Wall Street slumps as hot inflation fuels case for faster rate hikes, consumer confidence falls again

U.S. inflation rose to a four-decade high last month. Consumer prices (CPI) shot up 7.9% on a year-on-year basis and the worst may be yet to come. In addition to tightening labor market conditions, Jerome Powell pointed out that the continuing war in Ukraine would likely contribute to rising inflation due to shortages of goods. The Russian invasion has indeed led to surging prices in raw materials, amid fears of supply disruptions. Wall Street now expects as many as seven rate hikes in 2022 (i.e. at least +175bps).

With no diplomatic solution in sight as Russia-Ukraine talks in Turkey failed to make any progress, the S&P 500 fell for the second-straight week (-2.88% WTD, -11.79% YTD). Signs of weakness in consumer sentiment (University of Michigan index down from 62.8 to 59.7 in March, i.e. its lowest level since September 2011) also weighed on the broad market. Wild trading continued all week long and the tech-heavy Nasdaq plunged -3.53% WTD (-17.90% YTD). Yet European indices bounced back on bargain hunting after suffering double-digit losses last week. The MSCI EMU was up +3.42% over the week (-14.53% YTD) even though the IMF stressed that "the ongoing war and associated sanctions will also have a severe impact on the global economy." The ECB is now facing an exogenous stagflationary shock that will be difficult to address. Against this backdrop, Christine Lagarde surprised investors on Thursday by taking a relatively hawkish tone, pushing Treasury yields higher in the eurozone.

Elsewhere, the FTSE gained +2.41% WTD (-3.10% YTD) as Great Britain's economy rebounded much more than expected in January (GDP up +0.8% after a 0.2% decline in December). Asian markets closed mixed. Chinese stocks tumbled in Hong Kong after the SEC delisting warning and a record Covid-19 death rate. The Hang Seng index plunged -6.17% WTD (-12.15% YTD). Japan’s Nikkei lost -3.17% WTD (-12.60% YTD). By contrast, the NIFTY gained +2.37% WTD (-4.17% YTD).

Energy sector under the spotlight

U.S. crude oil prices dipped over the week (-5.49% at $109.33 a barrel) after hitting 14-year highs above $130 in the wake of stiffer sanctions imposed by Western countries. Vladimir Putin said Russia will honor its energy sales to all its customers while Germany resisted pressure for a full ban on Russian energy imports. Furthermore, traders now bet that some major oil-exporting countries could increase their own production to offset the downturn in Russian exports. Nevertheless, energy was the only S&P sector in the green this week (+1.88%).

Consumer staples took a nosedive (-5.78%, worst performer for the week) as consumer sentiment sank to decade lows. A rise in U.S. Treasury yields hit rate-sensitive tech stocks as their value rests heavily on future earnings. Information technology was down -3.81%, pushed lower by Apple (-5.17%). Communication services were not far behind (-3.14%), once again weighed by Netflix (-5.92%) and FB Meta-Platforms (-6.22%).

It was also a tough week for consumer discretionary (-2.59%) with the free fall of Tesla (-5.12%). Electric vehicle stocks remained under pressure after extreme volatility in the nickel market (price up +62% week-over-week) illustrated by the risks associated with shutting Russia – a major world producer - out of the market. Nickel is an essential metal for the current generation of batteries.

Sharp trend reversal on Treasury yields

U.S. government yields jumped as inflation continued to increase in February. The U.S. 10-year T-note yield rose from +1.72% to +2%. The yield on German 10-year government bonds traded again in positive territory (+0.25%), gaining +32bps over the week. In a nutshell, it was a bond bloodbath.

Investment grade corporate bonds suffered their heaviest losses since March 2020 (-2.22% in Europe, -2.39% in the U.S.). High-yield bonds lost -1.06% in Europe and -1.60% in the U.S.

Emerging debt crashed again (-5.19% WTD) as the World Bank warned Russia is “mighty close” to default on sovereign debt. The greenback edged higher (dollar index up +0.87%), helped by safe-haven flows, like gold (+0.90% WTD, spot price at $1,988.46/Oz) as investors are increasingly worried about the economic impact of war on the global economy.

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