A deluge of data showing a resilient economy and persistent inflation cemented the case for higher interest rates and helped to stoke bearish sentiment among traders. Minutes of the Fed's last meeting released on Wednesday indicated that its members continue to support more rate hikes. It is highly likely that the Fed funds rate will reach the 5.25%-5.50% range this year. Fed fund futures traded at 94.60. The U.S. central bank is expected to hike rates at upcoming meetings in March, May, and June. The yield on the U.S. benchmark 10-year Treasury notes hit a fresh three-month high at 3.95%, up 13 basis points week-over-week.
Investors shifted out of risky assets, flocking to T-bills and money market funds. Several billion were added to short-duration Treasury ETFs. The S&P 500 closed below its 50-day moving average of 3,980 points, sitting at 3,970.04 on Friday (down 109.05 points, or -2.67% for the week, up +3.40% for the year). It’s only 30 points above the 200-day mark of 3,940 points. The Dow Jones Industrial Average was down 1,009.77 points, or -2.99%, at 32,816.92, slipping into negative territory on the year (-1.00%). The Nasdaq Composite dropped 3.33% to 11,394.94, bringing its year-to-date performance to +8.87%.
European stock markets also closed lower, as investors digested German inflation data. It stood at +8.7% in January, measured as the year-on-year change in the consumer price index (CPI). It eased to 8.6% in December. At the same time, sentiment improved among German business leaders. The IFO Business Climate Index rose to 91.1 points in February, up from 90.1 points in January. The DAX 30 traded 1.76% lower (up +9.24% year-to-date). The CAC 40 shed 2.18% (up +11.02% YTD). The MSCI EMU fell 2.30% (up 9.93% YTD).
In Asia, China’s central bank left its interest rates unchanged. The Shanghai Composite gained 1.34% over the week (+5.76% for the year), offsetting the losses suffered over the last three weeks. Investors continue to see a sustained economic recovery this year in the wake of reopening and policy stimulus. In Japan, the Nikkei 225 index edged down 0.22% (up 5.21% YTD).
Resilience of energy stocks
Ten of the 11 S&P sectors ended the week in the red, with communication services and consumer discretionary among the biggest decliners. Communication services fell 4.37%, weighed by Netflix (NFLX, -8.85%) and Alphabet (GOOG, -5.54%). Consumer discretionary plunged 4.44%, dragged lower by losses in Tesla (TSLA, -5.49%). This is its worst weekly performance since a similar skid in mid-December. Rising yields also pressured the IT sector (-2.71%) despite the Nvidia-led surge in chip stocks. Nvidia Corp (NVDA) delivered upbeat guidance following quarterly results, sending its shares 8.87% higher.
Energy was the only sector that managed to stay above the flatline (+ 0.17%). WTI crude oil futures remained unchanged week-over-week (-0.03%). By contrast, natural gas futures prices rebounded (up 14%, but down 74% compared with the level observed at the end of August).
U.S. Treasury yields rise for the fifth straight week
Expectations for further rate hikes pushed Treasury yields higher. They now reach levels not seen in three months. The 10-year benchmark rate hit its highest level since Nov. 9 (3.95%). The 2-year yield, meanwhile, rose to 4.78%. Yield curve inversion (-83 basis points) is deepening, leading to heightened concerns about a possible U.S. recession. Furthermore, the Fed decreased its balance sheet by $51 billion over the last three weeks, and almost $170 billion since the beginning of the year. The unwinding of its balance sheet drains liquidity, which also drives yields higher.
In Europe, the yield on the German 10-year Bund gained 10 basis points to 2.54% from 2.44%. The French OAT yield moved up in unison (+10 basis points at 3.01%).
The corporate bond market retreated as investors' risk appetite was waning.
Investment grade corporate bond prices were down 0.62% in Europe (IBOXX € Liquid Corporates index up 0.75% year-to-date) and down 1.18% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index up 0.43% YTD).
High-yield bonds slid 0.41% in Europe (IBOXX € Liquid High Yield Index up +2.97% YTD) while they edged down 0.11% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index up +1.48% YTD). Emerging debt dropped 0.47% (+1.11% YTD), weighed again by a strong greenback. The dollar index topped 105.25 (+1.35% over the week).
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