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.