GETTING NAUSEOUS ON THE ROLLER COASTER
It has been quite a ride on the roller coaster that we call the markets over the past week. The prospect of higher rates loomed large after the 4% GDP figure put to bed any concerns over the lingering impact of the harsh winter on economic activity. While the greater than average inventory build gave the bond bulls something to cling to, the large increase in imports partially negated any negative economic implication of this development. While the initial response to the GDP results were higher rates, an accommodative FOMC statement later that day took some of the luster off possibly earlier than expected rate increases. It was not until the following day, last Thursday, that we saw the market price in the possibility of a more hawkish Fed on the heels of rising wages ala an above average employment cost index report. Our view of the subsequent employment report on Friday was that it was akin to a goldilocks report, not too hot, not too cold, which in the past would have elicited a rally in all markets. However, this time stocks did not get the message and we had a decidedly risk-off tone to last week’s developments, which ultimately supported rates while causing the biggest sell-offs of the year for high yield and equities. Add the recent spike in geopolitical risk, principally from Russia/Ukraine, and we have pushed yields back to levels before the GDP report.