Most US stocks were lower again last week as the Russian war in Ukraine ground on. Once again, energy was the only sector in the S&P 500 to finish higher on the week. Interestingly, European stocks fared somewhat better in the latter half of last week, rebounding significantly after reaching YTD lows on Tuesday. Emerging market benchmarks were dragged lower by weakness in Chinese equities, which closed at 4+ year lows on Friday.

The selloff in bonds continued as investors lost hope that a silver lining of the war in Ukraine might be a less hawkish Fed. 2y Treasury yields rose 27bp, 10y yield gained 26bp to a fresh pandemic high of 1.99%, and 30y yields rose 19bp. After expectations for 2022 rate hikes fell in the days following the invasion, Fed Funds Futures markets are now pricing in a total of seven 25bp hikes by year end. See the Chart of the Week for a time series of 2022 rate hike expectations.

Last week brought some welcome relief in commodity prices, particularly oil which eased lower despite a US ban on Russian oil imports.

In economic news, the University of Michigan consumer sentiment gauge weakened in preliminary March data, with 1y forward inflation expectations rising to +5.4% while longer term (5-10y) expectations remains anchored at +3.0%.

Meanwhile, CPI data showed strong price gains in February:

* Headline CPI rose 0.8% sequentially to reach +7.9% y/y

* Core CPI (ex food and energy) rose 0.5% sequentially to +6.4% y/y

Stocks were lower last week as the Russian war in Ukraine intensified. European stocks were hit especially hard, sending MSCI’s EAFE developed market international index down 6.5% on the week. In the US, investors scrambled to increase their exposure to energy stocks and defensive sectors, while selling tech and most cyclicals besides energy.

Bond markets reflected the sharp increase in risk aversion, with Treasury yields falling across the curve while credit spreads widened. The belly of the curve saw the most dramatic move, with 10y yields falling 23bp on the week, 2y yields finishing lower by 9bp, and 30y yields falling 11bp. Meanwhile, investment grade credit spreads moved wider by 9bp to reach 122bp, while high yields spreads were 23bp wider on the week, finishing at 376bp. See the Chart of the Day for a time series of credit spreads.

Commodity prices moved sharply higher last week. WTI finished above $115/barrel for the first time since September of 2008 (oil spiked briefly in the immediate aftermath of “Lehman weekend”), while the S&P GSCI Non-Energy Commodity Index closed at a new all-time high on Friday.
In economic news, nonfarm payrolls (+678k) significantly exceeded consensus expectations, while the unemployment rate fell to 3.8%. In a sign that inflation pressures may be abating slightly (at least prior to any economic fallout from the war in Ukraine), average hourly earnings were flat sequentially in February and fell to +5.1% y/y.

US large caps moved lower last week in the wake of higher-than-expected inflation data, with tech and other growth sectors underperforming while cyclicals (especially energy) held up better. Small and midcap benchmarks managed to finish the week in the green, as did international stocks.

Rates continued to move higher last week, particularly in the front end of the curve as 2y yields rose 19bp while 10y and 30y yields were up just 3bp. Investors recalibrated their bets regarding the forward path of Fed policy, with the chance of a 50bp hike at the upcoming March FOMC meeting rising from ~30% pre-CPI print to roughly 60% afterwards. By the end of the week, investors were pricing in between six and seven 25bp hikes by year-end.

Commodity prices edged higher last week, with oil surging on Friday as the
situation in Ukraine began to look increasingly tenuous. West Texas Intermediate finished the week at $93.10/barrel, its highest level since September of 2014.

Economic data was mixed last week. CPI rose +0.6% sequentially which was above consensus expectations, as core CPI reached +6.0% y/y while headline CPI printed at +7.5%. Initial jobless claims fell for the 3rd consecutive week as the omicron-driven uptick continued to fade. And finally, the University of Michigan Consumer Sentiment index came in much lower than expected in the preliminary February reading, as the current conditions component fell nearly 5 points while future expectations were down nearly 7 points. Encouragingly though, long term (5-10y) inflation expectations were unchanged from January at +3.1%.

Financial markets went into full risk-off mode last week, with equities moving lower, the Treasury yield curve flattening, credit spreads widening, and the dollar stronger. An uptick in jobless claims suggests that omicron is having an impact on demand, while investors continue to grapple with the hard pivot in Fed policy.

US large caps were down 5-7% on average, with small caps down even more sharply. Defensive sectors held up the best, along with energy stocks which were once again buoyed by rising oil prices. International equity markets fared better as they generally have so far in 2022, registering smaller losses.

Treasuries saw strong demand in the belly and long end of the curve as 10y and 30y yields fell by 2bp and 5bp, respectively. 2y yields finished slightly higher on the week, but fell 6bp in the last two sessions after peaking at 1.06% on Wednesday. Meanwhile, credit spreads widened modestly in investment grade markets and more significantly in high yield, echoing the move lower in equities.

Oil prices were also higher last week, although they too peaked on Wednesday before being pulled lower by the increase in risk aversion on Thursday & Friday.

While the uptick in jobless claims was not encouraging, other economic indicators were strong. Housing starts and residential building permits rose in fresh December data, the Philly Fed Business Outlook survey registered strong gains in the January print, and the Conference Boards Leading Economic Index (LEI) rose 0.8% in December, the 10th consecutive month of solid gains.

In a move that echoed the early days of 2021, markets got off to a rough start during the first week of 2022 as rising bond yields pushed discount rates higher for all risk assets.

The release of the December FOMC minutes provided a clearer window into the Fed’s current thinking on inflation risks, and investors responded by pushing yields higher across the curve: 2y yields rose 13bp to 0.86% (a fresh pandemic high), 10y yields rose 25bp to 1.76% (also a new pandemic high), and 30y yields rose 22bp to 2.12% (still well off last year’s high of 2.40%). See the Chart of the Week for a time series of 2y Treasuries.

Credit spreads were mostly stable last week, pushing the price declines in
Treasuries through to corporate and municipal bonds as well.

In US equity markets, long-dated tech and other secular growth stocks were hit the hardest, sending the Nasdaq down 4.5% on the week. Cyclicals fared much better, with the energy sector posting a +10.6% total return, resulting in smaller declines for the S&P and especially the Dow. Small caps and international stocks also finished lower on the week.

Oil prices rose thanks to supply disruptions related to events in Libya and
Kazakhstan. OPEC+ announced an agreement to increase output that was in line with expectations.