highlights

U.S. equities posted their sixth straight weekly decline, the first such streak in over a decade. Over that time, the S&P 500 has lost 12%, while the NASDAQ has declined 18.70%.Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10% to -19.99%), and 13 bear markets, with an intra-year average decline of 14%. As of today, the S&P 500 is currently down just over 15%.Mega-cap tech continued to sell-off, weighed down by Apple and Microsoft. As of Tuesday, the plunge in tech stocks over the three- prior sessions led the combine value of all NASDAQ 100 members to shed nearly $1.7T of market value, the biggest wipeout over any similar stretch since at least 2000.CPI increased 8.3% year-over-year, and came in hotter than expectations. However, did decline on a month over month basis, causing some conversation to pick up regarding peak inflation.Fed speak from various members continued to highlight the need for multiple 50bps hikes in the coming months, as they downplayed the probability of a 75bp hike at this time.European Central Bank officials hinted that they could end Quantitative Easing by the end of June and start raising rates in July.In the United Kingdom, Bank of England warned more rate hikes may be needed to fight inflation.In China, industrial output fell 2.9% year-over-year in April, and retail sales plunged 11.1% during the same period.

U.S.

This week is the sixth consecutive weekly downward move in U.S. equity markets, the first such streak in over a decade. The NASDAQ led declines, finishing down 2.80%, while the S&P 500 closed lower by 2.41%. As the broader market sell-off continued, the S&P 500 touched its lowest levels since March 2021, while the NASDAQ hit its lowest point since November 2020.

Although, stocks received a much-needed end of week rally on Friday, in which the S&P 500 and NASDAQ gained over 2% and 3.8% respectively, 2022 has marked the worst start to a calendar year since 1932.

While the declines and volatility can make any client feel uneasy, we want to put in perspective how regularly market corrections happen. Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10%–19.99%), and 13 bear markets (-20% or worse) according to data from CFRA. On average since 1980, the S&P 500 has an intra-year drawdown of 14%; however, in 35 of the last 42 years, the index has posted a positive return.

Source: Bloomberg as of 05.18.22

Continuing to drive price action was the bearish narrative, which dominated headlines, and included:

Higher ratesA potential recessionMore persistent inflation than expectedFed-led global monetary tighteningContinued China lockdowns exacerbatingContinued geopolitical concernsGlobal growth shutdown

These headlines drove bullish sentiment close to its lowest levels on record.

Source: Bloomberg as of 05.18.22

Over the course of the week, growth meaningfully underperformed value with speculative assets and high valuation tech names coming under pressure again. Profitless tech (ARKK -4.5%), cloud and momentum software, solar, and fintech were among some of the largest underperformers, although it is worth noting mega-cap tech was also weighed down by a decline in Apple and Microsoft. As of Tuesday, the plunge in tech stocks reached levels not seen in the last two decades as the combined value of all NASDAQ 100 Index members dropped nearly $1.7 trillion over three days, the largest decline since at least 2000 according to Bloomberg.

Source: Bloomberg as of 05.18.22

Defensive sectors outperformed (with the exception of REIT’s) with Consumer Staples being the lone positive bright spot on the week, while Healthcare and Utilities declined less than all other risk assets. Treasuries were firmer across the curve with the 10-year yield declining about 20bps to 2.91%.

Perhaps the biggest news on the week from an asset class perspective was the blowup in various crypto currencies following the collapse of Luna and Terra. Bitcoin futures were down sharply, declining 16.4% while registering a seventh straight week of declines, finishing below the widely watched $30K level. After the $1T in capital losses seen in the space, JPMorgan warned there could be a spill over to the traditional financial system due to broad- based selling by retail investors. Although, in our opinion, this has not yet been seen and remains a low probability.

Source: Bloomberg as of 05.18.22

CPI AND PPI REPORTS FAIL TO SHOW END TO INFLATION

The most highly anticipated piece of economic data, the CPI report (and to a lesser extent, the PPI report), showed headline CPI increased 8.3% in April year-over-year, down from 8.5% in March, while core CPI (excludes food and energy) increased 6.2% year-over-year, down from 6.5% a month earlier.

While both April prints (headline and core) declined on a month- over-month basis, they both came in hotter than expected, providing little reassurance to investors that the Fed has inflation under control. However, with the sequential decline on a month over month basis, there was more focus and discussion regarding peak inflation, and how that seemingly appears to be in the rear-view mirror, despite a very tight labor market and strong household balance sheets.

Ultimately, the print did not shift rate expectations around with futures pricing in a fed funds rate of 2.63%, down slightly from the week earlier.

Source: Bureau of Labor Statistics, Bloomberg as of 05.18.22

FED SPEAK

This week was extremely busy in terms of Federal Reserve member comments, with many echoing the same general narrative.

Fed Chair Powell reiterated his planned 50bps hikes over the next two FOMC meetings. However, he did reference that the so-called “soft landing” may come with some pain and may be difficult to accomplish given this is the fastest pace of hikes experienced in over two decades.San Francisco Fed President, Mary Daly, said on Thursday that “going up in 50-basis-point increments to me makes quite a bit of sense and there’s no reason right now that I see in the economy to pause on doing that in the next couple of meetings,” in reference to the equity market volatility.St. Louis Fed’s James Bullard agreed with his constituents re-iterating that although the Fed is sensitive to disruptions in the financial markets, market volatility is the result of investors pricing in tighter monetary policy.Federal Reserve Bank of Atlanta President Raphael Bostic said he favors raising rates by half a point at each of the next two or three meetings and is open to “moving more” on interest rates if inflation persists.Federal Reserve Governor Christopher Waller gave the most aggressive comments saying, “I don’t care what the reasons are, inflation’s too high and it’s my job to get it down.”

Source: Bloomberg as of 04.20.22

While the Fed has a dual mandate, balancing an overly hot labor market and surging prices, many believe the Fed would rather send the U.S. economy into a recession than have inflation levels stay at current levels. Despite recession talks picking up as the selloff intensifies and inflation remains at elevated levels, many experts (JPMorgan’s Marko Kolanovic, Goldman’s David Kostin, Morgan Stanley’s Seth Carpenter and MKM’s Michael Darda) believe a recession is not the base case scenario, even though it is an outcome that is increasingly becoming priced in by markets.

International

The Bloomberg World index decreased 2.27% last week, with growth down 2.84% and value down 1.68%. Brent oil edged down 0.75% to $111 per barrel as Chinese lockdowns continue to impact global demand of energy. The Bloomberg Commodity index dropped 1.55% led by the sharp decline of steel and iron ore, partially offset by the good performance of wheat (+6.40% last week). The world economy weighted inflation year-over-year keeps trending higher, up 8.57% as of mid-May.

Europe

European Central Bank (ECB) officials hinted that they could end Quantitative Easing by the end of June and start raising rates in July. Bank of France’s Villeroy, Bundesbank’s Nagel and ECB’s Schnabel expressed their support for a swift shift in monetary policy as Euro area inflation rose 7.5% year-over-year in April. Recent rate hikes from the Federal Reserve and Bank of England show that the ECB chose a different path to prioritize the economic recovery from the Pandemic. Last week, coordinated efforts to add European sanctions on Russia failed to materialize as Hungary continues to veto the package. Unanimous approval from all Member States is required to legalize the new proposed sanction package. According to the latest guidance published by the European Commission, European companies can purchase Russian gas without breaking sanctions imposed on Moscow. The Euro STOXX index gained 1.39% last week.

In the United Kingdom (UK), Bank of England (BOE) warned more rate hikes might be needed to fight inflation. Policy makers expect consumer prices to peak around 10% in the fourth quarter, which could cause a temporary spike in unemployment rate to 5.5%. BOE Deputy Governor, Dave Ramsden, told reporters, “I don’t think we’ve gone far enough yet on bank rate, but I do think what we’ve already done is having an impact.” New data from Bank of England shows Britons are facing the second-worst year on record for living standards as real post-tax household disposable income shrank this year. Prime Minister Boris Johnson offered to extend price cap for energy bills beyond 2023, and tampered expectations for additional government support. He said, “For every pound of taxpayer’s money we spend on reducing bills now, it is a pound we are not investing in bringing down bills and prices over the longer term.” The FTSE 100 index gained 0.41% last week.

APAC

In China, new economy data show that Xi’s COVID Zero policy is taking a toll on the economy. Indeed, industrial output fell 2.9% year-over-year in April, and retail sales plunged 11.1% during the same period according to China’s National Bureau of Statistics. China also registered record high youth unemployment, with the rate of 16 to 24-year-olds climbing to 17%, compared to the headline jobless rate of 6.1%. Bloomberg Economics estimates that GDP declined 0.68% year-over-year in April, which would be the first contraction since 2020. Full lockdowns are still in effect in major cities despite the economic cost. The Vice Mayor of Shanghai said on Sunday that “normal life and production will only fully resume by mid-to-late June.” The auto industry is disproportionately affected by lockdowns, as not a single car was sold in Shanghai last month. Despite supply chain disruptions, the cost of shipping 40-foot box containers remains stable at $8,666, compared to $9,112 at the beginning of April. The Shanghai Composite index climbed 2.76% last week.

In Japan, producer prices rose 10% year-over-year, slightly above estimates of 9.4%. Bank of Japan Kuroda says “aggressive easing needs to remain”, although he warns about sharp yen moves that could potentially affect households and firms. In fact, Yen-based import prices rose 44.6% versus 34% a month earlier. Kiyoshi Imamura, managing director of a steel manufacturing company, claims macro conditions are pushing Japanese manufacturers to move their offshore operations to Japan. According to him, “the yen has fallen so much that Japan’s trade balance won’t be back in the black. Under such circumstances, companies judge it’s better to do manufacturing in Japan.” Economists expect rising inflation to be temporary and see a peak at 2.2% in October. The NIKKEI 225 index dropped 2.13% last week.

Source: China’s National Bureau of Statistics, Bloomberg as of 05.18.22

Emerging Markets

In Mexico, the Central Bank lifted its benchmark interest rate by half point to 7%, in line with Federal Reserve’s rate hike. Banxico said in a statement, “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” One of the Deputy Governor voted for a 75bps hike, a move that would have surprised markets as the consensus was for 50bps rate hike. The Mexican Peso rallied on the news and is now up 2.33% year-to-date versus the U.S. dollar, showing resilience in a strong dollar environment compared to other emerging market currencies. Mexican stocks gained 0.08% last week.

In Chile, a proposal to replace the concession model for copper producers with a system of temporary and revocable permits failed to meet the required two-thirds threshold to be adopted by the Chile Convention. As a result, the draft constitution lacks a clear mandate for mining rights, leaving legislation subject to changes in the future. Copper miners soared on the news as the current systems provide more earnings visibility and favors incumbents. Meanwhile, consumer prices continue to erode the purchasing power of Chileans. Last month, Chile CPI rose 9.4% year-over-year, well above the 3% target. Chile’s Central Bank lifted its benchmark interest rate by 125bps, to 8.25%, 25bps above the consensus estimate. Chilean stocks gained 0.25% last week.

Source: Banco de Mexico, Instituto Nacional de Estadistica, Geografia e Informatica, Bloomberg as of 05.18.22

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