The Market Today
“Positive Movement” in Russia – Ukraine Talks
by Craig Dismuke, Dudley Carter
Consumer Confidence and Inflation Expectations: The only economic report on today’s calendar is the University of Michigan’s March report on consumer confidence. It is expected to decline further as inflation expectations continue to rise. Perhaps more important than consumers’ inflation expectations, the market-based 5y/5y forward implied inflation rate has risen from 1.96% in mid-February to 2.30% now. As an indicator of how sticky inflation is perceived to be, this reflects a concern that the addition of the Russian problem to the already-excessive inflation picture could result in inflation holding above the Fed’s target for longer and longer.
OTHER ECONOMIC NEWS
Household Net Worth Continued Historic Climb to Close Out 2022: Household net worth rose $5.3 trillion in the final quarter of 2021 as home prices and equities continued to climb and overall consumer credit remained contained. The quarterly gain pushed total household net worth up to $150.3 trillion and continued a historically rapid increase in consumer wealth. Over the last six quarters – since the second quarter of 2020 – household net worth has risen nearly 27%, the strongest rate for any six-quarter period in pre-pandemic history. Total assets rose $5.7 trillion, helped out by a $1.5 trillion increase in real estate and a $3.9 trillion increase in financial assets. Total liabilities rose $387 billion on a $245 billion increase in mortgage balances and a $96 billion increase in other consumer credit types. Household net worth as a percentage of disposable income jumped to a new all-time high of 826% while liabilities as a percentage of assets fell from 11.0% to 10.9%, the lowest level since 1973.
Treasury Yields Continued to Climb as Stocks Remained Lower for the Week: Treasury yields continued their weekly climb after another hot inflation report but the moves trailed much larger increases in Europe following the European Central Bank’s (ECB) hawkish surprise. Equity futures had pulled back overnight following Wednesday’s strong performance and Treasury yields were nearly unchanged before the ECB’s decision. European yields rocketed higher after the bank announced it planned to conclude quantitative easing in the third quarter which could open the door to rate hikes sooner than previously expected. The Euro initially spiked to session highs but faded after President Lagarde pushed back on the idea that the decision was an acceleration of tightening, characterizing it instead as a “balanced approach” that provides the bank with “optionality” to respond to incoming data. Nevertheless, European yields closed sharply higher. Germany’s 2-year yield jumped 10.9 bps while Italy’s soared 21.6 bps. The 10-year yields in those countries jumped 5.6 bps and 22.2 bps, respectively. Treasury yields moved up after the ECB decision and continued to climb after headline CPI accelerated from 7.5% to 7.9% and core picked up from 6.0% to 6.4%, both as expected and the fastest since 1982. The 2-year Treasury yield inched up 1.6 bps to 1.70%, a new cycle-high, while the 5-year yield rose 4.5 bps to 1.92%, the third highest since May 2019 (behind February 10, 15). The 10-year yield rose 3.3 bps to 1.99%, earlier crossing 2.00% for the first time since February 25. The S&P 500 spent the entirety of Thursday’s session in negative territory but closed near session highs, down 0.4% from Wednesday.
Sovereign yields continued to inch higher Friday with global inflation pressures and hawkish central bank plans back in focus this week and a positive comment from President Putin providing a glimmer of hope in an otherwise dark situation. On the heels of another hot U.S. inflation report and the ECB’s surprisingly hawkish decision, revisions confirmed German inflation picked back up in February to 5.5%, a few tenths below November’s all-time high, and lifted Spain’s rate to a record high of 7.6%. Sovereign yields were mostly lower after the data but rose quickly on a report that Russia’s President noted some “positive movement” in the talks with Ukraine. Germany’s 10-year yield moved to up 3.6 bps at 0.30% and Treasury yields climbed to session highs. At 7:05 a.m. CT, the 2-year yield was 3.5 bps higher at 1.73% and the 10-year yield had edged up 2.1 bps to 2.01%, flattening the curve for the first time in four days. Global equities also bounced to daily highs, continuing the recent run of volatile trading. Europe’s Stoxx 600 rose 1.6% and U.S. index futures gained around 1.0%. Oil prices, however, steadied after a sharp two-day slide amid continued uncertainty. Before Putin’s comment, other reports cited continued bombardment of major cities in Ukraine and indicated Russia was increasing troop levels in the country.