Last Week in Review – February 4, 2022

Last Week In Review

Last week equity markets remained volatile but recorded overall gains for the second consecutive week. Breaking with a pattern of value outperformance mainly in place since November, growth and value shares performed similarly, while mid-and small-caps outpaced large-caps. It was one of the busiest weeks of the fourth-quarter earnings reporting season, with 112 companies in the S&P 500 Index reporting results.

These included several mega-cap names, which drove significant moves in the overall benchmarks. Meta Platforms’ report of a decline in Facebook’s average daily users and guidance for slower revenue growth resulted in a 26% decline in its stock price. It wiped a record USD 232 billion off its market capitalization on Thursday. Conversely, Amazon’s report of better-than-expected earnings, driven in part by its Web services business, helped the indexes jump back Friday morning. Energy shares performed best, building on their significant lead for the year as U.S. oil prices rose above USD 90 per barrel and as major oil exporters agreed to stick to only a modest production increase in the face of high demand.

US – Markets & Economy

Traders I spoke to reported that the major earnings releases took some—but not all—of the focus on rising bond yields and interest rates. The week’s heavy calendar of economic releases included data showing that manufacturing prices rose more than expected in January, reflecting modest upside surprises in gauges of factory activity. Measures of services sector activity fell back, probably reflecting the imprint of the omicron variant of the coronavirus, but not as much as expected.

Labor market data appeared to puzzle investors. On Wednesday, private payrolls firm ADP reported that its tally of private-sector employment fell by 301,000 in January—the most significant drop since the start of the pandemic. Friday morning’s official Labor Department jobs report showed a surprising gain of 467,000 jobs in January—roughly three times consensus expectations—despite the impact of omicron. Previous months’ gains were revised significantly higher, and average hourly earnings jumped 0.7%, the most significant increase in 10 months. Expectations are that these numbers may be revised downwards over the coming month(s) as the gain was abnormally high considering economic conditions.

The unemployment rate ticked higher to 4.0%, but this seemed to reflect an increase in the labor force participation rate, which rose to its highest level (62.2%) since the start of the pandemic. Observers pointed to the end of the increased federal Child Tax Credit and easing coronavirus concerns as encouraging a return to work. Many also cautioned that January’s preliminary payrolls number might also be revised significantly given the unique circumstances posed by the pandemic.

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 jobs data pushed the yield on the benchmark 10-year U.S. Treasury note to 1.93% on Friday morning, its highest level since late 2019. (Bond prices and yields move in opposite directions.) Despite the higher Treasury rates, the broad municipal bond market rallied through most of the week. Municipal traders observed more robust demand from institutional buyers and a positive reversal in cash flows as the week progressed.

According to traders, investment-grade corporate bond spreads are on positive footing as expectations of a lighter primary calendar, generally encouraging corporate earnings reports, and relatively attractive valuations after some year-to-date weakness boosted demand. However, an uptick in new issuance weighed on the asset class later in the week, with more volatile bonds underperforming.

High-yield bonds rebounded from recent weakness and traded higher along with equities. The high yield primary market was active, with several new deals were announced with steady demand as buyers reemerged. However, the market gave back some gains after weaker tech earnings were announced on Wednesday afternoon and renewed inflation fears following hawkish commentary from the European Central Bank (ECB).

The bank loan market also performed well. Earnings beat(s) boosted sentiment, and traders noted that positive retail flows continued. There was strong demand from collateralized loan obligations as more loans trading below par supported the secondary market.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Equities in Europe weakened after European Central Bank (ECB) President Christine Lagarde made comments that appeared to leave the door open for a possible rate increase this year. The pan-European STOXX Europe 600 Index ended the week 0.73% lower in local currency terms. Major indexes slipped as well. Germany’s Xetra DAX Index fell 1.43%, while France’s CAC 40 Index declined 0.21%. Italy’s FTSE MIB Index posted a modest gain, while the UK’s FTSE 100 Index advanced 0.67%.

Core euro zone bond yields rose on concerns about inflationary pressures and the possibility of a shift in the ECB’s accommodative policies. Peripheral eurozone bond yields moved in tandem. A Bank of England (BoE) interest rate increase—the second one since December—pushed gilt yields higher.

At a press conference following the ECB’s policy meeting, President Lagarde, in typical central bank double-speak, declined to reiterate that it was “very unlikely” that the central bank would raise interest rates this year after being asked about the market appearing to price in some tightening in monetary policy. “You know, I never make pledges without conditionalities, and it is even more important at the moment to be very attentive to that,” Lagarde replied. “We will assess very carefully, [and] we will be data-dependent. We will do that work in March.”

Her comments came after the ECB decided to keep its deposit rate at a record low of -0.5% and stuck to plans to reduce asset purchases this year. Data released earlier in the week showed that eurozone inflation unexpectedly ticked up to a new record of 5.1% in January.

The BoE raised its key interest rate to curb inflation that the central bank forecast could hit 7.25% in April. The Monetary Policy Committee (MPC) voted 5 to 4 to increase the bank rate by a quarter-point to 0.5%. The minority wanted a half-point hike. The MPC also voted unanimously to stop reinvesting the proceeds from maturing government bonds bought in its quantitative easing programs.

Meanwhile, Stock markets in Japan generated a positive return for the week, with the Nikkei 225 Index rising 2.70% and the broader TOPIX Index up 2.86%. A rally late in the week in some stocks that would benefit from an economic reopening was sparked by a report from Japanese broadcaster TBS, which indicated that the government could present a policy as early as next week covering whether to ease the ban on the entry of nonresident foreigners into Japan. However, TBS did not elaborate on when and how the measures would be relaxed.

On the monetary policy front, the Bank of Japan (BoJ) reassurance the market that it had no plans to modify its policy boosted broader sentiment. Although price momentum in Japan remains low, inflationary pressure is forcing other major central banks to tighten monetary policy, prompting some speculation that the BoJ could follow. The 10-year Japanese government bond yield rose to 0.20%, from 0.17% at the end of the previous week, the highest since the BoJ started its negative interest rate policy in January 2016. The yen strengthened to around JPY 114.91 against the U.S. dollar, from the prior week’s JPY 115.26.

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