Tag: key leading economic indicators

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

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.

A rotation trade played out last week, with defensives rallying, tech steady, and cyclicals lower as the yield curve pivoted into an inversion. Small caps outperformed, as did most international benchmarks on gains in Europe and China.

Treasuries were in focus as the 2s10s yield curve saw the culmination of a 12-month flattening trend that ended with an inversion on Friday. Coming into the week 2s10s was positively sloped at +20bp, but it flattened by 28bp in 5 days to finish at -8bp (10y = 2.38% and 2y = 2.46%). An inverted yield curve has historically been a very reliable recession predictor, albeit one with a very long lead time (6m to 2y).

Credit spreads continued to tighten, helping US corporates recoup some of the YTD underperformance relative to Treasuries. IG spreads finished 5bp tighter and are now 28bp inside the YTD wides reached just prior to the March FOMC meeting, while high yield spreads have moved ~90bp tighter over the same period.

Most commodity prices fell last week as US crude benchmark West Texas Intermediate closed below $100/barrel for the first time in nearly 3 weeks. Natural gas bucked the trend and finished higher as officials continue to paint a dire picture of what would happen to the European economy without Russian gas imports.

Finally, there was a raft of economic news last week:

• 431k new nonfarm payrolls added and an unemployment rate of 3.6%
• Case-Shiller’s 20-city composite showed home price appreciation of 19.1% y/y
• The Conference Board’s Consumer Confidence Index was steady in March at 107.2
• Personal income grew at +0.5% in February, while personal spending was +0.2%

Stocks finished higher for the second straight week despite surging bond yields. The energy sector led the way with a 7.4% return on the back of a sharp rebound in oil prices, while all other sectors besides healthcare posted positive returns on the week. Small caps lagged the rally and finished slightly lower. International stocks posted smaller gains than the US, with Chinese equities temporarily range-bound after a dramatic reversal the week before.

Treasury yields rose significantly last week, particularly in the front end as increasingly bearish rates forecasts were published by sell side economists. A note from Citi on Friday predicted that the Fed would enact four consecutive 50bp hikes this year, and that the terminal Fed Funds rate would reach 3.5-3.75%, well above the ~2.8% rate currently implied by the Fed’s “dot plot”. Meanwhile, credit spreads narrowed for the second straight week, in line with the improvement in equities.

Oil prices rose by more than $9/barrel as an Iran nuclear deal looked increasingly unlikely in the near term, and Yemeni rebels stepped up attacks on Saudi Arabian Aramco facilities. Non-energy commodities also finished higher on the week. In economic news, mortgage applications and new home sales fell as mortgage rates rose, weekly jobless claims hit fresh pandemic lows, durable goods orders fell more than expected in February, and S&P’s US Manufacturing and Services PMIs exceeded expectations in preliminary March data. Overall, incoming data point to a still-strong economy with a resilient consumer, despite signs that rates are beginning to have an impact on the pace of transaction activity in housing.

Stocks staged a strong rebound last week that was only briefly interrupted (for about an hour) by the start of the Fed’s rate hiking cycle. Most US benchmarks were up at least 5%, while an even sharper rally in growth stocks pushed the Nasdaq higher by more than 8%. Only the energy sector failed to deliver positive returns. International stocks also finished higher, with Chinese equities staging a dramatic reversal after authorities pledged to support a rapidly falling market.

Treasury yields moved higher leading up to the FOMC’s well-telegraphed Fed Funds rate decision. By week’s end, futures markets were pricing in a total of seven additional 25bp hikes by the end of the year, implying a Fed Funds target rate floor of 2.0%. Meanwhile, credit spreads moved tighter as equities rallied, driving small price gains in corporate bonds despite the move higher in rates.

Commodity prices finished lower for the second straight week on volatile day-by-day moves. Oil fell nearly $15/barrel through Wednesday’s close before rebounding sharply later in the week on renewed fears of tight supplies. Nonenergy commodities followed a similar pattern.

Economic data continued to point to a strong economy and high inflation last week. Residential housing starts and new building permits were very strong, unemployment claims remained low, and the Conference Board’s Leading Economic Index (LEI) gained 0.3% in February despite the invasion. Meanwhile, various indicators of inflation remained in the double digits on a y/y basis, including PPI (+10.0%), import prices (+10.9%), and export prices (+16.6%).

Most US stocks were lower again last week as the Russian war in Ukraine ground on. Once again, energy was the only sector in the S&P 500 to finish higher on the week. Interestingly, European stocks fared somewhat better in the latter half of last week, rebounding significantly after reaching YTD lows on Tuesday. Emerging market benchmarks were dragged lower by weakness in Chinese equities, which closed at 4+ year lows on Friday.

The selloff in bonds continued as investors lost hope that a silver lining of the war in Ukraine might be a less hawkish Fed. 2y Treasury yields rose 27bp, 10y yield gained 26bp to a fresh pandemic high of 1.99%, and 30y yields rose 19bp. After expectations for 2022 rate hikes fell in the days following the invasion, Fed Funds Futures markets are now pricing in a total of seven 25bp hikes by year end. See the Chart of the Week for a time series of 2022 rate hike expectations.

Last week brought some welcome relief in commodity prices, particularly oil which eased lower despite a US ban on Russian oil imports.

In economic news, the University of Michigan consumer sentiment gauge weakened in preliminary March data, with 1y forward inflation expectations rising to +5.4% while longer term (5-10y) expectations remains anchored at +3.0%.

Meanwhile, CPI data showed strong price gains in February:

* Headline CPI rose 0.8% sequentially to reach +7.9% y/y

* Core CPI (ex food and energy) rose 0.5% sequentially to +6.4% y/y