Week Ahead: Increased Volatility Seen As Bull-Bear Equity Market Clash Continues

 | May 08, 2022 12:38

  • Slumping stocks make valuations more attractive
  • Has inflation peaked?
  • 10-year yields can act as a gauge for upcoming inflation

    • The recent financial market clash between bulls and bears is likely to continue and possibly escalate as spiking inflation and rising interest rates continue to dominate investor focus. An added dollop of geopolitics could also boost anxiety to red hot levels. 

    Nevertheless, with all four major US indices—the S&P 500, Dow Jones, NASDAQ and Russell 2000—finishing a volatile week in the red, the valuations of many previously frothy stocks could begin reaching price points that some may consider buying opportunities.

    Still, the primary market drivers will remain the level of hawkishness the Fed applies to upcoming hikes along with whether we've reached peak inflation, something that could become apparent via this week's CPI and PPI releases. 

    The Producer Price Index gauges wholesale prices (which eventually trickle down to consumers). Economists expect the reading to come in at 10.7% versus the 11.2% print seen in March. 

    Some economists have already made the call regarding peaking inflation, with expectations for April's YoY Consumer Price Index print forecast to be slightly below March's 8.5%. Investors could then look to Treasury yields to gauge the market's interpretation of the data. 

    The burning question remains though, can the Federal Reserve actually slow the US's worst inflation in four decades? Last week the Fed announced it had increased its Fed funds target rate by 50 basis points and signaled it would likely continue with additional hikes of similar magnitude. After the meeting, Fed Chair Jerome Powell added that he expects a "soft or soft-ish" landing as he attempts to infuse markets with confidence.

    The benchmark 10-year yield closed at 3.142% on Friday, at the very top of the session, the highest level for the much-followed Treasury note since November 2018. An additional 1% elevation would take the 10-year yield to heights not seen since 2011. Yields rise when bonds are sold off. Generally, investors do this when the appetite for risk becomes more prominent, in order to rotate into stocks.

    However, the current context is a bit different. As risk sentiment remains highly depressed, investors are selling bonds whose current payout shrinks versus expected future yields. Yields have climbed for the fifth straight week or for eight of the past nine weeks.