Your Weekly Update for Monday, April 11, 2022.
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Markets finished down week. The Dow Jones Industrial Average fell 0.28% to 34,751.21 while the S&P500 ended down 1.27% to 4,488.28. The Nasdaq Composite fell 3.86% to 13,711.00. The annual yield on the 30-year Treasury rose 32.2 basis point(s) to 2.746%.
In a light week for economic data, ISM services sentiment continued to show strength, while the minutes from the most recent March Fed meeting laid out a plan for faster rate hikes and a plan to allow for a balance sheet run-off of treasury and mortgage bonds.
Equity markets in both the U.S. and abroad fell back last week, as interest rates ticked higher and economic concerns weighed on sentiment. Bonds suffered along with rising rates. Commodities were mixed, with gains in agriculture offset by less volatile energy prices last week.
(0) Minutes from the March FOMC meeting, as usual, didn’t offer any surprises not already touched on in the formal statement, but did provide some clarity about the mysterious upcoming balance sheet runoff plans. Additionally, it appeared that support for upcoming hikes in the magnitude of 0.50% are favored by committee members. (Early May would be the first potential hike of that level.) Of course, events in Ukraine and global economic ramifications remain in close focus, and the likely reason a half-point hike wasn’t put through in March.
The balance sheet run-off process is being closely anticipated, because one of this size has never been before attempted. It appears that a cap of $95 bil./month is the likely amount (split between about 2/3 treasuries and 1/3 agency MBS), to be phased in over the course of a few months. It’s obvious from the ‘phased’ language that the Fed is treading carefully on this, to avoid disrupting current market pricing, as well as future market expectations. However, at the same time, this pace would be twice as fast as the last cycle—starting after wrap-up of the financial crisis. (Bond markets obviously noticed.)
Inflation remains the most important focus at this time, an objective which looks to have finally superseded concerns over Covid, which is no longer being mentioned in the formal statement. Perhaps even more importantly, the Fed is committed to keeping future inflation expectations contained—which they appear to be when looking at a variety of measures five and ten years out. However, an economic environment that weakens at a deeper and faster rate than predicted could eventually put an early cap on the eventual peak fed funds rate, and obviously a less than ideal scenario for the Fed, which is attempting to ‘normalize’ things.
(+) The ISM services/non-manufacturing index for March rose 1.8 points to 58.3, reversing a drop the prior month, but falling short of expectations calling for 58.5. Under the hood, business activity, new orders, and employment all gained further into expansion. On the other hand, supplier deliveries fell back to the lowest levels in a year (although remaining solidly in expansion), while prices paid ticked up a bit further to even more elevated territory.
As with manufactured goods, sentiment remains solidly in expansionary levels, pointing to continued economic growth. This contrasts with some concerns over rising recessionary risks; however, those risks remain the lower-probability bear case at this time. If ISM falls below 50, into contractionary territory, recession probabilities may rise in line.
(0) Initial jobless claims for the Apr. 2 ending week fell by -5k to 166k, below the 200k consensus estimate. Continuing claims for the Mar. 26 week rose by 17k to 1.523 mil., above the 1.302 mil. forecast. These numbers were skewed a bit by a significant revision in historical seasonal factors by the BLS, done to reflect pandemic impacts, so last week should probably be taken with a grain of salt. Regardless, levels for both remain extremely low for the current cycle, reflecting very strong labor conditions.
|Period ending 4/8/2022||1 Week (%)||YTD (%)|
|Bloomberg U.S. Aggregate||-1.82||-7.89|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks pushed higher last week, despite few major events, and the upcoming earnings season not having yet started. By sector, leaders were a mix of defensives, such as health care, utilities, and staples, as well as energy, all of which gained several percent on the week. On the other hand, technology, consumer discretionary, and industrials all lost ground during the week, each by several percent. Elon Musk’s substantial investment in Twitter seemed to generate some excitement in growth sectors temporarily. Real estate also gained, despite the challenge of rising rates. Volumes appeared to be lower than average, with the start of earnings season coming up—featuring a likely divergence of results compared to the strength of a year ago at this time. With no real results yet, expectations for year-over-year earnings growth are running just below 5% (compared to almost 50% year-over-year in Q1-2021), but also expected to rebound to an above-average 10% or so for the full 2022 year.
Foreign stocks were in the negative as well last week, with the exception of the U.K., despite (another) wave of Covid cases in the latter. Emerging markets outperformed Europe and Japan, with gains in India coupled with less severe losses in Asia, despite enhanced lockdowns in Shanghai and a few dozen other cities. Sentiment in Europe remained tied to the war in Ukraine, and resulting cuts to economic growth this year. In fact, a recession wouldn’t be out of the question, despite metric such as labor still showing improvement generally.
U.S. bonds fell back again as treasury rates continued to move higher—the 10-year reaching over 2.7%. Yet, treasuries outperformed corporates, due to the change in spreads and sector effects. Floating rate bank loans, however, outperformed sharply, by ending flattish for the week, so at least suffering less damage. Foreign bonds suffered by several percent, with higher rates coupled with a stronger dollar, in both developed and emerging markets. Russian debt lingered on the brink of default, as the U.S. kept the government accessing payment systems—serving to keep the sanctions pressure on due to the damaging effects a sovereign default can have on borrowing ability and demanded rate.
Last week, Fed Governor Brainard noted the Fed is ‘prepared to take stronger action,’ which belied her usual more dovish tendencies. This caused longer-term rates to rise again. These comments also hinted at a ‘rapid’ reduction of the Fed’s balance sheet, which could begin as soon as the May meeting. Longer-term yields, such as the 10-year treasury, are hinged less on current fed funds levels than they are to longer-term inflation and growth expectations. Inflation has lasted longer than expected, but is expected to gradually decline, and long-term GDP growth remains anchored around the 2% level. There are also the cross-currents of a shrinking balance sheet, which takes away the Fed as a large market buyer of treasury debt, but also an underlying concern about rates rising unreasonably, which would escalate U.S. government interest payments. As it stands, estimates of some economists placing a rough ‘fair value’ target of the 10-year of around 2.5% has drifted upward by perhaps a half-percent, due to the faster-than-expected Fed balance sheet runoff.
Commodities were mixed on the week, with declines in energy and industrial metals offset by sharp gains in agriculture (wheat, corn, and soybeans) as well as higher gold prices. The price of crude oil bounced around a bit on the week, before ending down about a percent to just over $98/barrel. Natural gas, on the other hand, spiked by another 10%.
“Mortgage rates have increased 1.5%age points over the last three months alone, the fastest three-month rise since May of 1994,” said Sam Khater, Freddie Mac’s Chief Economist. “The increase in mortgage rates has softened purchase activity such that the monthly payment for those looking to buy a home has risen by at least 20% from a year ago.”
The 30-year fixed-rate mortgage averaged 4.72% with an average 0.8 point for the week ending April 7, 2022, up from last week when it averaged 4.67%. A year ago at this time, the 30-year FRM averaged 3.13%.
The 15-year fixed-rate mortgage averaged 3.91% with an average 0.8 point, up from last week when it averaged 3.83%. A year ago at this time, the 15-year FRM averaged 2.42%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.56% with an average 0.3 point, up from last week when it averaged 3.50%. A year ago at this time, the 5-year ARM averaged 2.92%.
Freddie Mac’s Primary Mortgage Market Survey® is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Mortgage Services Inc. dba Prestige Home Mortgage (NMLS#14216) in Vancouver, Washington we originate residential and reverse mortgages.
|Symbol||Name||Price||7d %||30d %||YTD %||Market Cap|
Information current as of 4:20 PM PDT, Monday, April 11, 2022. Source: https://coinmarketcap.com/
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.