|Dow Jones||S&P 500||Nasdaq|
The main indices concluded the week down, with small-caps and growth companies behind significantly. Within the S&P 500 Index, sector performance varied substantially, with normally protective consumer staples and health care sectors posting good gains while information technology, communication services, and consumer discretionary companies suffered sharp losses. Traders at T. Rowe Price noticed that volumes were light for most of the week as investors anticipated the start of the first-quarter earnings reporting season. However, Twitter shares increased by more than 27.0 percent on Monday, after reports that Elon Musk had purchased a 9.2 percent investment in the social media company.
The Federal Reserve’s stance and the crisis in Ukraine loomed big over emotions. Stocks fell dramatically on Tuesday morning after Fed Governor Lael Brainard, usually regarded as one of the more dovish officials, said in a speech that the Fed will begin “reduc[ing] [its] balance sheet at a brisk pace as soon as our May meeting.” Later that day, Federal Reserve Bank of Kansas City President Esther George told Bloomberg that there was “no doubt” the Fed needed to move quickly to combat inflation.
Following the publication of minutes from the Fed’s mid-March policy meeting, stocks dropped even lower on Wednesday. The minutes indicated that policymakers were willing to lower the central bank’s balance sheet by USD 95 billion each month, which was higher than the average forecast of roughly USD 80 billion—but not nearly as much as some on Wall Street had predicted. The minutes also revealed that authorities were planning to hike interest rates by 50 basis points (0.50 percent) at their May meeting. By the end of the week, futures markets predicted that the federal funds target range would rise to 2.50 percent to 2.75 percent by the end of the year, significantly above its current range of 0.25 percent to 0.50 percent.
The economic calendar for the week was rather light, although it could be argued that the economy was showing robustness in the face of inflation and the conflict in Ukraine. Most significantly, weekly unemployment claims dropped far faster than projected to 166,000, the lowest level since 1968. Continuing claims, on the other hand, increased unexpectedly. The Institute for Supply Management’s measure of service sector activity came in somewhat lower than expected, but it still suggested healthy growth.
Because of the Fed’s intentions for quick quantitative tightening (i.e., cutting asset holdings on its balance sheet), the yield on the benchmark 10-year U.S. Treasury note has reached its highest level since early 2019. (Trends and bond prices move in different directions.) As a result of the move, the carefully monitored two-year/10-year region of the Treasury yield curve steepened significantly, as the yield differential between the two maturities grew. Last Friday’s temporary inversion in that area during intraday trading stoked fears of an approaching recession. However, the five-year/30-year curve section, which many investors regard to be a recession signal, remained negatively sloped.
Tax-exempt municipal bonds continued to suffer, although they outperformed US Treasury bonds for the most of the week. According to our traders, persistent industrywide withdrawals from municipal bond portfolios—which have intensified in the last week, according to Refinitiv Lipper data—have resulted in strong selling activity at times.
According to our traders, technical circumstances in the investment-grade corporate bond market were impeded by tight liquidity and weak overnight Asian demand. Broader risk sentiment fell in tandem with the Fed’s hawkish minutes and remarks from Fed Governor Brainard. During moments of downturn, more volatile corporate bonds often underperformed.
According to our traders, high yield bonds suffered from the sell-off in rates and stocks, while aggressive Fed comments put most purchasers on the sidelines. Additional sanctions imposed by the international community on Russia heightened worries about inflation and the accompanying Fed policy actions, which impacted on risk assets such as high yield bonds. Our traders saw that the main market was lively early in the week, but that fresh issuance volume subsequently declined.
Bank loans outperformed wider risk markets due to limited issuance and positive flows, which generated good technical circumstances for the asset class. Our traders saw that sellers were mostly focused on the higher-dollar portion of the market, despite robust demand.