Overview: Global stocks ended higher last week in another volatile week of trading. In the U.S., the S&P 500 index was up 1.6% for the week, with international developed (MSCI EAFE) and emerging markets (MSCI EM) up 2.1% and 2.5% respectively. In the U.S., a strong employment report and generally positive earnings helped counteract investor concerns around inflation and tighter monetary policy by the Federal Reserve. On the earnings front, about half of the S&P 500 companies have reported, with 82% beating revenue expectations, and with profits 8% higher than forecast for the past quarter. In bonds, the 10-year Treasury yield rose to 1.93% last week, up from 1.50% at the start of the year. The 2-year Treasury ended the week 0.16% (16bp) higher in yield, at 1.32%, as markets prepare for the Fed to begin raising short-term rates, now expected to begin next month. Oil prices rose again last week as OPEC+ will gradually restore production, signaling continued supply tightness ahead. WTI crude prices surpassed seven-year highs, ending at $92.31/barrel, up from $75.21/barrel at the beginning of 2022. The widely followed employment situation report on Friday showed nonfarm payrolls growing by 467,000, well above the consensus estimate of 125,000. The unemployment rate rose from 3.9% to 4.0%, while the labor force participation rate came in at 62.2%, the highest level since the beginning of the pandemic. This week’s eyes will be on the consumer price (CPI) report on Thursday, where the core CPI is expected at 5.9%, up from 5.5% last month.

Update on Rate Hike Expectations: (from JP Morgan) Market expectations has been pulled significantly forward in recent weeks as investors gear up for a more active and hawkish Fed amidst the background of a strong U.S. economy, low unemployment, and high inflation. Six months ago, the market was pricing in just one Fed rate hike for 2022. Fast forward to today and the market is now expecting 5 rate hikes this year. In August 2021, investors were anticipating that interest rate liftoff would begin in late 2022 with some even leaning towards early 2023. Current expectations thus signify a marked shift with investors now bracing for liftoff in March 2022 and steady increases thereafter. This is a short time for markets to adjust to such a meaningful move in rate expectations and is one of the reasons why we have been seeing a return to much more normal levels of volatility in markets after experiencing relatively low volatility in 2021.

Market Returns and Data

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg

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