The week that was

The US market finally market caught a bid last week. Early in the week the market was down few percent after an earnings miss by ad dependent social media platform Snap (of Snapchat fame) combined with weak guidance raised more doubts about the economy and economic resilience of tech companies.  Then things started to improve with the minutes of the last Fed meeting indicating that the Federal Reserve Committee is at least no more hawkish than expected and then the latest significant inflation report came in as expected indicating that inflation remained high but no higher than expected. This economy wide PCE Deflator measure, which is the Fed’s preferred metric  was actually slightly down compared to the previous month . On Thursday significant retail stocks, Macy’s and Dollar Tree surprised on the upside in stark contrast to Walmart and Target the week before. Putting all that together the market started to believe that a moderation in inflation and a still cashed up US consumer could help the Fed engineer a soft landing. That thought helped US markets finish the week 6% higher having been down by 2% earlier in the week, the biggest rally since the market bounced off its lows in early 2020. While retailers enjoyed the biggest gains it was the large tech stocks like Apple and Microsoft that underpinned the gains, rising 8% each. Interestingly the meme stocks GameStop and AMC were also up strongly and flows into equity funds were exceptionally strong indicating some ‘buy on the dip’ opportunism coming back into markets and perhaps the influence of retail investors.  

Europe was up 4% and Chinese markets were also up sharply late in the week after Alibaba’s strong earnings results defied the ongoing local lock-down. Gains in Japan and Australia were more muted with the local market up just 0.5% mainly due to modest gains from the miners and banks. IT stocks Block and Computershare were under pressure while Appen was briefly up by 30% before its takeover suitor backed out, apparently miffed at news of the deal being leaked, leaving it more or less where it started the week.  

Bond markets also enjoyed a better week but the jury is out whether this was because inflation expectations were ebbing or because slower growth might allow for lower long-term interest rates. On balance, dips in the so called break-even market-implied inflation expectations last week suggest the former, more optimistic prognosis and the jump in high yield bonds prices (lowering credit spreads mean higher prices and less assumed risk of default). Generally higher commodity prices also suggest optimism although it was also a week where the first tangible signs of credit stress appeared in high yield bond markets with cash strapped UK supermarket chain, Morrisons, and US online car sales company, Carvanna, failing too raise money in public markets before being forced to turn to private debt lenders.

For now though it appears that the Fed might have glimpsed the narrow ‘soft landing’ runway. Let’s hope so.      

‍