To quote the Virtu morning piece (June 2022): It’s going to be an ugly start to the week as global assets are selling off hard following Friday’s big US CPI print and ensuing sell-off. Nasdaq futures are leading the way down pre-market, trading almost 3% lower while S&P and DOW futures are off 2.2 and 1.8% respectively. Yields continue to jump as investors begin to price in a 75bps hike at one of the next three Fed meetings and Barclays and Jefferies suggest the larger hike will come this Wednesday. The 2y10y yield curve briefly inverted overnight (Virtu, June 2022).  

With last week’s inflation data, the Ten-year Treasury yields ended last week at 3.16% (up 0.20% over the last week and now 42 basis points the last 2 weeks) (Yahoo Finance, June 2022).  The high last Friday was 3.18%, which is a new cycle high and the highest level since November 2018 (Yahoo Finance, June 2022).   

  • By the way, the high yield in 2018 was 3.25% in October 2018 (Seeking Alpha, June 2022). Go through that, 10s will be at their highest yields since 2011 (Seeking Alpha, June 2022).  
  • In turn, the average 30-year fixed mortgage rate also rose last week and is now at 5.58% as of June 5, 2022, (up 18 basis points from last week) (Bankrate, June 2022).  This is also a new high for the cycle (Bankrate, June 2022).    
  • Last week, demand for new mortgages hit a 22-year low (CNBC, June 2022). Total mortgage application volume fell nearly 7% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index (June 2022).   
  • The Bloomberg Aggregate Bond Index yield is now 3.66%, also its highest since November 2018 (Bloomberg, June 2022). 
When it comes to interest rate forecasts, according to Strategas, among 52 sell-side forecasts, not one economist has a year-end 10-year yield target north of 4.00%, and only 6 are north of 3.50% (June 2022).  The “pain trade” could be considered for higher bond yields still (Strategas, June 2022).  

Deeper Dive 

The shocking news last week was the CPI data, reported on Friday:  

  • The Consumer Price Index (CPI) increased by 1.0% in May, well above the consensus expected +0.7% (FT Portfolios, June 2022). The CPI is up 8.6% from a year ago (FT Portfolios, June 2022). 
  • This is the highest year-over-year increase since 1981 – and delays the concept of “peak inflation” for the time being (FT Portfolios, June 2022). 
  • Lots of factors drove prices higher – energy, food, airfares, and much more (FT Portfolios, June 2022).  
  • Expect rents to be a key driver for inflation in 2022 and beyond because they make up more than 30% of the overall CPI and still have a long way to go to catch up to home prices, which have skyrocketed more than 30% since COVID started (FT Portfolios, June 2022).  
With the losses to end last week, and to start this week, we are on the cusp of potentially another quarter of negative returns for BOTH the overall US stock market and bond market, which has only happened about 10% of the time going back to 1976, and potentially only the fourth time where we had two negative quarters back-to-back for both stocks and bonds (Strategas, June 2022).    

What are the best months for stock market gains?  In short, it’s not uncommon for June to be on the weak side of average (Visual Capitalist, June 2022).   

Over the last several weeks, municipal bonds have come up a few times of late, and for good reason, as muni tax-equivalent yields look attractive (Columbia Threadneedle, June 2022).   

There are now signs that interest in ESG investments is flagging (CNBC, June 2022). After more than three years of inflows, stock investors pulled about $2 billion from US exchange-traded ESG funds in May, the biggest monthly redemption on record according to Bloomberg Intelligence (June 2022).    

Over the last year, the dollar has rallied more than 20% versus the yen, and since the start of the year, the gain has been more than 16% (Bespoke Investments, June 2022).  From a longer-term perspective, the dollar's rally puts it at the highest level versus the yen since February 2002, and if it rallies another half one percent, it will be the strongest dollar vs yen since 1998 (Bespoke Investments, June 2022).    

The market cap of the 7 largest stocks is one-third of the next 500 largest stocks (Empire Financial Research, June 2022)!  

Food prices are at new all-time highs but still below inflation-adjusted highs (University of Nebraska – Lincoln, June 2022).   

The average gas price moved up to $5.01 (up 15 more cents from the prior week) as of June 13, 2022  (AAA Gas Prices, June 2022). 

Currently, the Atlanta Fed’s initial GDPNow model estimate for real (after-inflation) GDP growth for the second quarter of 2022 is 0.9 (Federal Reserve Bank of Atlanta, June 2022). Are we on the brink of a recession (CNBC, June 2022)? 

There is nothing slated for Monday on this week's economic calendar, but a full week otherwise, including Producer Price Index (PPI) Tuesday, housing data throughout the week, and a full Wednesday including lots of Fedspeak and Retail Sales (Calculated Risk Finance & Economics, June 2022).  

Index funds now own more of the US stock market than active funds (Financial Times, June 2022). Passive portfolios control 16% of the market, versus 14% of their active counterparts, according to Investment Company Institute data cited by the Financial Times (June 2022). Ten years ago, active funds accounted for 20%, with passive funds holding just 8% (Financial Times, June 2022). Now, these numbers represent all funds, not just ETFs (ETF Daily, June 2022). 

Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager 

  • Crypto prices fell into the weekend. Bitcoin prices fell to near 9% to around $27,400 (CNBC, June 2022). Ethereum dropped to near 18%, similar to other major coins like Solana, Dogecoin, Polkadot, and Avalanche (Coindesk, June 2022). 
  • Crypto-friendly senators Lummis and Gillibrand proposed a bill that would move crypto regulation to the CFTC from the SEC, amongst other ideas (not expected to pass, but it’s the most comprehensive legislation so far) (Coindesk, June 2022). Unsurprisingly, the SEC is probing Terra regarding the Terra/Luna blow-up (Bloomberg, June 2022). Ethereum moved one step closer to the much anticipated ‘merge’ to proof-of-stake expected to happen later this year (CNBC, June 2022). 
  • Grayscale, the largest US provider of crypto-related trust products, hired the former US solicitor general Donald Verrilli as they ramp up efforts to convince the SEC to allow their GBTC trust to convert to an ETF (Bloomberg, June 2022). Other digital asset-related ETF news was limited. 
Additional Resources  

This PwC report shows that one-third of hedge fund managers are investing in crypto and another 29% are in “late-stage” planning to do so (Financial Advisor Magazine, June 2022).  

This week on Orion's The Weighing Machine podcast, we hear about the value of outsourcing, financial technology, and why this year could be the best summer ever for movies. Our guest is popular past guest Kostya Etus, who is currently Head of Strategy at Dynamic Advisor Solutions. 

Thanks for reading and have a great week!  As always, please let us know what we can do better at rusty@orion.com or ben.vaske@orion.com. Have a great week!   Invest well and be well. 

1056-OPS-6/16/2022 The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.