Morning Note | March 22, 2022
Good Morning!
Futures are up a day after markets snapped a 5-day winning streak, though they staged a strong late day rally. The 10-year is up again to 2.33%. Powell Is Ready to Back Half-Point Hike in May If Necessary. Bonds Extend Drop After Fed Sparks One of Worst Days in Decade. U.S. Yield Curve Crushed as Short-End Rates Surge on Fed Stance. Oil has given back its gains as it appears that EU may be unlikely to achieve a consensus to ban Russia oil imports. Biden warns, and reaches out to 100+ US companies, on Russian cyberattacks- suggests data encryption and 2-step authentication, at a minimum. CIBR may see a bid on the news, ETF is +12% during the war. NKE beat earnings in both North America and China; stock was +6.5% post-mkt and FL was up in sympathy.
Equities took a breather on Monday following a 6% gain last week, the S&P 500's strongest weekly gain since late 2020. The S&P 500 finished the day largely unchanged, though it saw some pressure midday after comments from Federal Reserve Chair Powell in which he referenced "too high" inflation and indicated that the Fed is willing to act aggressively to address it.
10-year Treasury rates were up sharply today, rising above 2.3% for the first time in nearly three years. Interest rates have risen as fixed-income markets continue to price in expectations for several more rate hikes this year after the Fed announced the first hike last week. The increase in longer-term rates is adding some steepness to the yield curve, which reflects Fed Chair Powell's suggestion Monday that more aggressive policy is not out of the question. The probability of a 50 basis point increase in May (as opposed to 25 bps) climbed above 60%. Eight 25 bps rate hikes (seven in addition to the one we just had) this year have been fully priced in. Could we see nine?
Yield curve inversion is getting a lot of attention now given that the flattening has been truly tremendous in the last month. But remember, the 10-yr is still depressed because of the intervention of the Fed. Some estimates believe that the rate is about 100 bps below the natural level if the Fed was not manipulating it. So there is a theory in the media the inversion doesn't mean as much as it used to. But the rates are the rates and banks will likely not lend in an inverted environment regardless if it is manipulated or not.
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