Market Pulse

Market Pulse

March 28, 2022

In focus

Negotiations between Ukrainian and Russian officials highlight what could be an eventful week. Recent reports reflect a shift in Russia’s strategy away from Ukraine’s capital city of Kyiv and toward Ukraine’s eastern territory along the Russian border. Each side is maintaining firm conditions for a ceasefire; however, the gap between the two countries remains very wide. Reaching any resolution could result in a relief rally for foreign assets, but any timetable is virtually impossible to predict.

In the U.S., the Fed commands center stage as they try to pull a page out of the 1994 rate hike playbook, endeavoring to engineer an economic soft landing. The highest inflation in 40 years has complicated their path. This week’s PCE inflation data and monthly jobs report may provide clarity on their next steps. While history provides lessons in the linkage between Fed policy, the economic path, and market behavior each scenario has its own character. Key differences between today’s environment and that of the 1994 case are: significantly higher levels of inflation, negative real yields, and a higher level of economic activity that may give the Fed more cover than prior instances. As of today, we believe it is premature to project a recession based on recent yield curve flattening.

Q1 earnings season prepares to kick off with what is likely to be a mixed bag. Five of the eleven S&P 500 sectors are reflecting upwardly revised Q1 earnings estimates while seven have seen negative revisions. S&P 500 index earnings have been trimmed by almost a full percent for Q1 whereas full year 2022 estimates have been upwardly revised by roughly 0.5%. We continue to have a tilt toward U.S. equities that are somewhat more insulated from the Ukraine war and tethered to U.S. GDP growth.

A look back

  • Global equity markets traded modestly higher last week by 1.19%. U.S. markets once again led the way with strength also seen in Japan. Small caps struggled along with European and Asian markets, though sentiment in emerging markets improved.

  • The U.S. yield curve flattened by 0.15% last week following hawkish comments from Fed Chair Powell where he put a 0.50% hike on the table for the upcoming Fed meeting triggering a bond sell-off.

  • The situation remains fluid in Ukraine with in-person talks to resume this week between negotiators. Odds are growing that neither side will be able to claim full victory.

A look ahead

  • Markets are bracing for what could be a volatile earnings season with supply chain shocks a known unknown. Q1 estimates have been trimmed from 5.7% to 4.8% since 12/31 but have risen modestly for the full year.

  • Geopolitical posturing could reach a fever pitch this week potentially complicated by President Biden’s off script message at his Saturday speech. The 2023 proposed budget will also be released.

  • Economic releases: JOLTS job openings, Conference Board consumer confidence, 6 Fed Presidents speak, final Q4 GDP, PCE price index, monthly jobs report.

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