highlights

The NASDAQ, S&P and Dow all finished lower, in a week that was devoid of a catalyst, as the path of least resistance remained lower.Value outperformed growth again, expanding its outperformance to 5.70% over the last two weeks.Re-opening names such as hotels, airlines, cruise lines, and casinos all outperformed, while Tech was the worst performing, coming under pressure as yields continued to jump.CPI showed a headline increase of 8.5% Y/Y, the largest gain since 1981, while PPI reported an all-time high Y/Y increase of 11.2% for March.Yields on U.S. Treasuries climbed to their highest in years as the 10-year Treasury closed at 2.82%, its highest levels since December of 2018.Expectations still call for about ten rate hikes in total this year, with the odds increasing for 50bp hikes in May, June, and July, ultimately putting the benchmark rate between 2.50% & 2.75%.In the United Kingdom, consumer prices climbed to 30-year high of 7% last month. The FTSE 100 index declined 0.69% last week.The European Central Bank left its key deposit rate unchanged at 0.5% and announced that its asset purchase will slow down from €40B in April to €20B in June.

U.S.

U.S. equities finished mostly lower on the week with the Russell 2K being the broadest index that edged out a small weekly gain. The NASDAQ and S&P 500 fell for a second straight week, both losing over 2%. Growth names were again a large underperformer to value, drifting lower by more than 2.70% during the shortened week, bringing growth’s two-week underperformance against value to 5.70%. The FANMAG complex was also lower with all names closing between 2% and 6% lower, highlighting the risk-off tone underpinning equities.

Source: Bloomberg as of 04.20.22

Tech names were again the worst performing, coming under pressure as soaring yields continue to hit the long-duration assets. Semis fell for a third straight week, while FinTech (FINX), and profitless tech ARK Innovation (ARKK) also came under pressure, shedding 2.8% and 2.7% respectively. Healthcare underperformed with life science tools and services names being the main drag on the sector. Financials and more specifically, banks were lower after an underwhelming start to earnings season.

Re-opening names such as hotels, airlines, cruise lines, and casinos all rallied this week, with airlines being a notable outperformer after positive comments from Delta’s (DAL +15%) upper management, saying the carrier has sold a record number of tickets in the past five weeks as customers set aside their concerns about inflation to splurge on air travel.

There were few notable developments on the week, with the path of least resistance being lower. Despite a number of bullish talking points emerging, they did not gain much traction in terms of price action. Some of the points referenced were:

Peak inflationBetter Supply Chain trendEconomic normalizationStrong ConsumerOptimism surrounding quarterly earnings

INFLATION AND THE FED

Treasuries finished the week under pressure, driven by Tuesday’s March CPI report, which largely came in-line with expectations, showing a gain of 8.5%, which was the largest gain since 1981. The widely followed inflation gauge rose 1.2% from a month earlier, with gasoline costs driving half of the monthly increase. Following the report, yields declined before pushing to new three-year highs as the 10-year yield finished at 2.82%, its highest closing yield since December of 2018. Wednesday‘s PPI number, reported from U.S. producers rather than consumers, hit its highest year-over-year reading of all time at 11.2% for March.

Analyst commentary noted the CPI report likely represented peak inflation, with many expecting inflationary pressures to continue to subside as supply chain issues begin to ease, and the Fed continues to increase lending rates. According to this week’s NY Fed Survey of Consumer Expectations, one-year inflation estimates now stand at 6.6%, the highest on record, while the three-year expectation moved slightly lower, slipping to 3.7%, down from 4.2% six months ago.

Source: Bureau of Labor Statistics, Bloomberg as of 04.20.22

Despite potentially peaking inflation and a CPI report that largely came in-line with expectations, market participants increased the odds of a 50bp hike in May, June, and July. Odds now show the market is pricing in a 91% probability of a 50bp hike at the May meeting.

Additionally, the new total hikes being priced now stands at 10 for 2022, although probabilities of this event fell this week from 57% to 42%. Ten potential hikes this year, ranging from 0.25% to 0.5% would ultimately push the benchmark rate up to the 2.50% – 2.75% range.

Source: Bloomberg as of 04.20.22

With a more hawkish Fed taking action to try and curb inflation pressures, 30-year mortgages touched their highest levels in more than a decade, surging to 5%. The last time rates hit 5% was in February 2011 and comes as elevated home prices and already tight inventory are making homeownership the most expensive in a decade. With housing and rent accounting for roughly one-third of the CPI basket, these higher borrowing rates could potentially cool headline CPI if the housing sector slows.

Ultimately, investors, economists, and other officials still believe the Fed can engineer a soft landing, despite the warning of the Financial Times given that the Central Bank has a spotty record when trying to engineer one, with six of the last eight campaigns to fight inflation have resulted in a recession soon after.

Recent Fed speak continued to mirror the hawkish outlook seen from investors (despite the odds of 10 hikes falling), with the following making headlines this week:

Christopher Waller told CNBC he sees multiple half point rate hikes aheadLael Brainard said tighter financial conditions should start to slow overall demand and reduce the level of job openings

Source: Bloomberg as of 04.20.22

EARNINGS

Earnings season kicked off with large banks reporting results with few notable takeaways.

JPMorgan announced an earnings miss, although some analysts noted better trends around expense control.WFC slumped more than 3% after top line revenue missed estimates, while earnings came in ahead (although were down on a year- over-year basis). The bank reported weaker net interest income and ongoing risks to the downside from the war in Ukraine as the reason for the miss.

International

The Bloomberg World index decreased 1.61% as peace talks between Russia and Ukraine stalled. Brent oil surged from $102 per barrel to $112 as Libya closed its biggest oil field and warned of additional shutdowns. As a result, Libya’s total oil production is down by half a million barrels a day. Bloomberg reported that two Libyan ports have been ordered to stop loading oil after political protests called for the resignation of the Prime Minister. Instability in the region is another upside catalyst for oil prices and inflation. World Bank cut its 2022 global growth outlook from 4.1% to 3.2%, citing Russia’s invasion and COVID-19 as the main headwinds.

Europe

The European Central Bank (ECB) left its key deposit rate unchanged at 0.5% and announced that its asset purchase will slow down from €40B in April to €20B in June. ECB President Christine Lagarde announced that Quantitative Easing should end in the third quarter amid the 7.5% surge in inflation. Policy makers reportedly agreed to lift rates as soon as June by 25bps. Markets anticipate at least two rate hikes by year- end. In March, the Euro-area consumer confidence plunged to the lowest level since May 2020. First quarter earnings announcements will provide more clarity regarding the overall health of consumers. The Euro STOXX index dropped 0.15% last week, with technology down 2.22%.

In the United Kingdom (UK), consumer prices climbed to 30-year highs of 7% last month, adding pressure on Bank of England to tighten financial conditions. Economists project 9% inflation in April as a 54% price hike in energy bills is expected to kick in. Wages data also point to a healthy economy, with 5.4% year-over-year growth in March versus 4.8% in the prior month. Tesco, UK’s largest retailer, warned investors

that cost pressures could affect profit margins this year. Bank of England sees inflation peaking at 8% this year before gradually slowing down. Markets anticipate 25bps rate hike at the next policy meeting on May 5th. The FTSE 100 index declined 0.69% last week, with financials down 3.8%.

APAC

In China, new economic data gave a glimpse of the impact of COVID-19 restrictions. While GDP rose 4.8% year-over-year in the first quarter, retail sales dropped 3.5% in March from a year ago and the unemployment rate rose to 5.8%. Over the past weeks, monetary and fiscal authorities announced various stimulus packages to offset the cost of COVID-19 restrictions. In Shanghai, officials encouraged companies to restart production despite surging COVID-19 cases. The People’s Bank of China announced that it would cut the reserve requirement ratio for most banks by 25bps to ease financial conditions. Despite these measures, Chinese stocks broadly remain in a bear market as markets expect worse economic readings for April and possibly May. The Shanghai Composite index declined 0.81% last week.

In Japan, the Yen extended its decline against the greenback for a twelfth straight session as Bank of Japan (BOJ) intervened in the bond market to cap yields. BOJ governor, Haruhiko Kuroda, kept a dovish tone in his recent press conference and said that the Central Bank will remain accommodative to stimulate the economy. Kuroda added that a weak Yen should be positive for the economy and that the BOJ will discuss stimulus exit plan when the 2% inflation goal is reached. In February, inflation climbed to 0.9%, the highest level since April 2019. The NIKKEI 225 index gained 0.69% last week.

Source: Bloomberg as of 04.20.22

Emerging Markets

In Brazil, President Jair Bolsonaro announced his plan to spend $1.3B to boost public worker wages by 5% starting in July. The news came after several weeks of protest and strikes from state and municipal workers, including employees from the Central Bank and the Internal Revenue Service. Surging costs of energy and raw materials pushed inflation to 11.3% year-over- year growth in March, up from 10.5% a month earlier. Petrobas, the leading oil and gas producer in Brazil announced a 25% fuel price hike despite little political support. Last week, the state-controlled energy producer selected former energy minister official Jose Mauro Coelho as the new CEO. Energy prices will play a key role in public opinion ahead of presidential elections later this year. Brazilian stocks dropped 1.81% last week.

Source: Bloomberg as of 04.20.22

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