The Week that Was: January 10 to January 14

A concise weekly overview of the U.S. equities and derivatives markets

Last week (January 10 – January 14), earnings season kicked off with reports from a handful of Big Banks on Friday. Financials sold off at the week’s end. Earnings announcements will increase this week with more Financials reporting, including Goldman Sachs and Bank of America. Other bellwether companies on the docket include Netflix, Procter & Gamble, Alcoa, United Airlines and CSX.

In terms of S&P 500 Index sector performance, Utilities, Health Care and Real Estate lagged. Energy continued to outperform with WTI Crude Oil moving up toward $85 per barrel. The Consumer Price Index (CPI) and Producer Price Index (PPI) data published last week were in line with expectations. The core CPI number, which excludes food and energy prices, hit levels last seen in early 1991 and the CPI reached the highest year-over-year number since June of 1982. The Core PPI data hasn’t been this high since 2011.

The Retail Sales data published last week was a disappointment. The report showed a 1.9% drop in December. In person and online sales both declined, indicating the weakness was not exclusively driven by the COVID-19 Omicron variant. Similarly, the University of Michigan Consumer Confidence Index came in lower than anticipated at 73.2, near 10-year lows. Americans seem genuinely concerned about inflation.

The bond market may be less tumultuous over the next two weeks as the Federal Reserve enters a quiet period ahead of the next Federal Open Market Committee (FOMC) meeting (January 25 and 26), during which Fed Governors are forbidden from speaking on monetary and economic policy. Currently, the bond market (Fed fund futures) is pricing in four rate hikes (25 basis points each) in calendar year 2022. In October 2021, the market was pricing in one hike in 2022. Over the same time frame, the 10-year U.S. Treasury yield has moved from approximately 1.0% to 1.77%.

Quick Bites

Indices

• U.S. Equity Indices had a bumpy week. 
• S&P 500 Index (SPX®): Decreased 0.3% week-over-week.
• Nasdaq 100 Index (NDX): Moved fractionally higher week-over-week.
• Russell 2000 Index (RUT℠): Decreased 0.8%. week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Ended the week at 19.19, up 0.43. 

Options

• SPX options average daily volume (ADV) was 1.56 million contracts per day, higher than the previous week’s average of 1.48 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,665 strike with a 1/21 expiration) implies a +/- range of about 1.55%.
• VIX options ADV was about 420,000 contracts last week, which was higher than the previous week’s ADV of 380,000 contracts. The VIX options call-put ratio was 1.2:1.
• RUT options ADV was 52,400 contracts, up from the previous week’s ADV of 50,000.

Across the Pond

• The Euro STOXX 50 Index increased 0.09%.
• The MSCI EAFE Index (MXEA℠) increased 0.23% and the MSCI Emerging Markets Index (MXEF℠) increased 2.45% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index increased by 0.43 week-over-week and closed at 19.19. The weekly high measure was 23.33 and low was 17.36.
• The January VIX futures traded in a 4.90 handle range and the VIX futures curve remains in fairly steep contango.
• The January/February VIX futures spread moved from 1.70 wide to 2.05 wide. January (Month-1) VIX futures declined 0.75 points last week and the February (Month-2) VIX futures fell by 0.40. 

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.12%, unchanged week-over-week. The 10-year U.S. Treasury yield ranged from 1.81% to 1.7% and closed at 1.77%, also unchanged on a weekly basis.
• The 2-year U.S. Treasury yield moved from 87 basis points up to 97 basis points. Short term rates continue to climb. The 2-year yield was just 15 basis points six months ago.
• Consumer Price Index (CPI) and Producer Price Index (PPI) data reached multi-decade highs last week.
• Inflation measures remain persistently high, driven by supply chain bottlenecks and strong consumer demand. Some economists expect both measures to peak in the next few months. China’s Zero COVID-19 policy could exacerbate the supply chain issues if manufacturing capacity remains offline.
• The S&P GSCI gained 3.7% last week. Natural Gas climbed by 7.8% as temperatures become colder across much of the U.S. Crude Oil jumped 6.7% and is approaching levels last breached in late 2014. Inventories remain well below the five-year average.
• The U.S. Dollar Index (DXY) declined again last week despite the hot inflation data. In general, a weaker dollar tends to bolster dollar-denominated commodity prices.
• Big tech stock prices were little changed on a weekly basis.
• Technology leaders led the markets higher early in the week. The Nasdaq 100 fell by 2.5% on Thursday as rate-sensitive tech companies declined following Federal Reserve Chair Powell’s comments about inflation.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $44,200 and $39,900. Digital asset markets bottomed on Monday and peaked Thursday morning.
• BTC found support around the $40,000 levels, which is where BTC bottomed in September 2021.
• BTC gained 2.7% on the week.

Ethereum

• Ethereum (ETH) prices followed a similar pattern to BTC. ETH ranged between $3,400 and $2,700 last week. ETH ended the week around $3,300, up 2.8%.  
• ETH also traded down to September 2021 lows before bouncing.

Digital Asset Industry

• Dogecoin (DOGE) gained 31.6% at one point last week. The move was in part fueled by news that Tesla will now accept DOGE for merchandise purchases.  
• Cryptocurrency mining operations in Kazakhstan continue to struggle as power is rationed. It’s estimated that miners are losing approximately $4.8 million each day the internet is down or limited.
• On Friday, the World Economic Forum announced its Crypto Impact and Sustainability Accelerator (CISA). The aim is to “harmonize, enhance and advance crypto-enabled ESG efforts across the globe.”

Coronavirus

• The 7-day average COVID-19 infection rate in the U.S. continues to climb. The average moved to approximately 803,000 on January 14, up from approximately 681,000 cases per day the week prior.
• 63% of the U.S. population is fully vaccinated against COVID-19 and 75% have received at least one dose of a COVID-19 vaccine. For just those 12 years and older, the numbers are 72% and 85% respectively.
• In parts of the U.S., hospital systems are canceling all nonurgent procedures and the National Guard has been tapped to fill staffing holes with many health care workers recovering from COVID-19.  
• There are signs of “flattening” in parts of the U.S. where infections first spiked. Data from New York City, Chicago and Boston shows infection rates plateauing in recent days.
• Globally, the 7-day average moved from approximately 1.97 million on January 7 to approximately 2.8 million on January 14.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Over the past decade, the S&P 500 Index has markedly outperformed relative to Emerging Market (EM) Indices. The S&P Emerging BMI has a global focus with an emphasis on Chinese equities (35.5%), Taiwan (17.8%), India (16.2%), as well as 22 other countries with weights less than 5%. Historically, EM performance has been negatively correlated to the U.S. Dollar. In other words, when the Dollar strengthens, EM typically underperforms and vice versa.

S&P 500 Emerging BMI Versus the S&P 500 Index

Source: S&P Dow Jones Indices

• The Consumer Price Index (CPI) measures the average price of a basket of goods and services and is the most frequently cited measure of inflation. The December report showed a 7% year-over-year increase, which has negatively impacted consumer confidence. The increase is the largest annual jump since the early 1980s. Historically, the Federal Reserve has targeted a (core) inflation rate around 2.0% annually.

Year-Over-Year Percent Change in the Consumer Price Index

Source: Bureau of Labor Statistics and The New York Times

• Used car prices and shelter costs pushed CPI measures consistently higher between December 2020 and December 2021 as those markets have been impacted by the global chip shortage and supply chain issues. Most of the other inputs are running below the headline number of 7.0%. Energy prices have led but are not included in the Core CPI data. Similarly, the increase in meat, poultry, fish and egg prices are stripped out of Core CPI data.

Year-Over-Year Inflation in Select Categories

Source: Bureau of Labor Statistics and Chartr

The Week Ahead

Data to be released this week: Home Builders Index on Tuesday; Philly Fed on Wednesday; Initial Jobless Claims on Thursday; Leading Economic Indicators on Friday.

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