Market Review

Rate volatility picked up following a surprisingly strong July employment report and was further supported by Fed speakers working to move market participants from a “dovish pivot” toward a “higher for longer” theme for federal funds. Chair Powell’s short speech at Jackson Hole reinforced the committee’s commitment to squash inflation with expectations of a sustained period of higher overnight rates.

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The Inflation Reduction Act of 2022 represents a major development in U.S. climate and industrial policy. This month, we outline the pros and cons of the bill as well as investment implications across a wide range of industries. Additionally, the labor market continues to be tight while employers are being pressed to cut costs due to inflation and a slower growth outlook. We share how human capital management can be a differentiator for employers in this challenging environment.

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As we reflect on the first half of 2022, it is clear that the storm clouds have moved in over the ESG investment landscape.

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Rate volatility declined in July but remained elevated. The curve twisted around the 2- and 3-year notes; maturities of 1 year and less moved up in yield while intermediate to long maturities declined. The yield on the 10-year started the month at 2.88%, hit a high of 3.08% following the very strong June jobs print, and ended the month at 2.65%.
 
 
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The 2nd quarter of 2022 saw a decidedly negative equity market, rising bond yields, and, at times, extreme volatility, continuing the trend that began early in 2022. The first half of the year has been one of the worst in the history of financial assets. The bond market, although expecting rate increases, has nevertheless been caught off guard; market expectations for Fed Funds rate hikes have risen dramatically since early in the year. On June 30th, the S&P 500 Index was down 21% year-to-date, investment grade corporate bonds down 14%, and 10-year bond yields were up 1.2%.
 
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May was another volatile month in the rates markets, although nowhere near what was experienced by the equity markets. The Federal Reserve increased the fed funds rate by 50 basis points (bps) early in the month and made clear that additional hikes of that magnitude would be forthcoming along with a reduction in the size of the Fed’s balance sheet. This month’s inflation prints offered no relief, generally coming in higher than expected.

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