Equity and fixed income markets showed some mean reversion last month after a stellar start to the year. Stock markets fell despite some standout earnings. Bond yields rose sharply as economic and inflation data came in hotter than expected. The FOMC raised rates, as did other central banks, and leaned in on further monetary tightening to combat inflation.
- The SPX fell -2.45%, led by stock in the Dow Jones Industrial Average -3.94%. The Nasdaq continued to perform relatively better -1.00% in February, positive +9.61% in 2023. At the beginning of February Meta reported definitively positive earnings, creating some solid momentum in the tech sector. In the following few days Apple, Alphabet, and Amazon painted a slower growth picture. Despite choppy earnings, the tech sector was the only positive S&P sector for the month +0.29%. Laggards were real estate, utilities, and energy sectors, falling over 6% each.
- Fixed income sectors also gave back a majority of their positive total return from January as interest rates increased and the yield curve inverted further.
- The 2–3-year Treasury sector rose an “eye-popping” 62 basis points to reach cycle highs in February.
- The U.S. 2 Year Treasury benchmark note ended the month at its highest yield since July 2007, 4.82%.
- The U.S. 10 Year Treasury Benchmark also rose 41 basis points bringing its yield to 3.92%.
- Yields in the long end did not breach late-October 2022 “highs”, but the benchmark came close to breaking the psychological level of 4% once again.
- Perhaps the most talked about sector in the yield curve was US Treasury Bills. The 6-month sector remained the highest-yielding part of the curve. The T-bill rose to a yield of 5.15%, and 1-year bills topped 5% by month-end (the highest yield since 2001).
- While the cash-like sector continues to show attractive yields, its note-worthy that the “bull-whip” of higher yields is beginning to push out the curve as investors adopt a “higher for longer” scenario.
- Credit sectors of the market reacted to the yield curve last month. Investment grade corporate bonds fell more than comparable Treasuries as higher rates and weak equity prices formed. Municipal bonds, already pricey to Treasuries, saw much higher yields across the curve (long-duration performance was impacted more than shorter bonds).
- Interestingly, the high-yield market performed relatively better as it is less sensitive to changes in rates.
- Preferred debt and perpetual bonds outperformed less risky parts of the bond market.
February marked the 1 year since the Russian-Ukraine War began. On the 21st, Putin halted a nuclear pact with the U.S. and vowed to continue to push the war in Ukraine. Despite the continued threat that the ongoing war could escalate, markets were more focused on economic data, specifically inflation data…all of which contradicted a slower economy and rapidly falling inflation...
- Feb. 1st: the FOMC raised interest rates to the expected band of 4.50-4.75%. Despite reiterating his determination to fight inflation, and the pockets of strength in the economy, Chairman Powell mentioned that the economy has entered into a period of disinflation. This was taken as a fleeting positive for markets, and quantitative models to react to the use of language. The market is currently pricing in two more 25 basis point increases and a growing potential for a third. The previous consensus of a Fed Rate cut by year-end is quickly being reduced. Both the FOMC, Bank of England, and the ECB gave markets market-moving catalysts throughout the month.
- Feb. 2nd: The Bank of England raised rates by 50 basis points and stated more increases would be needed if signs of an inflationary spiral persist. Markets took President Bailey’s language as quite “dovish”, and Gilts moved sharply lower in yield, and reversed the move within a week.
- Feb. 3rd:
- The Jobs data on Feb. 3rd was referred to as “a blowout number” as non-farm payroll data came in at 517,000 (well above the expected 188,000), and the unemployment rate fell to a 53-year low of 3.4%. Average hourly earnings came down month-over-month and year-over-year, but the tight labor market was enough to begin the march higher in rates. Strategists and economists had to raise the probabilities of a “no-landing” economic scenario, where global growth is resilient and inflation stays higher for longer.
- The ECB took a lesson and delivered a much more “hawkish” 50 basis point increase than the Bank of England did the previous day. ECB President Lagarde said there was more to do and suggested another 50 basis points would be needed in March to fight inflation.
- Feb. 6th: FOMC members digested jobs data – Atlanta Fed president Raphael Bostic said a higher peak rate is on the table after the strong employment report. “If a stronger economy persists, we may have a little more work to do.”
- Feb. 7th: Chairman Powell reiterated his message in an interview with David Rubinstein at the Economic Club of Washington DC. He indicated if economic indicators remain strong, they may have to raise rates further than expected.
- Feb. 10th: The “flame was fanned” as inflation data for January came in. CPI revisions were released for 2022 and some of the later figures showed upward revisions to the previous tame reports. Post Superbowl weekend, both January CPI and PPI reports came in stronger than expected. Later in the month, inflation reports on the GDP price index, Core PCE QoQ, and the PCE deflator all rose higher than previous readings.
- Feb. 22nd: the previous minutes of the FOMC meeting were released. A few members were compelled to increase rates by 50 basis points rather than 25.
Despite some dismal manufacturing data and negative business outlook commentary - areas of economic growth surprised in February. The service sector jumped (reported by the ISM service index), the NAHB housing market index rose, personal spending rose, and core retail sales figures more than doubled estimates. Overall macroeconomic data was a positive surprise for markets to digest.
Piton’s strategies performed better than relative benchmarks in February. Please reach out to the Piton team to review current strategies and performance.
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