Market Summary
The S&P 500’s steady climb higher was interrupted this week, reversing course to fall nearly 2%. The biggest weekly drop since February.
The Federal Reserve acted as the catalyst for this latest bout of volatility. On Wednesday, the FED issued a revised outlook, signalling that interest rates are set to increase sooner than previously projected as a result of higher inflation forecasts.
Commodities like copper slumped while the dollar touched a two-month high, and cryptos pulled back once again as China continues its clampdown on miners and the Crypto space as a whole.
Equities
1.9%S&P 500
Has the rotation into ‘Value’ run its course?
The rotation trade was once again out of favour this week. The Dow Jones Industrial Average, a proxy for so-called value stocks, fell 3.4% as a slight change in rhetoric from the FED weighed on the appetite for trades tied to economic growth and higher inflation.
Bond Yields
1.44%US 10Y TREASURY YIELD
The yield curve flattened this week as market participants bet that the Federal Reserve will act sooner to control inflation.
On Wednesday, the FED announcements pushed two-year and five-year yields higher, which are the most sensitive to rate changes. Long-dated yields dropped, led by declines in 30-year bond yields.
Market Outlook
While the FED’s projected interest rate timeline still doesn’t signal a rate increase until 2023, this week’s meeting seemed to move away from unemployment as the focal point of the FED’s economic policy and back towards inflation. It seems this potential to revert to their old ways at the first sight of inflation spooked market participants this week and will continue to dictate moves over the coming weeks.
If the FED is unwilling to allow inflation to run as they had suggested, then the trades placed to benefit from higher inflation will continue to suffer.
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