Last Week in Review – January 7, 2022

Last week stocks backed away from record highs as longer-term bond yields increased. Expectations for higher interest rates took a particular toll on growth stocks and the technology-heavy Nasdaq Composite—which suffered its most significant weekly decline in nearly a year—by increasing the implied discount on future earnings. Technology and health care shares were fragile within the S&P 500 Index, while energy shares outperformed as domestic oil prices pushed back toward USD 80 per barrel. Financials were also strong.

The S&P 500 reached a new high on Monday, although traders I spoke with noted that only five of the index’s 11 sectors were in positive territory. After the electric vehicle maker reported more fourth-quarter deliveries than expected, Tesla was a significant driver of the gains. Indeed, reflecting the dominance of the most heavily weighted stocks (similar to last year), traders noted that stripping out gains in Tesla and mega-caps Apple and Amazon.com would have left the S&P 500 nearly flat for the day.

US – Markets & Economy

Market sentiment took a notable turn for the worse on Wednesday afternoon following the release of minutes from the Federal Reserve’s mid-December policy meeting. The minutes revealed that policymakers had discussed faster and more aggressive rate hikes, with the first quarter-point hike in the official short-term rate coming as soon as March. Officials also discussed reducing the Fed’s balance sheet soon after liftoff. Selling a portion of the Fed’s USD 8.8 trillion in Treasuries and agency mortgage-backed securities would put upward pressure on long-term rates as well.

The week’s omicron news seemed to have a mixed impact on markets. Traders noted that new lockdowns in Hong Kong appeared to contribute to Wednesday’s sharp declines, and U.S. case numbers set new records. Investors seemed reassured that rising hospitalizations were decoupling from reported cases, and the number of deaths remained roughly stable.

Economic data released during the week were also mixed. The Institute for Supply Management’s (ISM’s) gauges of manufacturing and service sector activity missed consensus expectations but indicated healthy expansion. The ISM survey also showed that supply challenges might be easing for manufacturers.

Friday’s closely watched jobs data offered decidedly mixed signals. The monthly payrolls report showed that employers added only 199,000 jobs in December, roughly half of consensus expectations. This was a big disappointment to the White House, who expected a number north of 400,000. Average weekly hours worked also fell slightly. On the other hand, the household survey showed that the unemployment rate fell to 3.9%, lower than the 4.2% expected and near levels seen just before the pandemic. Average hourly earnings rose 0.6% in December, beating expectations for a 0.4% gain. The conflicting data suggested that many Americans chose self-employment, especially considering the record 4.5 million people quitting their jobs in November.

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

Stock prices fluctuated on the conflicting data, but U.S. Treasury yields moved decisively higher. The yield on the benchmark 10-year U.S. Treasury note touched 1.80%, its highest level since the onset of the pandemic. (Bond prices and yields move in opposite directions.) Municipal bonds held up somewhat better, thanks to a light primary market calendar and positive flows into municipal bond portfolios industrywide.

Investment-grade corporate bond credit spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—tightened at the start of the week despite an active primary calendar. However, sentiment appeared to soften as investors digested the hawkish tone of the Fed’s meeting notes, and spreads drifted wider in response. From a technical perspective, secondary trading volumes rebounded, and new issuance exceeded weekly expectations.

Traders reported that high yield bonds (which have a high correlation to equities) traded lower due to rates increasing and general risk-off sentiment. Investors also appeared to focus on reopening the primary market, which contributed to some weakness in the secondary. Broader risk markets seemed to be assessing the hawkish tone of the Fed’s meeting minutes and the prospect of earlier rate hikes.

US Treasury Markets

Interesting News Overseas

Shares in Europe pulled back amid worries that central banks may reduce asset purchases and raise interest rates faster to contain persistent inflation. The pan-European STOXX Europe 600 Index ended the week 0.32% lower in local currency terms. The main equity indexes in Germany, France, and Italy advanced. The UK’s FTSE 100 Index gained 1.36% as banks and energy—industries that include some of the index’s largest stocks—rallied.

Core eurozone bond yields rose with U.S. Treasury yields. Minutes from the Federal Reserve’s mid-December meeting justified the need for a faster pace of rate hikes, contributing to a broad sell-off in developed market government bonds. Core yields also jumped on Friday in anticipation of eurozone inflation data. UK gilt yields broadly tracked core markets. Peripheral eurozone bond yields also rose as part of the global sell-off but faced additional upward pressure from reports of new supply in Italy.

Inflation in the eurozone accelerated to a record level in December, driven by a surge in energy and food costs. According to the European Union’s harmonized index, consumer prices rose 5% year over year—an acceleration from the 4.9% inflation rate registered in November. German inflation came in near a 30-year high, prompting Finance Minister Christian Lindner to announce that the government was considering financial aid for lower-income households to pay for rising heating bills.

Chinese stocks fell for the week. The CSI 300 Index slid 2.3%, and the Shanghai Composite Index shed 1.7% amid ongoing turmoil in the property sector and the U.S. Federal Reserve’s hawkish tilt. Yields on China’s 10-year government bonds rose to 2.837% from the previous week’s 2.793% as investors adjusted for a reduced yield premium between China and the U.S. The yuan posted its biggest weekly drop since mid-September, reflecting expectations of U.S. monetary tightening. The currency struck a three-week low of 6.3832 against the U.S. dollar before recovering to 6.376.

Lastly, China’s cash-strapped property developers, which are grappling with an unprecedented liquidity squeeze due to a housing slump and high debt levels, continued to make headlines. China Evergrande, the world’s most indebted developer with over USD 300 billion in borrowings, said it would seek approval for a payment delay on one of its yuan-denominated bonds at a meeting with creditors over the weekend. Evergrande has not yet missed any payments on its onshore bonds, which are more senior than the offshore debt, after missing USD 82.5 million in offshore interest payments last month.

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