U.S. employers added 431,000 jobs in March and the jobless rate dropped to the pre-pandemic levels of 3.6%. These numbers support Powell's more hawkish tone as the Fed battles to curb soaring inflation. In February, the PCE index which is the Fed’s favourite inflation gauge climbed +0.6%, bringing the annual rate to +6.4%. This is the fastest pace since 1982 and the worst may still be ahead. The U.S. data also showed that consumer spending slowed in February (+0.2% vs +0.5% expected and +2.7% in January), as the effect of pandemic-driven stimulus programs is fading and more expensive rents, food and fuel are eating away at most Americans’ wage gains, forcing them to cut back on spending elsewhere.

Yet stock markets shrugged off the bad news. The S&P 500 edged up +0.06% while the Dow Jones edged down -0.12%. The Nasdaq rose +0.65%. Small cap stocks fared well with the Russell 2000 up +0.63%.

In Europe, the FTSE rallied again (+0.73%), extending its winning streak to four weeks. The MSCI EMU jumped +1.47%, recouping the losses suffered last week, though inflation in the eurozone hit its highest level since the creation of the single currency. The consumer price index rose +7.5% over the year, in the wake of the Russia-Ukraine conflict. Moreover, several surveys showed business activity slowing sharply in March.

In Asia, equity indices closed mixed. The Shanghai Composite snapped a 5-week losing streak (+2.19% week-over-week) while the Nikkei lost -1.72% after gaining +11.87% over the last two weeks.

Energy in a roller coaster ride  

After climbing +8.79% last week, oil prices plunged -12.84% (WTI crude just below $100 a barrel) dragging energy stocks lower (-2.40%). Investors seem to cool their expectations of prolonged war disrupting energy supplies. Moreover, President Biden has planned to release a record amount of emergency oil supplies. In a nutshell, one million barrels per day from strategic reserves over the next six months.

Despite the sharp trend reversal in oil markets, energy was not the worst performer over the week. Among cyclical stocks, financials (-3.28%) were hurt the most by the bond market pointing to a potential recession. A key part of the U.S. yield curve has indeed inverted for the first time since September 2019. Thus, the 2-year Treasury note yield (+2.46%, up 16 basis points over the week) rose above the benchmark 10-year Treasury note yield (+2.38%, down 10 basis points over the week).

On the flip side, the real estate, utilities and consumer staples sectors rose +4.43%, +3.71% and +2.33% respectively, as investors favoured defensive stocks.

Pendulum swing for bonds

The yield on German 10-year government bonds fell 3 basis points, from +0.59% to +0.56%. But it is worth noting that the German yield curve has not inverted (10-year vs 2-year spread around +46 basis points), by contrast with the U.S.

The fall in long term interest rates gave a boost to the riskiest debt products. Investment grade corporate bond prices were up +0.22% in Europe and +1.05% in the U.S. High-yield bonds gained +0.86% in the U.S. and +0.45% in Europe. Emerging debt bounced back too (+1.25% in local currencies). The greenback edged lower (dollar index down -0.55%) and gold showed weakness (-1.67%, spot price at $1,925.68/Oz). In the crypto space, BTC USD slid toward $46k after a sharp rally in March offsetting most of the losses posted in January and February.

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