Weekly Letter (9/7 - 9/11)
Executive Summary:
War in the Middle East, inflation reports, and US Fed rate expectations drove the markets in the labor day shortened week. The US and Iran engaged in another week of heavy fighting. The two nations traded tanker strikes in the Strait of Hormuz, raising the price of oil to over $100, despite announcements out of Tehran that Iran and Oman had reached an agreement to manage shipping through the Strait. The Bureau of Labor Statistics reported PPI MoM on Thursday at 0.4% and PPI YoY at 5.4% with MoM in line with consensus estimates and YoY beating consensus. CPI reports came out Friday with CPI MoM at 0.4% and CPI YoY at 3.4% both in line with consensus. Lingering inflation, a sharp rise in oil prices, and record high rates for tankers and freight have the odds of a hike close to 80%.
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Equities:
WoW Performance: S&P 500 -0.8% | Nasdaq -0.6% | Dow -1.6%
Equities fell this week due to rising yields, high oil prices, and Fed rate hike expectations that all hurt growth and future earnings. Stocks fell for most of the week with their biggest loss on Thursday after the PPI report came in sticky. Equities staged a late week rally on Friday as oil paused its upward momentum despite steady exchange of strikes in the Middle East.
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Fixed Income:
WoW Yields: 2 Year +25bps | 10 Year +18bps | 30 Year +11.2bps | 2s10s Spread -7.1bps
Yields continued to climb even higher this week in response to the surge in oil prices and the BLS inflation reports that indicate inflation is still sticky and might continue to get worse considering shipping and freight rates are at their highest which passes on to consumers. Yields made their sharpest moves in the tail end of the week after the BLS inflation reports indicated that inflation still remains high and the Fed will need to take a hawkish stance. The 2s10s spread narrowed as the shorter term two year yield rose faster than the longer term ten year yield, highlighting the underlying worries on inflation and future economic growth.
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Commodities:
WoW Performance: Oil (Brent) +8.97% | Spot Gold -1.95%
Oil started off the week lower in response to the announcement that Iran and Oman had reached a deal to control shipping in the Strait of Hormuz. This move was quickly reversed, however, as Iran and the US continued to trade strikes on tankers and military targets in and around the strait causing oil to touch $109, the highest it's been since May. Gold fell over the course of this week in response to increased rate hike expectations in the US and around the world as investors worry about inflation caused by the US-Iran conflict. Gold experienced the biggest drop on Thursday in response to the PPI YoY report coming in slightly higher than expected. Investors tend to turn away from gold when central banks are hiking rates because of the opportunity cost of holding an asset that doesn’t pay any interest.
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Currency:
Wow Performance: DXY -0.06%
The dollar index finished relatively flat this week, dropping early in the week due to a rally in the Yen from ongoing speculation over Bank of Japan monetary tightening. The losses reversed later in the week as surging oil prices and higher than expected PPI and CPI reports boosted treasury yields and rate hike expectations.
