The Fed delivers

The S&P 500 closed the week at 4,123.34, -0.21% lower. The Dow Jones closed at 32,899.37, -0.24%, with the Nasdaq lower by -1.54%. The volatility index VIX closed the week at 30.19 down from 33.40. The Euro Stoxx 600 slipped -4.55%.

The 10-year UST closed at 3.13% up from 2.93% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +226bps. Corporate Bond spreads: Investment Grade were unchanged at 168bps and High Yield widened 17bps at 457bps. German 10-year Bunds yield closed at +1.13% up from +0.94% a week before. In Europe, Corporate Investment Grade spreads widened 5bps at 171bps and High Yield spreads widened 20bps at 502bps.

The US Dollar Index (DXY) appreciated +0.68% last week and closed at 103.66. The Euro closed at 1.0551 (+0.06% weekly); the Yen depreciated -0.66%, closing at 130.56 and the Swiss Franc depreciated -1.77%, closing at 0.9890. Gold closed at $1,883.81 depreciating -0.69%. Oil was up, Brent closed at $112.39 (+2.79%) and WTI at $109.77 (+4.85%).

^{Fed hikes 50bps
Fed decisions were in line with expectations with a 50bp rate hike and the commencement of runoff starting in June at a maximum pace of $95bn per month after a brief phase-in period, consistent with what the Fed signaled in the recent set of minutes. Powell’s tone about combating inflation has become even more forceful and mentioned: “we have the tools and will to bring inflation down…we are strongly committed to restoring price stability…the labor market is extremely tight while inflation is much too high…we are on a path to move our policy rate expeditiously to more normalized levels”. Powell said the neutral rate is 2-3% and promised that the Fed wouldn’t hesitate to go higher than that range if needed. On a dovish note, Powell pushed back against talk of 75bp increases by explicitly guiding for 50bp hikes at the next few meetings. He also expressed some optimism about the direction of inflation, “core PCE is at a peak or flattening out, but we want more than just some evidence”. Powell argued that the fed can tighten policy without triggering a recession: “we have a good chance for a soft or softish landing…the economy is very strong and well positioned to absorb tighter monetary policy”.}

^{Other central banks
The Bank of England (BoE) raised rates by 25bps to 1%, as expected. However, BoE’s gloomy forecasts on economic activity in UK weighed on the sterling, as the central bank could stop hiking rates before market expectations. The Reserve Bank of Australia (RBA) raised its policy rate by 25bp to 0.35%, surprising the market on the hawkish side. This decision was taken to counteract significantly higher-than-expected inflation and strong wage growth. Also, ahead of the 50bps rate hike by the Fed, the Reserve Bank of India unexpectedly hiked policy rates by 40bps amid surging inflation.}

^{Jobs report
April headline nonfarm payrolls were better than expected, coming in at 428k compared to consensus expectations for 396k. The unemployment rate remained unchanged m-on-m at 3.6%, while average hourly earnings grew 0.3% m-on-m, below consensus expectations for a 0.4% rise. On a y-o-y basis, average hourly earnings came in at 5.5% as expected. The release noted that the largest gains were in leisure/hospitality, manufacturing, transportation, and warehousing.}

^{Global economic data
In the US, the ISM manufacturing PMI reached a 20-month low of 55.4 in April, but still indicated healthy expansion, while the ISM services PMI recorded the 23rd consecutive month of expansion, even though it slowed too (to 57.1 from 58.3). The next big economic data point will be April CPI, to be reported next Wednesday, with headline CPI expected to rise 0.2% m-o-m, following a 1.2% increase in March, and core CPI expected to rise 0.4% following a 0.3% increase in March. In Europe, retail sales in the euro area dropped 0.4% m-o-m in March, with the biggest fall among large economies in Spain (-4% m-o-m). In a further demonstration of economic pressure in the currency area, industrial production in Germany declined by 3.9% m-o-m in March, much more than expected. Euro area unemployment continued to fall in March, to 6.8% from 6.9% the previous month. The Caixin China PMI for services fell sharply to 36.2 in April from 42 in March, its lowest level in two years, as Covid restrictions bit. The Caixan manufacturing PMI fell to 46 in April from 48.1 in March.}

Elevated volatility
Markets, both equity and rates, showed elevated levels of volatility. Coming into the Wednesday Fed meeting, the market was assigning an 87.1% probability for a 75bps hike in June. As Powell’s comments were more dovish than expected, the S&P500 rallied in the afternoon to close +2.99% in the day. The 2-yr yield, which is sensitive to changes in the fed funds rate, dropped 15bps to 2.61%. The 10-yr yield decreased four basis points to 2.92% after topping 3.00% intraday. The volatility index VIX fell 13.1% to 25.42. Now market expects the Fed to be more data dependent and the attention was turned into inflation and growth data points: preliminary units labor costs increased by 11.6% in Q1 compared to 10.0% expected; preliminary nonfarm productivity fell -7.5%, vs. -5.3% expected; on the consumer side, there were disappointing earnings and/or guidance from e-commerce companies (Shopify, eBay, Etsy and Wayfair); and, US retail foot traffic fell -10.9% last week from a year earlier. As a result, equity markets gave up prior day gains with S&P 500 -3.56%, Dow -3.12%, Nasdaq -4.99% or Russell 2000 -4.04%. The 2-yr yield, jumped 11 basis points to 2.72%. The VIX spiked 22.7% to 31.20.

Earnings season
In the US, 80% of the S&P500 have reported. From those, 80% of companies EPS estimates surprising positively by 4% with a +7% y-o-y growth. Topline growth is coming in at +15% y-o-y, surprising positively by 2%. At a sector level, Energy, Materials, Industrials and Healthcare are reporting strong numbers, while Financials and Discretionary are printing negative growth. In Europe, 60% of the Euro Stoxx600 have reported, with 72% of companies beating EPS estimates. EPS growth is coming in at +45% y-o-y, surprising positively by 13%. Bulk of the earnings growth can be attributed to commodity sectors, as EPS growth ex Energy and Materials is estimated at +13% y-o-y. Financials are faring poorly, along with Communication Services and Tech. Revenue growth is at +28% y-o-y, surprising positively by 4%.