Please see below this week’s market commentary from Brooks Macdonald received yesterday afternoon – 28/03/2022
Weekly Market Commentary | Concerns build over pace of Ukraine peace talks – 28 March 2022
• Bond yields continued to surge within the US Treasury market as bond investors price in further hikes
• Brent Crude oil prices rise as concerns build over the pace of Ukraine peace talks and European energy supply
• Investors await this week’s US average hourly earnings for signs of further inflationary pressure
Bond yields continued to surge within the US Treasury market as bond investors price in further hikes
US bond yields surged last week as Federal Reserve speakers opened the door to a 50bp rate hike at the next Fed meeting in May. Despite this, US equities continued to make gains, outperforming European equities which have been held back by concerns over security of energy supply.
The yield on the US 2-year bond moved up a further 33.3bps over the course of last week which is the largest weekly move since 20091. The US 10-year also moved higher, by a slightly smaller 32.4bps2 meaning that the yield curve continued to flatten (albeit modestly) over the week and sits close to inverting. An inversion of the yield curve has historically provided a strong indication of a recession in c. 18 months’ time so this remains closely watched. The bond market is now expecting around 2.4% of hikes in 20223 (including March’s hike). This week looks to be less exciting on the central bank front with relatively few Fed speakers compared to last week, this may give the Treasury market room to pause for breath.
Brent Crude oil prices rise as concerns build over the pace of Ukraine peace talks and European energy supply
Energy prices saw further volatility last week with Brent Crude oil prices rising over 10%4 as concerns built over Europe’s ability to access Russian oil and gas either due to sanctions or anticipatory measures by the Russian government. Whilst peace talks are continuing, they appeared to make little progress last week, leaving risk assets exposed to the conflict unable to sustain the positive momentum they had established a week ago. Over the weekend the White House needed to walk back comments from President Biden that implied support for regime change within Russia. Senior members of the Biden administration and other Western leaders have distanced themselves from the comments which could otherwise be interpreted as a sharp shift in the stated policy objectives of the US and NATO allies.
Investors await this week’s US average hourly earnings for signs of further inflationary pressure
The bond market moves of the last few weeks arguably tell us two things, firstly investors believe the Fed will aggressively raise rates this year, secondly the yield curve flattening implies the economy lacks the growth momentum to emerge unscathed. This week’s US non-farm payroll employment report will be awaited for the latest data on the health of the US jobs market with average hourly earnings a particularly important number given the impact on both consumer demand but also wider inflation.
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Charlotte Clarke
29/03/2022