Hi, welcome to PIGM weekly market commentary for April 11, 2022. I'm Matt Dingee from the Strategic Investment Research group or SIRG. SIRG is part of PIGM, the Asset Management Division of Prudential Financial.  

The Fed took center stage last week with a batch of Fed speak in the release of the FOMC March meeting minutes. In terms of Fed speak, the highlight came from remarks by Fed Governor Lael Brainard, who emphasized the importance of lowering inflation and said the Fed will start reducing its balance sheet as soon as the main meeting. 

She also suggested that if warranted, the committee is prepared to take a more aggressive rate hike. Her comments came as a bit of a surprise to markets, not because they deviated far from consensus, but because Brainard generally lies on the dovish side of the Fed policy spectrum. 

Regarding the meeting minutes, participants revealed that they plan to reduce the Fed's balance sheet by nearly $100 billion per month, which would be double the pace of the prior run off in 2017. 

Also, officials appear set on a more aggressive rate hike trajectory, with many members noting that they favored a 50 basis point hike in March but pulled back given the Russia Ukraine uncertainty. 

As a result, markets reprice for more aggressive Fed policy tightening with treasury yields rising sharply. Last week, the two year yield a proxy for rate hike expectations rose 9 basis points to finish at 2.52%. Meanwhile, the 10-year yield soared 33 basis points to close at 2.71%, a fresh three-year high. 

Against the rising rate backdrop investment grade bonds came under pressure with the Bloomberg Aggregate Bond index declining 1.82%. Higher yield bonds were also lower on the week equities face downward pressure as well, with the S&P 500 index falling 1.24%. For a second straight week, defensive sectors held up best. Also, with rates rising sharply, growth stocks underperform value by a fairly wide margin. 

In other news, the US and Europe imposed another round of sanctions on Russia in retaliation for evidence of war crimes against Ukrainian civilians. The new sanctions include banning new Western investment in Russia and target Russia's two largest banks. 

Also, the French presidential election is coming onto the market's radar as polls show French President Emmanuel Macron's lead over far-right candidate Marine Le Pen is narrowing. This matters for markets because there's concern about the political unity of Europe in response to the Russia Ukraine conflict. 

It was a relatively light week from an economic data standpoint. ISM’s nonmanufacturing PMI improved in March from an already robust level, providing evidence that the services sector of the US economy remains on solid footing. Survey respondents reported improving employment conditions, particularly for restaurants. However, they also pointed to worsening inflation trends and lingering supply chain challenges. 

Initial claims for unemployment insurance were once again at multi-decade lows as the US labor market remains tight, providing the Fed ample room to follow through with a more aggressive tightening cycle. Turning to this week, markers will continue to focus on public comments from a number of Fed officials over the course of the week. Q1 earnings season also gets underway with many big banks set to report on the economic calendar. 

The March CPI report will be in focus while the report is expected to show a continuation of broad-based price increases, there's expectations that the March release could represent peak year over year inflation. 

We'll also get an update on the health of consumer with retail sales for March, and the Consumer sentiment Index for April. 

That's all for this week, but we'll speak again next Monday.