Weekly Market Report: July 22, 2022

Last week we saw increasing economic concerns both domestically and abroad and a relatively downbeat earnings calendar met by a strong move higher in global risk markets, keeping in line with the market’s tendency to look beyond today’s headlines. While we don’t think we are out of the woods just yet, U.S. equities did cross through some key technical thresholds on their way to solid 2.55% gains, now sitting 7.8% above the June 17 lows, while developed international (+3.25%) and emerging international (+2.05%) both posted strong gains as well. Oil fell back below $95bbl while industrial metals posted gains netting a 0.75% gain for composite commodity markets. Interest rates continued to fall, particularly in the belly of the curve leaving the 10yr at 2.77%.

Market Anecdotes

• Last week the S&P 500 and Nasdaq both managed to break back above their 50-day moving averages which had been the longest sub-50-dma for the S&P 500 since the 2008 Financial Crisis. 
• 21% of the S&P 500 has reported 2Q earnings with blended bottom- and top-line growth of 4.8% and 10.9% respectively. Beat rates and beat margins are both below their 5-year averages with both unusually high 2Q 2021 comparisons and slowing macro environment contributing. 
• A bear market and looming potential recession has pressed S&P 500 valuations from a record highs of 27.2x down to 17x, much closer to its historical average. 
• Renmac noted that overdone negative investor sentiment, including the recent BoA/ML Fund Manager Survey, has been one of the more consistent rally indicators during the bear market which was on display again last week. 
• With the FOMC meeting this week, Bianco Research noted the Fed has never stopped hiking rates until the funds rate exceeded CPI and given the current respective levels of 1.75% and 8.60%, we have quite a gap to close. 
• The ECB began its first rate tightening cycle in eleven years last week with a 50bps hike while the BoJ maintained their ultra-loose -0.10% reference rate, reiterated its pledge to continue to be a buyer of 10yr JGBs at a yield of 0.25%, and reinforced its dovish forward guidance.
• While the 10yr UST yield has fallen from mid-June level of 3.49% to 2.77% last week, mortgage rates too peaked above 6% and have stabilized around 5.75%.
• Interestingly, high yield bond spreads have fallen from recent highs of 5.99% on July 5th back below 5% last week, implying a 12-month spread implied default rate of 6.65% – notably below normal recessionary default rates of 8%. 
• While the FAO food price index has decelerated for the past three months, it was up 23.1% in June – why we welcome a Russia/Ukraine deal signed last week lifting the Black Sea blockade of Ukrainian grain (and fertilizer) exports and allow Russia to resume grain exports as well.
• Thankfully, Europe’s Nord Stream 1 pipeline resumed flows of natural gas last week.
• In what will no doubt be a movie one day, it became public last week that an ex-Coinbase employee (Ishan Wahi) was caught frontrunning token issuance and arrested attempting to flee the country to India.

Economic Release Highlights

• U.S. flash PMIs for July fell from 52.3 to 47.5 with more weakness across the service sector than anticipated and manufacturing easing 0.4 to 52.3. 
• The June Conference Board LEI fell by 0.8% after a 0.4% decline in May. 
• Eurozone flash PMIs for July dropped from 52.0 last month to 49.4, now in contractionary territory with June Housing Starts (1.559M vs 1.588M) and Permits (1.685M vs 1.666M) both came in at consensus expectations. 
• June Existing Home Sales of 5.12M came in under consensus estimate of 5.395M and under the low-end consensus range of 5.15M to 5.5M. 
• The July Housing Market Index again fell short of consensus expectations, registering 55 versus consensus forecast of 66. 
• Eurozone CPI for June rose 0.81% MoM and 8.65% YoY.

Weekly Market Report: July 15, 2022

Last week brought us another up and down week with the official start of second quarter earnings and several highly anticipated economic reports as the key focus points. By the end of the week, we saw most global equity markets close down with U.S. (-1%), developed international (-1.5%), and emerging international (-3.6%). Inflation and growth concerns weighed heavily on risk appetite which translated to a strengthening USD, a rally in longer dated U.S. Treasuries, and a selloff in shorter dated U.S. Treasuries. Commodity markets were down again, losing 5.6% on the week, as oil closed back below $100bbl, gasoline prices fell but natural gas surged 16% to over $7.

Market Anecdotes

n eye watering July CPI report pushed market expectations for FOMC interest rate hike in July to 100bps immediately which slipped to 31% by week’s end. There was nowhere to hide across the subcomponents with gas, shelter, and food the driving forces.
• According to the New York Fed’s Survey of Consumer Expectations, the median 1 yr fwd inflation expectation surged to 6.78% while the median 3yr fwd fell to 3.62%.
• The strong USD should cut into inflation and GDP growth on a lagged basis, something the Fed is considering with respect to monetary policy. Softening commodity prices should also factor into near term inflation trajectory.
• Bespoke referenced a ‘bull whip effect’ as an interesting analogy to the aggregate demand and supply chain issues plaguing the economy since March 2020 in the form of an unprecedented pandemic demand shock and a series of overcompensations and over corrections by consumers, inventory intermediaries, logistics suppliers, producers, policy makers, and governments.
• The U.S. 2yr/10yr yield curve has fallen into its deepest inversion (-0.227%) since 2001 but the 3m/10yr (0.78%) remains slightly positive, at least until the FOMC hike later this month.
• Second quarter earnings started last week with reports from the banks. With 7% of the S&P 500 reported, we have a beat rate of 60% and a beat margin of 2%, taking blended earnings down to 4.2%. Revenue beats of 60% and beat margins of 0.8% are also coming in below average.
• The Bank of Canada hiked rates by 100bps and the RBNZ by 50bps to take both reference rates to 2.5%. The ECB meets this week and the FOMC on the 27th with markets pricing in rate hikes from both central banks as well.
• ZEW Survey of German investor sentiment fell to its lowest level since 2011 as inflation concerns abound. Natural gas concerns continue to rattle Europe with efforts to reduce reliance on Russian gas leading to increased likelihood that Russia will use the leverage while it still has it.
• Fresh political turmoil in Italy contributed to a rough week for European equities (-4.2%) with Mario Draghi tendering his resignation which was promptly refused by the head of state.
• A JPMorgan Chase report related the significant increase in interest rate (bond market) volatility to less market liquidity under the vastly expanded size and scope of the U.S. Treasury market noting BrokerTec data indicating only 25% of market depth relative to the past decade.
• Our strategists are discounting China’s record trade surplus posted in June as well as the 2.6t RMB infrastructure package recently announced.

Economic Release Highlights

• Retail Sales for June bounced back from May’s disappointing result with headline (1%a vs 0.9%e), ex-vehicles (1%a vs 0.6%e), and ex vehicles & gas (0.7%a vs -0.2%e).
• June CPI rose more than expected on the back of May’s upside surprise. Headline CPI jumped from 8.6% to 9.1% YoY and from 1.0% to 1.3% MoM. Core CPI moved from 6% to 5.9% YoY and 0.6% to 0.7% MoM.
• UofM Consumer Sentiment for July of 51.1 came in slightly higher than the forecast of 50.0 but was generally within consensus range of 48.4-53.0.
• NFIB Small Business Optimism Index tumbled to 89.5 in June, falling short of the 92.9 consensus estimate.
• June Industrial Production came in short of consensus (-0.2%a vs 0.1%e) with manufacturing output of -0.5% also missing consensus call for 0.2% growth.

Weekly Market Report: July 8, 2022

In a Fourth of July holiday shortened trading week markets digested a handful of economic reports and waited in anticipation of the upcoming 2Q earnings season to kick off. Risk appetite seems to have clearly shifted from valuation centric selling pressure to more concerns surrounding the outlook for growth and corporate earnings pressure. By the end of the week, the S&P 500 added 2% with the best performance coming from the most beat up sectors on the year (technology, consumer, communication) while energy, materials, and utilities lagged. Interest rates bounced last week, moving approximately 25bps higher across the curve, leaving 10yr yields back above 3%. Commodities (-3%) lost more ground with oil down 3.4%. The USD enjoyed another strong bid, up 1.8% on the week, taking year to date return to a whopping 11.8%

Market Anecdotes

• A not so surprising anecdote is that the S&P 500 marked its low point in mid-June corresponding to a highwater mark in interest rates and oil prices.
• Up until June 8th, the Energy sector was the only thing working in the market. However, the sector has reversed dramatically with oil closing below $100bbl and energy stocks falling close to 25%. That said, supply side dynamics should keep oil prices relatively firm.
• S&P 500 earnings are expected to rise 4.3% which should translate to approximately 9%-12% based on historical beats and leaves the S&P on track for 10% growth for the calendar year.
• June FOMC meeting minutes released last week revealed taming inflation and salvaging credibility as key considerations alongside testing the Fed’s resolve, long run inflation expectations breaking from the Fed’s 2% target, and inflation risks being skewed to the upside.
• Incoming data and the economic outlook will continue to inform the Fed including likely inflation pressure relief from falling commodity prices, declining shipping rates, easing supplier delivery backlogs, labor market dynamics, and shifts in consumption from goods to services.
• Supply chains are continuing to heal. ISM survey respondents reporting commodity categories in short supply have fallen from 36 to 13 in manufacturing and 33 to 14 in services while the GSCPI from the NY Fed also confirms easing pressures.
• Reports out of China suggesting that the Ministry of Finance is considering allowing local governments to bring forward 1.5 trillion yuan ($220 billion) of next year’s special bond issuance to the second half of this year catalyzed a rally in Chinese equities last week.

Economic Release Highlights

• The June Employment Report revealed 372,000 new jobs, comfortably beating the consensus estimate of 270,000. The unemployment rate stayed at 3.6%. Average hourly earnings MoM of 0.3% and YoY of 5.1% were generally in line with consensus. 
• June ISM Services Index (55.3a vs 54.8e) came in slightly higher than the consensus estimate. 
• June’s final U.S. PMI readings (C, M, S) of 52.3, 53.0, 52.7 saw a slowdown in manufacturing but more resilience across services with an upward revision to the flash report from the prior week. 
• The JOLT Survey reported 11.254 job openings. 
• China’s Caixin non-manufacturing PMI jumped to 54.5 in June from 41.4 in May.

Weekly Market Report: July 1, 2022

In a week that saw the S&P 500 wrap up its worst first half in over 50 years (1970), equity  markets delivered a fourth losing week out of the past five, remaining squarely in bear market territory as investors continue to look for guide posts in the second half. The week brought us some highly anticipated economic data on inflation, housing, and consumer confidence. U.S. equity markets were off approximately 2.3% while non-U.S. markets fell 1.7% with weakness again in technology/consumer and strength in utilities/energy. Bonds rallied sharply as interest rates fell again, leaving the 10yr now back below 2.9% while commodities lost 2% and the USD rallied 0.9% in a flight to safety bid.

Market Anecdotes

• With the second quarter and first half officially in the books, it warrants acknowledging the historic stock, bond, and commodity market returns thus far in 2022.

• The S&P 500 has repriced itself by -24% in P/E multiple terms heading into 2Q earnings season where consensus 2022 earnings sit at $229.23, a 10% increase over 2021 earnings.

   

• The notable change in Fed focus and tone in mid June when officials noted “economic activity appears to have picked up” has become more curious given the slowdown in both economic and inflation data. The paths of inflation and rate hikes remain pivotal input for risk assets.

   

• The outlook remains very unclear with the bullish view that $2.2t in savings will provide a significant boost to consumption offset by the bearish view that inflation is exacting a damaging impact on purchasing power and real consumption.

   

• The shift in consumption from goods (-$43b) to services (+$76b) continued in May which should be helpful for inflation pressures but it remains unclear whether the increase spend on services will offset declining demand for goods.

   

• Probability that the U.S. economy is in recession continues to increase with the most recent Atlanta Fed GDP Now model estimating a 2.1% contraction, following Q1’s 1.6% decline.

   

• A look at the yield curve shows both the 10yr-3m and 10yr-2yr slopes are still in positive territory but the 10yr-2yr is approaching the 0% threshold.

Economic Release Highlights

• PCE headline inflation for May came in MoM at 0.6%a vs 0.7%e and YoY at 6.3%a vs 6.5%e while core inflation registered MoM at 0.3%a vs 0.4%e and YoY at 4.7%a vs 4.8%e.

   

• Personal Income and Outlays report for May reported underwhelming consumption expenditures (0.2%a vs 0.5%e) and at consensus personal income (0.5%a vs 0.5%e).

   

• The June ISM Manufacturing Index came in slightly under consensus (53a vs 55e) but did fall within the broader consensus range of 52 to 56.

   

• Durable Goods Orders for May came in above consensus (0.7% vs 0.1%). Ex-Transportation (0.7% vs 0.4%) and Core Capital Goods (+0.5%) were also relatively strong.

   

• Pending Home Sales Index for May of 0.7% beat the consensus call of -2.5% and registered above the high end of the range of estimates (-4.5% – 0.0%).

   

• Case-Shiller Home Price Index for April came in at consensus 1.8% MoM and 21.2% YoY price increases.

   

• Consumer Confidence for June of 98.7 came in slightly below expectations of 101.0 but fell within consensus range of 95.0-104.0.

Weekly Market Report: June 24, 2022

We saw some typical bear market activity last week with equity markets continuing to churn, this time to the upside despite mounting evidence of a cyclical slowdown and global central banks chasing commodity prices. Some inflation data out of the U.K. and Germany provided some encouraging data points while other economic data made clear economies are still expanding, though at a decelerating pace. U.S. equity markets enjoyed a nice rally last week of over 6% while developed international (+3.75%) and emerging markets (+2.5%) were up but not as strong. Bond markets enjoyed further decline in interest rates while the USD lost a little ground and commodities, thankfully, did as well.

Market Anecdotes

• With the S&P 500 officially in a bear market, the key questions are how much deeper and how much longer? Depth and duration of the economic slowdown currently unfolding will be the determinant but either way, we’re on track for the worst six month start to a year since 1932.

• Wall Street analysts have been slow to adjust their year-end price targets for the S&P 500 with the S&P 500 now trading over 20% below its bottom-up consensus analyst price target – one of the widest divergences on record.

• Market and sentiment-based inflation expectations alongside inflation data continue to paint a concerning but mixed picture, particularly with a focus on headline data series.

• Some of the differences between CPI and PCE inflation include fixed versus dynamic weightings and differing data sources with the key differences in shelter and medical costs.

• Economists surveyed by The Wall Street Journal have dramatically raised the probability of recession, now putting it at 44% in the next 12 months, a level usually seen only on the brink of or during actual recessions.

• An interesting look at the origin of U.S. company profits from the BEA and Goldman Sachs does challenge some of the narratives of achieving adequate diversification by owning a broad basket of U.S. companies.

• A decoupling of U.S. consumer sentiment and unemployment has been one of the more remarkable reminders of the toxic power of inflation.

• With much attention on the health of the U.S. consumer due to the exceptional job market and household liquidity measures, it’s worth noting debt service on the part of corporations is also in a good position.

• Fossil fuel sales from Russia since their invasion of Ukraine have remained relatively stable but the composition has certainly changed and is expected to continue.

Economic Release Highlights

• Preliminary June PMI data saw broad based deceleration but remained in expansionary territory.
• U.S. Existing Home Sales for May (5.41mm) were down 3.4% last month and stand down 8.6% year over year.
• U.S. New Home Sales for May (696k) were up 10.6% over the prior month but are down 5.95% year over year.
• The average 30-year mortgage rate edged up to 5.81%, a level not seen since the advent of the global financial crisis in 2008.
• UofM Consumer Sentiment Index for June slid to 50.0, down from a 58.4 reading the prior month.

Weekly Market Report: June 17, 2022

Global central banks, inflation, and war in Ukraine combined to send equity markets to a second consecutive 5%+ decline as investors buckled up for a notable increase in the likelihood of recession. A primary driver was that the Fed made it pretty clear it had no intention of acknowledging financial conditions by stepping in to pause or ease or provide liquidity, unlike 1966 and 1987 – the only two bear markets on record that occurred without a recession in the general vicinity. Interest rates one year and shorter climbed 0.25% while maturities from 2yrs to 30yrs moved up a more modest 0.10%. Commodity markets fell 6% on the back of oil falling nearly 10% back to $109 and industrial metals were soft in reflection of global growth concerns.

Market Anecdotes

• The Fed hiked interest rates by 75bps on Wednesday, above the 50bp rate hike plan it had telegraphed at its previous meeting and made clear their renewed focus on issues being presented by headline inflation. The FOMC dot plot projections were also revised sharply higher. 
• With ample red ink to swim in this week, we’ll note some green which is clearly evident in nearly all post WWII data showing equity market returns following bear markets, 15% quarterly drops, and 20% or worse six month drops. 
• It’s been really rough sailing with nine of the last ten weeks closing out on a decline, something only three other periods can claim – 1970, 1982, and 2001. 
• The year-to-date decline in S&P Growth of -30% versus S&P Value of -15% has brought their relative valuations quickly back into neutral territory and U.S. large caps (15.4x), U.S. mid-caps (11.1x), and small caps (10.8x) overall have fallen back into fair to cheap range. 
• With inflation, and specifically the one including food and energy, now seemingly the focus of the Fed, the individual components and their trends warrant close attention. 
• Recovery in U.S. labor market participation is a key underpinning to a more muted recession scenario potentially allowing payrolls to keep growing while the unemployment rate rises. 
• Credit spreads in the bond market provide a good barometer of the overall economic anxiety level in the market and while high yield (above 5%) and investment grade (above 1.45%) are not yet at extreme levels, high yield CDS has risen to a new cycle high. 
• Investor sentiment has fallen into extreme bearish territory with 19.4% bulls, 22.2% neutrals, and 58.3% bears while LEIs and industrial production and goods orders are showing the wear and tear of inflation. 
• In an emergency meeting on Wednesday, the ECB pledged to “apply flexibility” when reinvesting PEPP proceeds and to address uneven impacts of policy normalization across jurisdictions. 
• The BoJ stuck with its ultra-doveish policy keeping its target rate at -0.1% and reiterating its 10yr JGB target yield around 0% while the BoE hiked rates by 25bps as expected.