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2020 Financial Markets Update

Week in Review: April 8, 2022

April 11, 2022

Recap & Commentary

Markets ended the week lower as investors digested ongoing headlines out of Ukraine, the brief 2-10 yield curve inversion, the release of the Federal Reserve’s March meeting minutes, and comments from a bevy of Fed officials. Notable among the comments were those by Fed governor Lael Brainard. Often viewed as “dovish,” Brainard struck a more assertive tone saying that the Fed will begin to reduce its balance sheet at a “rapid pace,” starting as soon as May. That was corroborated by the Fed’s March meeting minutes which stated that officials reviewed multiple options for reducing the balance sheet, all of which “featured a more rapid pace of balance sheet runoff than in the 2017-19 episode.”

The minutes further stated that officials generally agreed that the Fed should aim to reduce its balance sheet holdings by $95B/month. The combination of Brainard’s comments and the minutes led to a sharp sell off in longer-dated Treasuries, increasing the 10-Year Treasury yield by 0.33% over the course of the week. That was enough to reverse the brief 2-10 inversion at the start of the week. As a yield curve inversion is generally viewed as a harbinger of recession, investors will now be left to debate whether the short-lived inversion was an anomaly, or whether it portends further economic slowing.

The minutes also confirmed that the Fed is strongly considering raising rates by 0.50% at upcoming meetings, something it hasn’t done since 2000. The minutes indicated that such a move might be necessary “if inflation pressures remained elevated or intensified.” Given the recent sharp rise in commodity prices following Russia’s invasion of Ukraine, a 0.50% increase at the Fed’s May meeting seems highly likely. The futures markets have priced this in, as expectations for such a move currently stand at 79%.

Economic Commentary

Service sector activity accelerated in March, led by improvements in new orders, new export orders, and employment. The latter was heartening as employment had declined slightly in February as employers continued to struggle with attracting and retaining workers.

Consumer debt increased nearly $42B in February, the largest increase on record, easily surpassing the expected increase of $17B and January’s increase of $9B. The increase was led by a 21% ($1.1T) increase in revolving credit, e.g., credit cards. While its unclear what exactly drove the increase, it may be a sign of consumers struggling to keep up surging inflation. Despite average hourly wages increasing 5.6%, with inflation running closer to 8%, real wage growth continues to decline, putting further strain on consumers. Now with the Fed set to raise rates aggressively in the coming months, many consumers will also be squeezed by higher interest rates on their credit card debts.

Weekly jobless claims fell to 166K, a new record low dating back to 1968.

Of Note

According to the United Nation, global food prices rose 13% in March, the fastest pace on record. Since mid-2020, food prices have risen 50%. Fighting between Russia and Ukraine – two of the largest exporters of wheat and corn – has contributed to the large spike, which is expected to get worse before it gets better.

S&P 500-1.3%
Small Caps-4.6%
Intl. Developed-1.5%
Intl. Emerging-1.6%
U.S. Bond Market-1.8%
10-Year Treas. Yield2.71%
U.S. Dollar1.2%
WTI Oil ($/bl)$98
Gold ($/oz)$1,949

The Week Ahead

  • Consumer Inflation (CPI)
  • Producer Inflation (PPI)
  • Consumer Sentiment
  • Retail Sales
  • Industrial Production
  • Weekly Jobless Claims

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