Equities
U.S. stocks remained highly volatile as the S&P 500 plunged below 4,000 before rebounding on Fri. Factor performance continues to tell the story, with the riskiest growth stocks leading the market lower and profitable dividend-payers holding up best. For the first time since spring 2020, the S&P 500 forward P/E ratio finished the week below 17x – a 30th percentile reading versus the past 5 years as financial conditions tighten rapidly. Earnings forecasts have held up after a strong Q1 and will take center-stage as markets grapple with a potential growth slowdown. Stocks in Europe declined -1.04% and have outperformed their U.S. counterparts by nearly 6% over the past month.
Fixed income
Bonds rallied, with the 10-year Treasury yield falling back below 3%. Breakeven inflation expectations fell sharply despite an above-consensus CPI report as real interest rates continue to be the primary driver of higher nominal yields. The Barclays Agg reprised its role as a hedge to equities, if only temporarily, and gained 0.89% on the week. High yield bonds declined -1.21% as spreads approached 500 bps while leveraged loans shed -1.79%.
Commodities
Crude oil endured another volatile week of trading, plunging alongside risk assets mid-week before rebounding to $110/bbl to end the week. An EU ban on Russian oil remains up in the air amid handwringing from some countries and outright opposition from Hungary. Refinery margins have soared to a record high of above $50/bbl, meaning prices of refined products such as gasoline, diesel, and jet fuel have risen much by much more than even the elevated price of crude would suggest.
Economic overview
The April CPI report showed inflation is still firmly entrenched, with the core index rising 0.6% m/m (6.2% y/y) and headline 0.3% m/m (8.3% y/y). The composition of inflation is shifting as pandemic effects fade, with goods price gains moderating and stickier services prices grinding higher. While a 19% surge in airfares was responsible for much of the upside surprise, the report is unlikely to offer the Fed any comfort. The UMich Consumer Sentiment Index plunged to 59.1, the lowest level since 2011 as inflation continues to weigh heavily on households.
