Week in Review: March 18, 2022

March 20, 2022

Recap & Commentary

Markets ended a busy week higher with the S&P 500 enjoying its best weekly gain since November 2020, thanks to increasing optimism for a diplomatic solution to the fighting in Ukraine and pledges from the Chinese government to support both its economy as well as financial markets. In addition, the Federal Reserve raised rates, as expected, but otherwise did not throw the markets any curve balls. Interest rates, as measured by the 10-Year Treasury yield, ended the week at 2.15%, boosted by the Fed’s decision and the overall risk-on attitude of investors.

With COVID cases accelerating in Hong Kong and mainland China, authorities imposed a lockdown on multiple cities including Shenzhen, a large industrial hub. However, days later the Chinese government indicated that it will take a more nuanced approach to its zero-COVID policy, relaxing some of its strictest quarantine rules. In addition, the government announced that it will “actively introduce policies that benefit markets,” including supporting overseas share listing and keeping domestic stock markets stable. That resulted in Hong Kong’s Hang Seng index jumping 9.1%, its largest daily gain since 2008.

As expected, the U.S. Federal Reserve raised rates by 0.25% following its March meeting. The Fed also provided updated interest rate projections for 2022 and beyond which forecast the Fed raising rates a total of seven times in 2022 and another four in 2023, leaving year-end rates at 1.9% and 2.8%, respectively. In addition, the Fed indicated that it expects to begin reducing its balance sheet “at a coming meeting,” i.e., sooner rather than later. Speaking afterwards, Federal Reserve Chair Jay Powell helped allay investor concerns that the U.S. central bank might be acting too aggressively by noting that the economy is “very strong” and the chance of a recession “is not particularly elevated.”

Economic Commentary

Producer Price Index (PPI) in February was slightly weaker than expected, providing a glimmer of hope on the inflation front. The 0.8% gain was 0.1% less than expected and down from January’s 1.2% pace. However, similar to the February reading on consumer prices, the recent surge in commodity prices following the outbreak of fighting in Ukraine was not captured in the data. Thus, March data could see prices move higher once again.

Consumers pulled back on spending in February, with retail sales rising just 0.3% compared to an outsized 4.9% gain in January. “Control” sales which exclude autos, gas, building materials and food services, and correspond more closely with consumer spending captured in GDP data fell 1.2%.

Despite continued supply chain issues and rising input costs, February housing starts rose to their highest level since 2006, reflecting continued strong demand.  At the same time, however, existing home sales fell slightly, to a six-month low, as limited supply and higher mortgage rates pressured sales activity. Compared to a year ago, the median price rose 15% to $357.3K.

Industrial production rose 0.5%, aided by some supply chain improvements and fewer workers missing time due to COVID.

Of Note

U.S. gasoline prices hit a new all-time high of $4.33 per gallon, exceeding the prior record of $4.10 per gallon set in 2008. However, on an inflation-adjusted basis, today’s prices remain well below those of 2008, which would now be over $5.20.

S&P 500 6.2%
Small Caps 5.4%
Intl. Developed 5.5%
Intl. Emerging 3.4%
Commodities -2.4%
U.S. Bond Market -0.4%
10-Year Treas. Yield 2.15%
U.S. Dollar -0.9%
WTI Oil ($/bl) $105
Gold ($/oz) $1,920

The Week Ahead

  • New Home Sales
  • Pending Home Sales
  • Durable Goods Orders
  • Manufacturing PMI
  • Services PMI
  • Consumer Sentiment
  • Weekly Jobless Claims

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