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Weekly Market Update for April 8, 2022

by Jared Plotz

Both equity and fixed income markets struggled through the week as participants digested “Fedspeak,” contemplated moves in the Treasury yield curve, and questioned the impact of the worsening Covid outbreak and lockdowns in China. After three consecutive weekly gains, the S&P 500 closed 1.27% lower while the NASDAQ fell 3.86% this week.

The biggest driver of the “risk-off” positioning was hawkish (tightening) commentary from Federal Reserve officials – even from known “doves” (those who typically favor quantitative easing) – following the release of the March FOMC meeting minutes on Wednesday. Most members argued more aggressive action is needed to stem rising inflation, with likelihood of future 50 basis point rate hikes rising. The group announced they would soon begin reducing assets on the Fed balance sheet by $95 billion a month. The balance sheet has ballooned to nearly $9 trillion in the wake and aftermath of Covid, from $4 trillion pre-pandemic.

As the markets reprice the shift in Fed policy this year, interest rates have surged. The 10-yr US Treasury rose 33 bps this week and is up 120 bps this year (moving from 1.51% up to 2.71%). Even before this week’s advance, Goldman Sachs highlighted that the one-month change in rates registered a 3-standard deviation move in nominal terms. This has posed a significant year-to-date headwind to fixed income performance. In equities, the big jump in bond yields weighed on growth stocks and those with variable-rate debt. Companies with pricing power and an ability to manage wage pressure have fared better.

The impact on housing activity could be severe. While demand for homes has been very strong, supply has been tight for some time. Now with the move in the average new 30-yr mortgage rate rising above 5.00% and home prices also up considerably, the median new mortgage payment is 38% higher than a year ago. With over 90% of current existing mortgages at rates below 5.00%, refinance activity should largely grind to a halt. And who is going to want to move out of their current home only to pay a higher rate? Activity in the near-term likely slows.

As evidence of atrocities committed by Russian troops in Ukraine gathered international attention, the US Senate voted (100-0) to ban Russian oil imports and strip their trade status while the EU & Japan banned coal imports.  The Russian army seems to be refocusing their activity in the south and east regions as the fighting continues.

Next week brings the unofficial start of Q1 earnings season on Wednesday, with JPMorgan leading the big banks to report. Major economic news will include the March CPI on Tuesday, the PPI on Wednesday, retail sales and trade metrics on Thursday, and industrial data on Good Friday. The CPI will garner the most attention as inflation is expected to remain elevated but peak, at +8.4% annual growth, in March (vs. +7.9% in February).

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