Hey Folks, I am seeing a lot of potential market risk over the horizon which I would define as about 3 to 4 months. How will the FEDs begin their rate hike campaign as to speed and rate, the degree to which the current inflationary environment will remain sticky vs transitory and then of course those pesky Russians are adding to the near term market dynamics. All of these has no doubt added to market fear driving up interest rates as expected along with Volatility. Get my take on the current market in this week’s Market Round-Up.
WEEKLY SOUND BITES:
Equity markets ended lower for another Volatile week as the Tech heavy NASDAQ fared the worst ending in Correction territory for the year. According to FactSet, roughly three out of four S&P 500 companies that have reported earnings have referred to inflation in their earnings calls, but net margin estimates for the current quarter have fallen only slightly, suggesting that many businesses are successfully passing on higher input costs to customers who still have money to spend. Over the last 42 years, the S&P 500 has experienced an average intra-year correction of -14.0%. Corrections happen all the time. In 2021, however, volatility was unusually low – there were only 55 trading days with moves of 1% or more in either direction (compared to 109 in 2020), and only seven days with a move of 2% or more. The biggest market pullback for the year was around -5%.5 A market correction in 2022 was to be expected, in my view.
The Labor Department reported that the headline consumer price index (CPI) advanced 7.5% over the year ended January, more than consensus expectations and its highest annual gain since February 1982. Core prices, which exclude food and energy purchases, rose 6.0%, the most since August 1982. Inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment in February, released Friday morning. At 61.7, the index reading came in well below expectations of roughly 67 and hit its lowest level since October 2011. According to the survey nearly half of all consumers are expecting declines in their inflation-adjusted incomes during the year ahead. Consumer bullish sentiment had fallen to an 18-month low, while bearish sentiment rose to a 16-month high. Only 21% of investors were bullish about the stock market over the next six months, compared to 46.7% of investors who are bearish. Investor sentiment is often useful as a contrarian indicator.
The upside CPI surprise, combined with hawkish comments from St. Louis Federal Reserve Bank President James “Red Bull” Bullard, sent short-term rates racing higher on Thursday, resulting in a flattening of the yield curve. The two-year U.S. Treasury note yield reached its highest level since January 2020 as investors priced in expectations for an accelerated rate hike schedule by the Fed—including the probability for a 50-basis-point rate increase at the central bank’s March policy meeting. Meanwhile, the benchmark 10-year U.S. Treasury note yield surpassed 2.00% for the first time since the summer of 2019.
Shares in Europe rallied, buoyed by strong corporate earnings. Core and peripheral eurozone government bond yields rose on the higher-than-expected inflation forecast issued by the European Commission (EC) and an upside surprise in U.S. inflation. The EC lowered its 2022 outlook for economic growth in the European Union (EU) and eurozone to 4.0% from its previous forecast, issued last fall, for a 4.3% expansion.
In a holiday-shortened week, Japan’s stock markets generated a positive return. A rise in Japanese Yields to its highest level since 2016, prompted the BoJ to announce that it would buy an unlimited amount of 10-year Bonds at a yield that corresponds to 0.25% on February 14. The BoJ has sought to cap the 10-year JGB yield at around 0% and, under its policy of yield curve control, has allowed it to fluctuate 25 basis points (0.25 percentage point) on either side of the target.
And over in China, their stocks also rose amid supportive official comments and a perception that the country’s regulatory crackdown cycle had peaked while the PBOC would provide stimulus support for their economy. In economic readings, the private Caixin/Markit services purchasing managers’ index (PMI) fell to 51.4 in January, a five-month low, from December’s 53.1 reading. Growth momentum slowed amid the renewed rise in COVID-19 cases across China and restrictions to stop its spread
Enjoy this Week’s Round-Up
Don’t Be A Rat Brain Trader – Be the Red Stripe Zebra !!
Trade Smart !
hpb
