Last Week in Review – February 11, 2022

Last Week In Review

Volatility continued last week, as the large-cap indexes ended the week lower, while the S&P Midcap 400 and small-cap Russell 2000 indexes recorded modest gains. The technology-heavy Nasdaq Composite fared worst and ended the week down roughly 15% from its recent peak, still in correction territory. Traders I spoke with noted that the tug of war between healthy earnings growth and fears over monetary tightening continued to dominate sentiment. Warnings from U.S. officials that a Russian invasion of Ukraine might be imminent may have also contributed to a late-week sell-off.

Declines in mega-cap technology stocks—including Facebook parent Meta Platforms, Microsoft, and Google parent Alphabet—weighed on the broader indexes last Monday. Still, the so-called reopening trade helped stocks regain their footing at midweek. Shares in restaurants, hotels, casinos, air and cruise lines, and online travel agency stocks rallied.

US – Markets & Economy

Highly anticipated inflation data on Thursday unwound the gains in stocks. 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.

In February, inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment, released last Friday. At 61.7, the index reading came in well below expectations of roughly 67 and hit its lowest level since October 2011. The survey’s chief researcher termed the drop “stunning” and pointed out that “nearly half of all consumers [are] expecting declines in their inflation-adjusted incomes during the year ahead.” According to FactSet, roughly three out of four S&P 500 companies reported earnings have referred to inflation in their earnings calls. Still, net margin estimates for the current quarter have fallen only slightly, suggesting that many businesses successfully pass on higher input costs to customers.

The University of Michigan data seemed to indicate that consumers were not especially comforted by improving COVID-19 trends and removing some restrictions. Several states, including California and New York, announced the rollback of mask mandates and vaccine requirements during the week. Amazon.com, the country’s largest private employer alongside Wal-Mart, also told that workers would no longer have to wear masks in its warehouses if they were vaccinated.

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

The upside CPI surprise, combined with hawkish comments from St. Louis Federal Reserve Bank President James Bullard, sent short-term rates racing higher on Thursday, resulting in a flattening 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. (Bond prices and yields move in opposite directions.)

According to traders, subdued forward supply expectations and an uptick in overnight demand from Asia supported investment-grade corporate bonds early in the week. However, the January CPI print, coupled with Bullard’s comments, contributed to risk-off sentiment and weighed on investment-grade corporate bonds later in the week.

Similarly, high yield bonds tracked equities more elevated in the first half of the week as buyers were more active, partly due to more attractive valuations following the recent interest rate-driven weakness. However, after last Thursday’s higher-than-expected CPI report and Bullard’s hawkish comments, the asset class retraced the gains. Traders noted that the primary market was quiet, with only a few new deals announced.

The loan market was flat most of the week. The asset class did not participate in the more robust performance seen in broader risk markets as loan investors awaited Thursday’s CPI print to get a new gauge on the inflation narrative and the aggressiveness of the Fed’s trajectory. Nevertheless, collateralized loan obligation demand and continued retail inflows supported loans.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Last week shares in Europe rallied, buoyed by strong corporate earnings. The pan-European STOXX Europe 600 Index ended at 1.61% higher in local currency terms. Value-oriented stocks and those in cyclical industries fared well, reflecting inflationary pressures and the possible implications for vital central banks’ monetary policies. Germany’s Xetra DAX Index advanced 2.16%, Italy’s FTSE MIB Index gained 1.36%, and France’s CAC 40 Index tacked on 0.87%. The UK’s FTSE 100 Index climbed 1.92%, helped by better-than-expected economic data.

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. UK gilt yields increased after data indicated that the economy contracted less than expected in December and grew 1% in the fourth quarter. This resilience appeared to contribute to market expectations for the Bank of England to increase interest rates again.

The Dutch and German central banks heads, who are members of the European Central Bank’s (ECB’s) governing council, separately commented that the ECB should wind down its asset-purchase programs to set the stage for potentially raising interest rates before year-end.

However, ECB President Christine Lagarde, the head of France’s central bank, and ECB Chief Economist Philip Lane pushed back against potentially tightening policy prematurely, citing the view that record-high inflation could subside and approach the central bank’s 2% target in the medium term. Lagarde seemed to adopt a more cautious stance, saying there was no need for a “measurable tightening” policy. She added that the ECB saw “no need to rush to any premature conclusion at this point—the outlook is way too uncertain.” In an interview at the end of the week, she then stressed that an increase in interest rates would not bring down inflation and undermine economic recovery.

Lastly, in a holiday-shortened week, Japan’s stock markets generated a positive return, with the Nikkei 225 Index rising 0.93% and the broader TOPIX index up 1.66%, supported by solid corporate earnings. The yen weakened to around JPY 116.02 against the U.S. dollar, from the previous week’s JPY 115.22. A higher-than-expected inflation reading in the U.S. sent the dollar higher amid expectations of aggressive monetary policy tightening by the Federal Reserve. With the 10-year Japanese government bond (JGB) yield finishing the week at 0.22% (compared with 0.20% at the end of the prior week), the Bank of Japan (BoJ) acted to curb rising yields and to maintain favorable financial conditions.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com