Tag: oil prices

US large caps moved lower last week in the wake of higher-than-expected inflation data, with tech and other growth sectors underperforming while cyclicals (especially energy) held up better. Small and midcap benchmarks managed to finish the week in the green, as did international stocks.

Rates continued to move higher last week, particularly in the front end of the curve as 2y yields rose 19bp while 10y and 30y yields were up just 3bp. Investors recalibrated their bets regarding the forward path of Fed policy, with the chance of a 50bp hike at the upcoming March FOMC meeting rising from ~30% pre-CPI print to roughly 60% afterwards. By the end of the week, investors were pricing in between six and seven 25bp hikes by year-end.

Commodity prices edged higher last week, with oil surging on Friday as the
situation in Ukraine began to look increasingly tenuous. West Texas Intermediate finished the week at $93.10/barrel, its highest level since September of 2014.

Economic data was mixed last week. CPI rose +0.6% sequentially which was above consensus expectations, as core CPI reached +6.0% y/y while headline CPI printed at +7.5%. Initial jobless claims fell for the 3rd consecutive week as the omicron-driven uptick continued to fade. And finally, the University of Michigan Consumer Sentiment index came in much lower than expected in the preliminary February reading, as the current conditions component fell nearly 5 points while future expectations were down nearly 7 points. Encouragingly though, long term (5-10y) inflation expectations were unchanged from January at +3.1%.

Financial markets went into full risk-off mode last week, with equities moving lower, the Treasury yield curve flattening, credit spreads widening, and the dollar stronger. An uptick in jobless claims suggests that omicron is having an impact on demand, while investors continue to grapple with the hard pivot in Fed policy.

US large caps were down 5-7% on average, with small caps down even more sharply. Defensive sectors held up the best, along with energy stocks which were once again buoyed by rising oil prices. International equity markets fared better as they generally have so far in 2022, registering smaller losses.

Treasuries saw strong demand in the belly and long end of the curve as 10y and 30y yields fell by 2bp and 5bp, respectively. 2y yields finished slightly higher on the week, but fell 6bp in the last two sessions after peaking at 1.06% on Wednesday. Meanwhile, credit spreads widened modestly in investment grade markets and more significantly in high yield, echoing the move lower in equities.

Oil prices were also higher last week, although they too peaked on Wednesday before being pulled lower by the increase in risk aversion on Thursday & Friday.

While the uptick in jobless claims was not encouraging, other economic indicators were strong. Housing starts and residential building permits rose in fresh December data, the Philly Fed Business Outlook survey registered strong gains in the January print, and the Conference Boards Leading Economic Index (LEI) rose 0.8% in December, the 10th consecutive month of solid gains.

In a move that echoed the early days of 2021, markets got off to a rough start during the first week of 2022 as rising bond yields pushed discount rates higher for all risk assets.

The release of the December FOMC minutes provided a clearer window into the Fed’s current thinking on inflation risks, and investors responded by pushing yields higher across the curve: 2y yields rose 13bp to 0.86% (a fresh pandemic high), 10y yields rose 25bp to 1.76% (also a new pandemic high), and 30y yields rose 22bp to 2.12% (still well off last year’s high of 2.40%). See the Chart of the Week for a time series of 2y Treasuries.

Credit spreads were mostly stable last week, pushing the price declines in
Treasuries through to corporate and municipal bonds as well.

In US equity markets, long-dated tech and other secular growth stocks were hit the hardest, sending the Nasdaq down 4.5% on the week. Cyclicals fared much better, with the energy sector posting a +10.6% total return, resulting in smaller declines for the S&P and especially the Dow. Small caps and international stocks also finished lower on the week.

Oil prices rose thanks to supply disruptions related to events in Libya and
Kazakhstan. OPEC+ announced an agreement to increase output that was in line with expectations.

News of the omicron variant sent stocks tumbling on Friday, pushing all major equity indices into the red for the week. The Nasdaq was the worst performer, as concerns about rising rates had dented longer-duration growth stocks even before Friday’s move. Small and midcap stocks underperformed large caps, while international stock underperformed the US.

In a classic flight-to-safety trade, US Treasuries rallied as yields fell and the curve flattened. Credit spreads widened, particularly in high yield where bond prices fell in sympathy with equities. Investment grade corporate bonds and high quality munis were close to flat on the week thanks to the offsetting moves in rates and spreads.

Commodity prices plunged on Friday, particularly oil which endured its largest oneday selloff since the early days of the pandemic last year. US benchmark West Texas Intermediate fell more than $10/barrel to close at $68.15, while non-energy commodities were off a more modest ~2% in aggregate. See the Chart of the Week for a time series of oil prices.

Apart from concerns regarding the omicron variant, economic news was mostly positive last week. Initial jobless claims fell below 200k for the first time since the onset of the pandemic, while the University of Michigan Consumer Sentiment index rose slightly more than expected in the final November print.

Most US equity indices finished the week slightly lower, due in large part to a higher-than-expected consumer price inflation (CPI) print for the month of October. Core inflation (ex food and energy) rose to 4.6% y/y, while headline inflation exceeded 6% for the first time since 1990. See the Chart of the Week for a time series of headline and core CPI.

Sector performance was mixed: basic materials (+2.6%) significantly outperformed, and four other sectors (healthcare, industrials, financials, and tech) finished with positive returns on the week. Other sectors finished lower on the week, with energy (-1.3%) and consumer discretionary (-3.2%) trailing by the widest margin. International stocks were mixed, with MSCI’s developed market index easing lower while its emerging markets index posted solid gains due to strength in Chinese equities.

Bond yields moved higher in the wake of the inflation print, particularly in the front end and belly of the curve: 2y and 10y yields both rose 11bp on the week, while 30y yields were up a more modest 4bp. Credit spreads were mostly stable, passing the price declines in Treasuries through to higher quality corporate bonds.

Commodity markets were mixed last week. Energy prices eased lower, while prices rose on many other commodities, including wheat, corn, copper, and gold.