Despite a truly harrowing ride for markets in 2022’s opening weeks, there’s been “no capitulation” out of stocks and no signs of an en masse asset allocation shift away from equities.
That was one takeaway from the latest edition of BofA’s weekly “Flow Show” series. This week’s installment carried the title “Silly Old Bear.”
Nearly $22 billion flowed into equities over the latest reporting period, bringing the YTD haul to $106 billion (figure below).
Stock funds enjoyed inflows in 20 of the year’s first 23 sessions, BofA noted.
Indeed, on my math, 2022 is actually tracking slightly ahead of last year. The purple dot in the figure (above) shows where things stood on February 3, 2021. The red dashed line is the current level of cumulative flows through the same reporting week in 2022.
Amusingly, the Nasdaq 100 managed a second consecutive weekly gain despite Thursday’s egregious rout. Amazon’s near 14% Friday surge (figure on the left, below) nearly compensated for Facebook’s historic plunge.
Amazon added $191 billion in market cap on the week’s final trading day, a stupendous achievement that ranks second on the list of all-time largest one-day bonanzas (figure on the right, above). It was the biggest single-session value creation event in US stock market history.
And all because of a Prime price hike and decent cloud results. “It was not a flawless report,” Nomura’s Charlie McElligott remarked on Friday, calling it “a case of results and guidance coming in less bad than trending e-commerce expectations.”
Market participants will take it, though. This was a trying week at a time when nerves were badly frayed. Although Fed officials demonstrated little appetite for a 50bps hike at next month’s FOMC, a very hawkish BoE and a dramatic pivot from Christine Lagarde put investors on edge again headed into US payrolls. The jobs report was impossible to parse, but if there was one overarching takeaway is was simply that wage pressures persist.
US yields were cheaper by up to a dozen basis points in the wake of the payrolls stunner. Losses were led by the front-end, but 10-year yields were through 1.92%, a level Bloomberg’s Edward Bolingbroke noted is associated with short gamma exposure. 1.92%, he reminded folks, “reflects a strike level in the March options where dealers remain significantly short puts.”
“The selloff in the front-end of the curve brought two-year yields as high as 1.31% and flattened 2s/10s to just 58bps,” BMO’s Ian Lyngen and Ben Jeffery wrote Friday afternoon. “The five-year sector also underperformed given the solid labor market update implies the Fed’s rate normalization efforts could ultimately result in a higher terminal rate than previously assumed,” they added. “After all, logic holds that if hiring momentum can withstand Omicron, there is dwindling pandemic risk as the year unfolds.”
Still, they remain in the 25bps camp for March, as do most strategists. The Fed really needs to lift the entire curve, lest they should find themselves staring down an inversion before liftoff is even official. 2s are gaining on 10s (figure below).
It’s still unclear how the Committee is planning to approach this situation. Although January payrolls were encouraging, the numbers were likely bedeviled by distortions. US growth is guaranteed to slow dramatically in Q1. The idea of hiking of rates 50bps into a slowing economy with the curve flattening aggressively seems perilous.
That brings us full circle to BofA’s Hartnett. “Inflation and falling approval ratings equals rate hikes,” he wrote, adding that “leveraged positions [will be] more expensive to fund” in Q2.
Additionally, rate hikes will be commencing “into an overvalued global credit and US stock market,” BofA went on to say, noting that over the past half-century, “almost all” hiking cycles began with the S&P trading on a 16x multiple, the exceptions being 1999 and today.
Finally, Hartnett reiterated that the Fed is hiking into a slowdown. “See yield curves,” he said, flatly.
Maybe Fed can stop buying 10s with its remaining QE, then sell 10s with its QT.
Treasury can tilt issuance more toward 10s – especially if there is little yield penalty.
I can’t imagine they aren’t trying to figure out how to avoid yield curve inversion.
The yield curve is more an indicator than a causitive factor in of itself. The FOMC needs to adjust but an aggressive stance is going to come back to bite them. That is what the yield curve is trying to communicate…..
H_Man, the long end is going to push up until equities break.