Last Week in Review – April 29, 2022

Last Week In Review

Last week the major indexes endured a fourth consecutive week of losses. Growth fears were compounded by some disappointing earnings results from Amazon.com, which has a heavy weighting (price-weighted) in many major indexes. The S&P 500 Index moved further into correction territory, down roughly 14% from its recent peak. At the same time, the technology-heavy Nasdaq Composite and small-cap Russell 2000 Index fell further into bear markets, down approximately 24% from their highs. Energy stocks outperformed in the S&P 500 after Russia announced cutting off natural gas exports to Poland and Bulgaria.

The geopolitical and macroeconomic concerns that loomed large over sentiment in recent weeks remained in place. Still, traders I spoke with noted that there were few headlines to decipher, at least early in the week. Significant earnings reports from Microsoft and Google’s parent company Alphabet largely offset each other in last Wednesday’s trading, with positive guidance from the former helping compensate for an earnings disappointment from the latter.

A similar dynamic appeared to be set up for Friday trading, following conflicting earnings reports from two other mega-cap companies, Amazon and Apple. Amazon shares plunged 14% after the company surprised investors with its first quarterly loss since 2015 due to weaker online sales. Apple stock initially rose on the news that it recorded record revenue in the previous quarter. Still, cautious guidance for the current quarter because of supply chain problems seemed to drain the gains later in the session.

US – Markets & Economy

Last week’s economic data offered ammunition for both those predicting “stagflation” or easing price pressures in the months ahead. The most significant data surprise may have been the Commerce Department’s advance estimate showing that the economy contracted at an annualized rate of 1.4% in the first quarter, well below consensus expectations of a roughly 1.0% expansion. Falling inventory investment and a record trade deficit were mainly to blame. Most economists agreed that solid consumer spending (up 2.7%) and business investment (up 7.3%, well above expectations) suggested that it was too early to conclude that the data signaled the onset of a recession—often defined as two consecutive quarters of economic contraction.

Other economic reports also indicated continued expansion. Core capital goods orders (excluding defense and aircraft) rose 1.0% in March, double consensus expectations, while personal spending rose 1.1%, beating expectations for an increase of 0.7%. Some inflation data were arguably encouraging. The year-over-year increase in the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, eased to 5.2% in March, its first deceleration in over a year. The year-over-year headline PCE measure advanced to a 40-year high of 6.6% but also missed estimates. However, the employment cost index rose 1.4% in the first quarter, above expectations, reflecting the tight labor market.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

After decreasing early last week, the yield on the benchmark 10-year U.S. Treasury note ended near where it began, seemingly pushed higher on Friday, in part, by the favorable consumer spending data. (Bond prices and yields move in opposite directions.) Cash outflows from municipal bond portfolios industrywide continued to hamper the tax-exempt market, which posted modestly negative returns and underperformed Treasuries through most of the week. However, traders reported that, due to the market’s continued underperformance versus U.S. government debt, more attractive municipal-to-Treasury yield ratios led to greater demand from crossover buyers—those who typically invest in taxable bonds.

The investment-grade corporate bond market traded lower as geopolitics, a drop in consumer confidence, and mixed corporate earnings results weighed on sentiment. New issuance was subdued and fell short of expectations. Traders I spoke with noted that recent new issues and liquid bonds outperformed older bonds later in the week. High yield bonds also moved lower, with higher-rated bonds faring better than lower-quality issues, while increases in commodity prices bolstered the performance of the energy segment. A few new deals were announced in the early part of the week.

However, weakness in the bank loan market felt more attributable to buyers pausing rather than significant selling. They noted, however, that the market continued to see sellers of higher-dollar prices and lower-quality loans looking to take advantage of attractive values in high-yield bonds. Building products and industries more exposed to inflationary pressures underperformed as investors reduced exposure to those market segments.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Shares in Europe pulled back on concerns about slowing economic growth, high inflation, and tightening monetary policy. Encouraging quarterly earnings reports may have helped to moderate these losses. The pan-European STOXX Europe 600 Index ended the week 0.64% lower in local currency terms. Major market indexes were mixed. Germany’s DAX Index gave up 0.31%, while France’s CAC 40 Index slid 0.72%. Italy’s FTSE MIB Index was little changed. The UK’s FTSE 100 Index advanced 0.30%.

Core eurozone bond yields fell as mounting concerns about inflationary pressures and weakening economic growth increased demand for high-quality government bonds. UK government bond yields broadly tracked core markets. Peripheral eurozone bond yields broadly rose.

European Commission Executive Vice President Valdis Dombrovskis told UK newspaper The Times that Brussels is working on the sixth package of sanctions against Russia. These actions could include some form of oil embargo or another mechanism that would target Russia’s oil revenue while seeking to minimize the potential “collateral damage” to the European Union (EU), which relies heavily on energy imports from the country. Meanwhile, Russian state energy company Gazprom stopped gas supplies to Bulgaria and Poland for failing to pay in rubles, as decreed by a new law.

In France, Emmanuel Macron won a second term as president of France, defeating Marine Le Pen, the far-right National Rally party leader. Macron took about 58.5% of the vote, while Le Pen garnered 41.45%. About 28% of voters abstained, the most since 1969. France’s parliamentary elections are slated for June.

Stocks in Japan fell over the week, with the Nikkei 225 Index down 0.95% and the broader TOPIX Index finishing 0.29% lower. The Bank of Japan (BoJ) remained dovish at its April monetary policy meeting, leaving interest rates unchanged at their near-zero levels and maintaining the scale of its asset purchases. The central bank strengthened its easing stance by announcing that it will carry out fixed-rate bond-buying every business day instead of on an ad hoc basis. This exerted downward pressure on 10-year Japanese government bond yields, which fell to 0.21%, from 0.24% at the end of the previous week. The BoJ’s decision signaled a continued divergence from the monetary policy tightening pursued by other major central banks

and sent the yen sharply lower—the currency finished the week near a 20-year low of JPY 130.39 against the U.S. dollar, compared with the prior week’s JPY 128.47.

The BoJ raised its outlook for inflation, forecasting that the consumer price index (CPI) will rise by a median 1.9% on the previous year in the 2022 fiscal year compared with the 1.1% increase it predicted in January of this year. It attributed this to a significant rise in energy prices. Still, it said that a likely rise in the CPI to around 2% during the fiscal year is expected to be temporary (transitory part 弐つ). The central bank revised its forecasts for economic growth over the same period from 3.8% year on year to 2.9%. Factors cited included the resurgence of the coronavirus, rising commodity prices, and a slowdown in overseas economies.

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