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WEEKLY SUMMARY: The US yield curve tumbles on hawkish Fed speaks
US equities gave back a portion of the previous week’s strong gains and closed modestly lower for the week. Growth stocks lagged value-oriented shares. The energy sector underperformed, however, as European oil and natural gas inventories reached near-peak levels. Dispelled reports of a Russian missile strike on Polish territory sparked a brief sell-off on Tuesday, but trading volumes remained muted for much of the week. The U.S Treasury yield curve inverted further during the week, driving the inversion in the two-year/10-year curve segment to its deepest level in over 40 years. Short-term U.S. Treasuries repriced to higher yields, particularly after James Bullard said that the Fed’s terminal policy rate should reach a minimum level of 5% and may need to go as high as 7% to achieve the central bank’s inflation objectives. There were however some “dip buying” in longer maturities, which helped push long-end yields downward. In Europe, the STOXX Europe 600 Index ended modestly higher in local currency terms. Euro bond yields held near recent highs as ECB Lagarde said interest rates need to rise more as policymakers seek to fight inflation. In the UK, Finance minister Hunt raises taxes but delays large spending cuts. UK inflation hit a 41-year high of 11.1% in October. In Asia, mainland Chinese stocks were modestly positive for the week while Japanese stocks fell. The dollar rose while cryptos were stable.
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Most US equities indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. The Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. Growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12%) and Alphabet (8.4%). On the macro-economic side, stagflation fears started to rise once again. Indeed, YoY CPI and PPI both accelerated. Meanwhile overall macro surprises disappointed for the fourth week in a row: on Thursday, the Labor Department reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000.