Hi, and welcome to PIGM weekly market commentary for April 18, 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. 

In recent weeks, high inflation and rising expectations for a more aggressive Fed rate hike cycle led to a backup in bond yields, which has been a big overhang on risk sentiment. Given this dynamic, the market's focus last week was on the March CPI print and any incremental policy clues from the latest batch of Fed speak. With regards to CPI, headline inflation rose 8.5% on a year-over-year basis in March, a new post-1981 high and was driven higher by soaring energy prices. However, core CPI, which strips out the volatile food and energy components came in softer than expected at 6.5%, helped by falling used car prices. Also, some strategists see the March CPI print is representing the peak in year over year inflation. 

Taken together, markets viewed the report is better than feared and treasury yields fell at the shorter end of the curve. However, the rate reprieve didn't last long, with yields rising later in the week after comments by Fed officials continued to suggest that the committee remains on track with a more aggressive front loaded tightening cycle, despite the CPI release easing some concerns about the inflation narrative. 

All told, it was a volatile week for treasury yields with the two-year yield falling 7 basis points and the ten-year rising 12 basis points caused a new yield curve to steepen. With the ten-year yield rising, a bit investment grade bonds came under continued pressure with the Bloomberg Aggregate Bond index declining 70 basis points, riskier high yield bonds had small losses for the week. 

In equity markets, the S&P 500 Index fell 2.1%, with value stocks outperforming growth, while the CPI release got the bulk of the headlines. Last week we've also got the March Producer Price Index, which measures prices paid by wholesalers. PPI was up 11.2% on a year-over-year basis, ahead of expectations highlighting that supply chain pressures could continue to keep inflation elevated even if prices peak in the months ahead.  

The impact of inflation on the consumer continues to be a key focus for markets. Consumer sentiment remained depressed in April, as wages haven't kept pace with surging prices. It did, however, rebound from last month's low, with optimism about a strong job market and some relief at the pump, as gas prices eased. On a similar vein, the March retail sales report was a mixed bag. Spending was up, but by slightly less than expected. Furthermore, that number was boosted by sales at gas stations, which were impacted by higher gas prices rather than improving underlying demand. This dynamic has led to speculation that real consumption, which is the level of spending once you account for the impact of inflation, may be softening. 

A final note about the consumer. The 30-year mortgage rate eclipsed 5% with surging interest rates, representing a potential threat to the housing market. This is one mechanism by which tighter fed policy and higher interest rates can dampen economic growth. 

Shifting to overseas developments, investors are also continuing to pay some attention to the French presidential election, where President Emmanuel Macron and far right challenger Marine Le Pen are heading to a runoff election later this month. This matters for markets because there is concern that a Le Pen victory could undermine the political unity of Europe in response to the Russia, Ukraine conflict. 

In China, lockdowns in Shanghai to combat a recent surge of COVID cases also continues to be on the market radar given the potential impact to the Chinese economy and further disruptions to global supply chains. 

As we head into this week, investors will continue to be laser focused on comments from Fed officials over the course of the week, looking for clues on the path of rate hikes or hints on details for how they plan to reduce the size of the Fed's balance sheet. 

In terms of economic data, the housing market will be in focus, as will the preliminary purchasing managers indices for April. Have a great week and we'll be in touch next Monday.