Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending April 8, 2022 and Year-to-Date)
- Dow Jones Industrial Average®: -0.3% | -4.5%
- S&P 500® Index: -1.3% | -5.8%
- NASDAQ Composite® Index: -3.9% | -12.4%
- Russell 2000® Index: -4.6% | -11.2%
- 10- year U.S. Treasury note yield: 2.71%
- Up 32 basis points from 2.39% on April 1, 2022
- Up 120 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Health Care, +3.5%
- Weakest-performing S&P 500 sector this week: Information Technology, -4.0%
*Past performance is no guarantee of future results.
Yields rise as Fed signals further tightening
Treasury yields climbed and stocks fell as minutes of the Federal Reserve’s March meeting and new comments from Fed officials indicated more aggressive monetary tightening may be on the way. The small-cap Russell 2000 index and tech-heavy NASDAQ Composite suffered the steepest losses.
- Fed governor (and vice chair nominee) Lael Brainard said Tuesday that reducing inflation “is of paramount importance,” and therefore the Fed will continue raising interest rates and start “to reduce the balance sheet at a rapid pace as soon as our May meeting.” Brainard’s comments were especially notable given her previously strong support for accommodative monetary policies.
- The presidents of the Philadelphia, St. Louis, and San Francisco Federal Reserve Banks also gave remarks indicating their growing concern about inflation, and the minutes of the Fed’s March meeting (more below) added more detail about officials’ thinking.
- The 10-year Treasury yield jumped about 10 basis points (0.1%) after Brainard’s remarks and kept climbing to its highest level in three years. Treasury yields rose this week across the maturity spectrum, longer-term rates more so than shorter-term. The 2-year yield rose less than one basis point; the 5-year rose 12 basis points; the 10-year rose 32 basis points; and the 30-year rose 29 basis points.
- While the previous week’s yield curve inversion reversed, the yield curve is still quite flat, reflecting the market’s expectations of coming Fed actions and the possible impacts on the broader economy.
- Rising interest rates sent many technology and other growth stocks lower.
- The United States and European Union announced additional sanctions on Russia, including a ban on new American investment in Russia, an EU ban on Russian coal imports, and restrictions on Russian transport using European ports and roads. The U.S. also blocked Russia’s access to U.S. banks for processing debt payments, increasing the likelihood of a future default, and Congress formally approved measures to rescind Russia’s most favored nation trading status and ban imports of Russian oil, gas, and coal.
- The International Energy Agency’s member nations announced a release of 60 million barrels of oil from Strategic Petroleum Reserves over the next six months, coinciding with last week’s announcement of a 180 million barrel release by the U.S. Oil prices fell modestly during the week.
- Eurozone inflation reached 7.5% in March, above February’s 5.9% and the highest since the data set debuted in 1997. Energy prices drove the surge.
- A key purchasing managers index showed China’s services sector slumped into contraction in March. The government recently extended a COVID lockdown in Shanghai that appears to be adding to global supply chain challenges.
- By contrast, the Institute for Supply Management’s purchasing managers index showed the U.S. services sector gaining strength in March.
- Ford reported new vehicle sales fell 17% in the first quarter, consistent with industrywide trends as automakers continue to grapple with semiconductor chip shortages.
- Weekly initial jobless claims fell to 166,000, matching the March 19th figure, the lowest since 1968. Recent data was revised sharply downward amid modifications to the seasonal adjustment factors the Labor Department uses to calculate the figures.
- The Biden Administration extended until September a pause on federal student loan repayments, which could leave more money in some consumers’ pockets.
Fed minutes show broad support for faster tightening
Minutes of the Federal Open Market Committee’s (FOMC’s) March meeting revealed increased support for 50 basis point (0.5%) interest rate hikes and a more rapid reduction in the Fed’s holdings of Treasury and mortgage-backed securities (MBS) than during the last episode of balance sheet reduction from 2017-2019.
- According to the minutes: “Many participants noted that—with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting.” Uncertainty emanating from Ukraine was a noteworthy factor in policymakers’ decision to raise rates by 25 basis points rather than 50 basis points.
- A 50 basis point increase could still be in the offing: “Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.”
- The minutes also indicated the Fed plans to reduce its $9 trillion balance sheet by about $95 billion a month—$60 billion in Treasuries and $35 billion in MBS—possibly with a three-month phase-in period. The Fed will allow securities to mature without reinvesting proceeds. Once the process is “well under way,” the Fed may consider selling mortgage-backed securities so the portfolio consists mostly of Treasuries.
- None of the plans discussed in the minutes have been officially agreed. FOMC members will have an opportunity to refine their plans before voting on their next policy actions at their May 3-4 meeting.
Final thoughts for investors
As the Fed’s plans come into sharper focus, interest rates may continue to rise, affecting markets in various ways. Uncertainty spawned by the invasion of Ukraine, ongoing COVID challenges, and other risks will also influence market performance. Speak with a financial professional about staying on track toward your long-term goals.
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