the week before.

But as is typically the case with Fed policy, the ensuing comments from Chairman Jerome Powell proved more consequential than the actual rate decision. In a speech that echoed ECB Chairman Mario Draghi’s famous “whatever it takes” moment from 2012 (albeit with a different policy goal in mind), Powell noted that the Fed remains “strongly committed” to bringing inflation down, and that it has “the tools we need and the resolve it will take”. Subsequently, the Fed’s annual report to Congress noted that the FOMC’s commitment to restoring price stability was “unconditional.”

Market participants interpreted these comments to mean that the Fed will continue to aggressively raise rates and will ultimately be willing to cause a recession if necessary to bring inflation under control. Stocks were sharply lower as a result, with the S&P 500 recording its second consecutive week of a greater than 5% decline.

Bond yields finished higher across the curve as investors priced in ~2 additional 25bp Fed rate hikes this year. Credit spreads widened, magnifying the price declines in municipal and corporate bonds.

Most commodity prices finished lower on the week, including oil which shed over $10 to finish under $110/barrel. Mercifully, gasoline prices finally stopped rising across most of the country, with the national average falling by 1c to $4.99/gallon.

Chart of the Week – FOMC “Dot Plot”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds
from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 16x is above the long-term historical average,
and valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices
in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of fourteen 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and
rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Weekly Recap

Markets fell sharply last week, particularly after consumer price inflation (CPI) data came in above consensus across the board:

  • Headline CPI was +1.0% sequentially in May (consensus was +0.6%)
  • Headline CPI reached +8.6% y/y (consensus +8.3%)
  • Core (ex food and energy) CPI was +0.6% sequentially in May (consensus +0.5%)
  • Core (ex food and energy) CPI reached +6.0% y/y (consensus +5.9%)

Stocks finished lower across the board, with technology, financials, and real estate feeling the worst of the selling pressure. Energy stocks were the most resilient once again, thanks to rising oil prices as US crude benchmark West Texas Intermediate closed above $120/barrel for the first time since early March.

The real action last week was in bond markets, particularly in the front end of the yield curve as investors significantly ratcheted up their expectations for additional rate hikes from the Fed. By Friday’s close 2y yields had risen 41bp and Fed Funds Futures markets were pricing nearly 10 additional 25bp rate hikes (13 total) by the end of 2022, implying a target rate floor of 3.25% in December.

Other economic news was not especially encouraging last week. Initial jobless claims ticked higher, mortgage applications fell, and the University of Michigan’s Consumer Sentiment gauge fell to its lowest level in history.

Finally, gasoline prices at the pump rose sharply again last week, with the US national average for unleaded gas finishing at exactly $5.00/gallon.

Chart of the Week – Headline and Core CPI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of thirteen 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.25% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Market Recap

Most markets were soft last week as an uptick in inflation concerns pushed bond yields higher and equity prices lower. Rates moved higher following Tuesday’s JOLTS report that showed 11.4 million open jobs in the US. Friday’s monthly jobs report from the BLS was also a factor, showing +390k new nonfarm payrolls versus consensus expectations of +318k. See the Chart of the Week for a time series.

By Friday’s close, rates had moved higher across the curve, with 2y yields rising 17bp, 10y up 19bp, and 30y finishing +13bp. Meanwhile, credit spreads tightened despite the move lower in equities, cushioning the price declines in corporate bonds.

Equity markets finished lower, but in a somewhat unusual way relative to much of the year. Defensive sectors underperformed, while tech and most cyclicals (ex financials) outperformed the broader market. The energy sector was once again the outlier, finishing higher on the back of rising oil prices.

Regarding oil, OPEC+ agreed to increase production by 648k barrels per day for July and August, but the market judged this measure to be insufficient to fully bridge the growing global supply deficit, sending prices higher. Gasoline prices at the pump also rose to a fresh all-time high in the US at $4.82/gallon.

In other economic news, home price appreciation remained very strong in March according to the FHFA and Case-Shiller indices, while the Conference Board’s Consumer Confidence Index declined slightly to a still-healthy print of 106.4, exceeding the consensus estimate of 103.6.

Chart of the Week – Monthly Change in Nonfarm Payrolls

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17.5x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.75% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Weekly Recap

Last week featured a very strong rebound in US equities, particularly after the release of the May FOMC meeting minutes on Wednesday and encouraging PCE data on Friday. Prior to Wednesday’s 2:00 pm release of the FOMC minutes, the S&P 500 had risen roughly 1.4% on the week. It then rose another 5.1% in the 2+ trading days thru Friday’s close. Investors took comfort that rate hikes in excess of 50bp were probably off the table for June & July, and were also encouraged by Friday’s release which showed a 2nd straight monthly decline in the core PCE deflator.

All sectors in the S&P 500 finished the week higher, led by consumer discretionary stocks (+9.3% at the sector level) that had more or less been left for dead just a week earlier. Energy stocks (+8.2%) had another strong week as oil and natural gas prices rose, while tech and financials also produced returns in excess of 8% on the week. Defensives lagged the rally after leading the way for much of the year.

Rates continued to stabilize as Treasury yields fell slightly across the curve. Credit spreads compressed, pushing corporate and muni bond prices higher. Economic news was mixed last week:

  • S&P Global’s US manufacturing and services PMIs missed expectations
  • New home sales fell rapidly in April data released last week
  • Durable and capital goods orders also missed expectations
  • Initial jobless claims ticked lower while continuing claims rose
  • Personal spending (+0.9%) rose more than incomes (+0.4%) in April
  • April PCE was in line with consensus: Core = +0.3%; Headline = +0.2%
Chart of the Week – Core PCE Deflator (y/y change)

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Last week was another challenging period for US equities as investors repriced the risk of a near-to-medium term US recession. Incoming macroeconomic data was mixed, but generally supported the notion that recession risk is rising:

  • Empire Manufacturing turned sharply negative in May (-11.6)
  • NAHB Housing Market Index fell to 69, the lowest since June 2020
  • Housing Starts (1.7m) and Residential Building Permits (1.8M) fell sequentially
  • Philly Fed Business Outlook (2.6) fell to its lowest level since May 2020
  • Initial jobless claims (218k) hit a 4-month high
  • The Conference Board’s Leading Index (LEI) fell sequentially by 0.3% in April

Consumer stocks were especially hard hit last week after disappointing results from retail bellwethers Walmart and Target. A few defensive sectors managed to eke out positive returns, including healthcare, utilities, and energy (the “special 2022 defensive”).

Rates fell in the belly and long end of the curve, sending most Treasuries higher. Credit spreads widened considerably though, resulting in muted price gains for investment grade corporates and steep losses in high yield bonds.

Meanwhile the US dollar weakened slightly after reaching multi-decade highs during the prior week, bucking the “flight-to-safety” trend in most asset classes. And finally, energy prices rose anew, with oil adding nearly $3/barrel, natural gas rising above $8/MMBtu, and unleaded gasoline prices reaching yet another all-time high in the US.

Chart of the Week – Conference Board Leading Economic Index (y/y change)

Economy & Earnings – Annualized US GDP growth fell to -1.4% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.7%.

Equity Valuation – The S&P 500’s fwd P/E of 16.4x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates – Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten or eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% – 2.75% by year end.

Inflation – Inflation is currently high on a y/y basis as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap


Last week was a challenging one for stocks as incoming macro data pointed to continued inflationary pressures and an erosion of consumer confidence. CPI data was released on Wednesday and showed core inflation accelerating to +0.6% sequentially in April, after it had slowed to just +0.3% m/m in March. On a y/y basis, headline CPI was +8.3% while core CPI was +6.2%, both of which were 20bp higher than consensus. A day later, headline producer price inflation (PPI) also exceeded expectations at +11.0% y/y. And on Friday, the University of Michigan’s Consumer Sentiment gauge reversed its gains from April and fell to 59.1 in the preliminary May reading, the lowest print in more than 10 years.

This combination of macro data produced a classic “flight to safety” response from investors. Stocks were down as the equity risk premium expanded. Defensive sectors provided some protection, while cyclicals and growth sectors underperformed. High quality bonds rallied as Treasury yields fell, but credit spreads widened. And the US dollar rallied to a two-decade high against a trade-weighted basket of foreign currencies.

Meanwhile, oil prices remain stubbornly high thanks to the ongoing war in Ukraine, resulting in all-time high gasoline prices at the pump for American consumers. Mortgage rates also rose slightly last week, creating another headwind for American consumers looking to buy their first home or relocate.

Chart of the Week – Headline and Core CPI

*Economy & Earnings – Annualized US GDP growth fell to -1.4% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.7%.

*Equity Valuation – The S&P 500’s fwd P/E of 16.6x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

*Interest Rates – Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten or eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% – 2.75% by year end.

*Inflation – Inflation is currently high on a y/y basis as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Stocks and bonds moved lower last week in choppy trading after the Fed enacted the first 50bp rate hike in more than 20 years (May of 2000 was the last one). The market’s initial reaction was positive, as investors expressed relief that a 75bp hike appeared to be off the table for the June meeting, and that the initial pace of Fed balance sheet reduction (aka Quantitative Tightening, or “QT”) would be somewhat slower than feared. Most major US stock indices rallied ~3% in afternoon trading on Wednesday following the Fed’s announcement and accompanying press conference.

The optimism was short-lived, however. An hour before equity markets opened on Thursday, the Bureau of Labor Statistics released a disappointing productivity number and higher-than-expected unit labor cost data for Q1, sending bond yields sharply higher as investors worried anew about inflation. Stocks had nowhere to go but lower, and the selloff quickly became self-reinforcing.

In the end, most major US benchmarks were down modestly on the week. As has been the case throughout much of 2022, energy stocks and some defensives (especially utilities) outperformed, while most growth/tech sectors lagged. Small caps and international benchmarks also underperformed, as they have for much of the year.

Finally, the carnage continues in bond markets, as rising yields pushed prices lower once again last week. Average yields on US investment grade corporates are now at 12-year highs, as are rates on 30-year fixed rate mortgages.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
Chart of the Week – US Fed Funds Target Rate (Lower Bound)
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Weekly Market Recap

Risk assets struggled last week in the face of numerous challenges, including high inflation, slowing economic growth, and the war in Ukraine. Inflation remains front and center on most investors’ minds, with personal incomes for US consumers rising 0.5% in March (+6.2% annualized) while February’s figure was revised higher to +0.7% (+8.7% annualized), both above consensus estimates. Meanwhile US GDP growth surprised to the downside in Q1 as last week’s preliminary estimate showed a 1.4% contraction (see the Chart of the Week for a time series). And finally, in
response to comments made by US Defense Secretary Lloyd Austin, Russia ramped up the rhetoric surrounding its invasion of Ukraine, increasingly seeking to cast it as a struggle for Russia’s very existence against hostile Western powers bent on destroying it.

All of these factors combined to push equity prices lower and bond yields higher. The Nasdaq was hit especially hard, entering bear market territory (23% below Nov ’21 high) on Friday following disappointing Q1 earnings and guidance from Amazon.

Rates moved higher by 4-7 basis points across the curve as investors slightly increased their expectations of 2022 rate hikes. Credit spreads moved slightly wider, amplifying the price declines in corporate bonds.

Despite the Q1 GDP print, real-time data continue to point towards a growing economy. Durable and capital goods orders increased in March, home prices are up ~20% y/y nationwide, jobless claims remain very low, and the Conference Board’s Consumer Confidence Index remained steady on March.

Chart of the Week – US GDP Growth by Quarter

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Weekly Market Recap

It was another tough week for stocks as bond yields continued to rise. Growth stocks bore the brunt of the selling pressure, sending the Nasdaq down 2.6% in a holiday-shortened week. Cyclical sectors fared better thanks to solid economic data, with materials (+0.7%), industrials (+0.4%), and energy (+0.3%) all finishing in positive territory. Small caps also finished slightly higher.

Meanwhile, the Treasury yield curve steepened considerably, with 2s10s gaining 19bp to finish at +38bp after having been inverted just two weeks prior. Credit spreads widened slightly, magnifying the price declines in high quality corporates and sending the Bloomberg US Corporate Index to its lowest level of the year.

The short week also saw a surge in energy prices. Oil gained more than $8/barrel, while natural gas rocketed higher to finish at $7.30/MMBtu, an all-time record high.

There were several positive data points regarding the economy last week. March retail sales were solid despite very high gasoline prices, industrial production rose more than expected, the Empire Manufacturing Survey came in well ahead of expectations, jobless claims remained low, and the University of Michigan Consumer Sentiment index experienced a strong rebound.

Finally, core CPI cooled slightly in March data, but other inflation metrics remain hot:

  • Headline CPI was +1.2% m/m and reached +8.5% y/y
  • Core CPI (ex food & energy) was +0.3% m/m and reached +6.5% y/y
  • Headline PPI was +1.4% m/m and reached +11.2% y/y
  • Core PPI (ex food & energy) was +1.0% m/m and reached +9.2% y/y
This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Weekly Market Recap

It was another tough week for stocks and bonds, prompted by hawkish commentary on Monday from FOMC member Lael Brainard regarding the potential pace of Fed balance sheet reduction. That was followed up on Wednesday by the release of the FOMC meeting minutes from March, which exacerbated investor concerns.

The result was an abrupt reversal in the flattening trend that had gripped the Treasury market this year as the curve pivoted to bear steepening: 2y yields finished higher by 5bp, while 10y yields jumped 32bp, pushing the 2s10s curve back to +19bp by Friday’s close. See the Chart of the Week for a 2s10s time series.

Equities fell as a result, with long-dated growth stocks once again bearing the brunt of the selling pressure. In a return of 2022’s familiar pattern, defensive sectors (utilities, staples, healthcare, and real estate) plus energy outperformed, while other cyclicals and especially tech shares were weaker. Small caps generally fared worse than large caps, with the Russell 2000 now trailing the S&P 500 by more than 5% YTD. International stocks also finished lower on the week.

Commodities were mixed, with oil (WTI) finishing below $100/barrel for the second straight week while natural gas rose to an all-time high on Thursday before finishing a hair lower on Friday. Non-energy commodities also finished higher on the week.

Apart from the FOMC, most economic news last week was positive: services PMIs from S&P Global and ISM remain firmly in expansion territory, initial jobless claims fell, and consumer credit surged in fresh February data.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!