The first quarter of 2022 marked the most volatile period since the first quarter of 2020.The quarter began with significant deterioration in the market’s outlook for growth stocks, particularly those lacking demonstrable earning power. Then, a geopolitical crisis, building for some time, intensified with the invasion of a European country, roiling markets ranging from commodities to equities.
Last, the Federal Reserve announced, as expected, a 25 basis point change in its benchmark rate and telegraphed six more rate increases in 2022, taking the Federal Funds rate to nearly 2.00% by year-end 2022.In a speech on March 21, 2022, though, Chairman Powell suggested a greater likelihood that future Fed moves may occur in 50 basis point, rather than 25 basis point, increments to combat inflation, which mirrors the position taken by Governor Bullard in dissenting to the Fed’s 25 basis point rate change at the mid-March meeting.
The following tables summarize key metrics we track regarding equities, fixed income, and commodity markets leading up to the invasion of Ukraine on February 23, 2022 and thereafter.
Equity Indices
Index data per S&P Capital IQ Pro
Broad market indices contracted through February 23, 2022, driven by valuation concerns for growth stocks Bank stocks remained stable through February 23, 2022, as valuations remained reasonable relative to historical norms Since February 23, 2022 bank stocks have experienced modest pressure, primarily among larger banks that may have some exposure to Russia While markets were volatile after the Ukraine invasion, broad market averages reported a robust recovery in the week of March 18, 2022 and continued gaining into last week
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Treasury Rates
Treasury yields per FRED, Federal Reserve Bank of St. Louis
Treasury rates increased during 1Q22, with a greater share of the expansion occurring prior to February 23, 2022 The yield curve flattened in 1Q22 Yields on 3- and 10-year Treasuries were virtually identical as of March 24, 2022, relative to a 55 bps spread as of year-end 2021
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Debt Spreads
Corporate Credit Spreads per FRED, Federal Reserve Bank of St. Louis CMBS spreads per ICE Index Platform
Corporate debt and commercial MBS option-adjusted spreads widened in 1Q22 Prior to the Ukraine invasion, high yield bond spreads widened to a similar degree, regardless of rating.However, since the invasion, BB-rated issuers have outperformed B- and CCC-rated issuers 1Q22 spread widening in BBB-rated corporate bonds (40 bps) is the largest since 1Q20 Although commercial real estate may appear somewhat more insulated from geopolitical considerations than the corporate bond market, CMBS spreads widened to a greater degree than corporate bond spreads in 1Q22
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Commodities
Oil price represents West Texas Intermediate; WTI prices per FRED, Federal Reserve Bank of St. Louis Corn & wheat prices per Bloomberg
Commodities experienced higher price appreciation than other asset classes in 1Q22 Wheat prices, already rising prior to the invasion, leapt after it.This reflects potential production disruptions in Ukraine, sanctions on Russia, and transportation issues in the Black Sea Oil prices dropped in the weeks after the invasion of Ukraine but still notched a 49% increase in 1Q22 Our agriculturally-oriented banks still expect U.S. farmers to fare well in 2022, despite higher input prices and difficulty obtaining some supplies like fertilizer
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Residential Mortgages
The 30-year mortgage rate, as reported by Freddie Mac, exceeded 4.00% in the week ended March 18, 2022.This is the first time the mortgage rate has exceeded 4% since May 2019.For the week ended March 25, 2022, the 30-year mortgage rate climbed higher to 4.42% Mortgage rates widened to a greater extent than long-term Treasury rates in 1Q22 UWM Holdings, the largest wholesale mortgage lender, in its March 1, 2022 earnings release projected that 1Q22 originations would decline by 24% to 40% from 4Q21 originations.Mortgage rates have increased further after it provided this estimate
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Originally appeared in the March 2022 issue of Bank Watch.