There's Something Happening Here
Prior Week Summary
Equity markets were incredibly volatile last week, with stock prices swinging wildly in sometimes frantic trading. The most common narrative that analysts pointed to as a cause for the volatility related to increasing concerns over deficit spending, and the risk of faster than anticipated inflation. Of all the interpretations that were offered by the analyst community, I found the view of Barry Ritholtz to be worthy of a direct quote. In an opinion article for Bloomberg, Mr. Ritholtz noted that “One of the more fascinating aspects about people and markets is how uncertain we are about what will happen next, yet so cocksure in our explanations of what just occurred. If it were so simple and predictable, why didn’t we see it coming in advance and prepare for it?”
It is important to keep in mind that the market can humble even the most prescient of investors, and that our best chance to harness the chaos is to develop a strong institutional risk management framework.
On the economic data front, it was a relatively quiet week, with little to drive markets one way or the other. The ISM non-manufacturing index rose to 59.9 in January, from a revised reading of 56 in December. The gain was largely attributable to increases in new orders, which rose 8.2 points to 62.7 last month.
The volatility in equities helped push the yield on the 10-year note closer to the psychologically important 3% barrier. 10-year yields traded as high as 2.89% during the week, before ending the week at 2.85%, levels that were last seen in the 2014 timeframe.
The Look Forward
The data calendar picks back up this week with updated information expected on consumer and producer prices, as well as the latest on retail sales. Cleveland Federal Reserve Bank President Mester is scheduled to discuss monetary policy and the economic outlook in a speech in Ohio. The auction calendar is relatively light, with 7 & 30 year TIPS coming mid-week.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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