Global Markets Weekly Update: April 14, 2022
U.S.
Benchmarks end mixed as earnings season kicks off
The major indexes ended mixed over a holiday-shortened week, which saw the release of the first major corporate earnings reports of 2022. Value stocks continued to outperform their growth counterparts, but small-caps regained ground lost the previous the week on large-caps. Financials lagged within the S&P 500 Index, dragged lower by JPMorgan Chase after the banking giant missed Wall Street’s estimates. Energy shares outperformed. The market was closed Friday in observance of the Good Friday holiday, and T. Rowe Price traders observed below-average trading volumes for much of the week.
Anticipation of a sharp deceleration in earnings growth appeared to be one factor weighing on sentiment. In contrast to recent quarters, analysts polled by FactSet have been lowering their earnings estimates and expect profits for the S&P 500 as a whole to have grown in the mid-single-digit percentages over the year before—the slowest pace since late 2020. As FactSet notes, however, companies typically exceed analyst estimates by some margin.
Inflation data offer mixed signals
Inflation data and how price pressures would impact corporate margins also seemed to be in the spotlight. Producer price inflation data out of China over the weekend weighed on sentiment before trading began on Monday, according to our traders, while Chicago Federal Reserve Bank President Charles Evans, historically considered “dovish,” said at an event in Detroit that he considers an accelerated pace of rate hikes worth debating.
On Tuesday, the Labor Department reported that headline inflation jumped 1.2% in March, bringing the year-over-year increase to 8.5%, slightly above consensus expectations and a new four-decade high. The core rate excluding food and energy prices rose only 0.3%, however, below consensus expectations of around 0.5%. Stocks initially rose on hopes that inflation might be peaking, but our traders reported that the rally was short-lived as crude oil prices rallied back through USD 100 a barrel after Russian President Vladimir Putin said peace talks with Ukraine are stalled.
Inflation-adjusted spending falls
Our traders also observed increased dialogue in the market around the risk to consumer activity following the steep move in rates, which has materially increased the cost of financing larger-ticket items, such as houses, cars, recreational vehicles, and boats. Retail sales, which are not adjusted for inflation, rose only 0.5% in March, below estimates and the weakest pace so far in 2022.
Further threatening corporate profits, core producer prices, reported on Wednesday, rose 1.0% in March, roughly double estimates, while February’s increase was revised higher. Over the previous 12 months, prices surged a record 9.2%.
The recent steepening of the U.S. Treasury yield curve continued over the week, with short- and intermediate-term rates retreating and long-end yields ticking slightly higher. (Bond prices and yields move in opposite directions.) Our traders reported that the softer-than-expected core reading in the March consumer price index (CPI) sparked demand for Treasuries—especially those with shorter maturities—and an unwinding of curve-flattening bets by many investors.
Muni outflows continue, but new deals see strong demand
The broad tax-exempt municipal bond market posted negative returns for most of the week amid continued pressures from fund outflows industrywide. Municipals also lagged Treasuries as tax-free bond investors appeared reluctant to follow alongside Tuesday’s relief rally in the U.S. rates market. As the week progressed, our traders reported that several primary market deals were greeted with strong demand.
Corporate bonds experienced some weakness at the start of the week amid elevated new issuance and anticipation of March CPI data, but the softer core reading had a positive impact on sentiment. Later in the week, the market was mixed alongside periods of weakness in the equity markets. Issuance was in line with expectations during a front-loaded week in the primary market.
Our traders reported that the high yield corporate bond market was down on lighter-than-average trade volumes. Broader risk assets continued to experience weakness with inflation risk and the ongoing conflict in Ukraine weighing on markets. No new deals were announced in the primary market.
The bank loan market saw somewhat light trading activity. Our traders noted that sellers of high-dollar loans looking to reinvest in cheaper high yield bonds drove much of the trading activity in the secondary market. Several new deals launched early in the week before primary market activity subsided ahead of the holiday.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,451.23 |
-269.89 |
-4.45% |
S&P 500 |
4,392.59 |
-95.69 |
-5.83% |
Nasdaq Composite |
13,351.08 |
-359.92 |
-12.36% |
S&P MidCap 400 |
2,628.61 |
11.52 |
-7.91% |
Russell 2000 |
2,004.98 |
10.42 |
-11.17% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price's presentation thereof.
Europe
European shares rose amid some relief that the European Central Bank (ECB) did not adopt a more hawkish stance at its policy meeting. In local currency terms, the pan-European STOXX Europe 600 Index ended the holiday-shortened week 1.09% higher. France’s CAC 40 rose 2.11%, and Italy’s FTSE MIB advanced 2.66%, while Germany’s DAX Index added 0.62%. The UK’s FTSE 100 fell 0.79% as energy stocks weakened and the UK pound strengthened against the U.S. dollar. A stronger pound weighs on the index because many of its companies are multinationals with overseas revenues.
Core eurozone bond yields were volatile and ended higher amid speculation around the ECB policy meeting. UK and peripheral eurozone bond yields broadly tracked core markets.
ECB sticks to stimulus withdrawal schedule
The ECB indicated at its latest policy meeting that it would adhere to its earlier guidance for a steady withdrawal of stimulus, saying that recent economic data “reinforce its expectation” that its asset purchases should end in the third quarter. ECB President Christine Lagarde said, after the meeting, that policymakers would “maintain optionality, gradualism, and flexibility in the conduct of our monetary policy.” She also said there was no clear timetable for raising interest rates after the program winds up.
UK growth slows, inflation soars, traders bet on May rate hike
The UK’s economic recovery showed signs of faltering while inflation continued to accelerate. Gross domestic product growth slowed to 0.1% in February, versus 0.8% in January, due to a decline in construction and production output. The quarterly growth rate was 1.0%, down from 1.3% in January. However, the full effect of Russia’s invasion of Ukraine in late February was not captured by the data. The jobless rate fell to 3.8% in February from 3.9% in January. Meanwhile, inflation jumped to a 30-year high of 7.0% in March from 6.2% in February on rising fuel costs and across-the-board increases in prices. UK financial markets indicated showed traders are all but certain the Bank of England will raise its key interest rate by a quarter point to 1.0% in May.
Macron versus Le Pen in second round of French election
National Rally Party leader Marine Le Pen and President Emmanuel Macron beat other challengers in the first round of the French presidential election and will face each other in the second round on April 24. Macron won almost 28% of the vote, and Le Pen won slightly over 23%. Democratic-Socialist candidate Jean-Luc Mélenchon garnered 22%. Le Pen’s result and subsequent tightening opinion polls suggest she is the closest ever to winning power for the far right in France.
Japan
Japan’s stock markets gained over the four-day period, with the Nikkei 225 Index rising 0.69% and the broader TOPIX Index up 0.62% through Thursday. Bank of Japan (BoJ) Governor Haruhiko Kuroda asserted that Japan’s economy will continue to recover despite surging commodity prices, but he stressed that the central bank needs to maintain its massive monetary stimulus to support the still-fragile post-coronavirus recovery. The BoJ’s ultra-loose policy stance, in contrast to the tightening pursued by many other major central banks, has contributed to significant currency weakness—the yen hovered around its lowest levels in nearly 20 years against the U.S. dollar, finishing the period at about JPY 125.36, compared with JPY 124.30 at the end of the previous week. The yield on the 10-year Japanese government bond was unchanged at about 0.23%.
Producer prices increase rapidly while consumer price inflation remains subdued
Japan’s producer price index, which measures the price of goods traded between companies, rose by 9.5% year on year in March, following a 9.7% rise in February. The rapid increase was attributable to spiraling crude oil and commodity prices, partly due to supply constraints stemming from Russia’s war with Ukraine.
Consumer price inflation, on the other hand, remains subdued, underpinning the BoJ’s commitment to accommodative monetary policy in the pursuit of its 2% inflation target. However, Kuroda said that he expects the core consumer price index to rise and cautioned that “extremely high uncertainties” remain about how the situation in Ukraine will affect the Japanese economy. BoJ Deputy Governor Masazumi Wakatabe said that while Japan has yet to completely emerge from deflation, it is no longer suffering from sustained price falls. He reiterated the view that it is desirable for currency rates to move stably, reflecting economic fundamentals.
Regional economic assessments revised downward
In the BoJ’s Regional Economic Report for April, eight out of nine regions from across Japan revised downward their economic assessments from January, mainly reflecting a resurgence in the coronavirus and supply-side constraints in some sectors. Downward pressure on services consumption was also highlighted. On the economic data front, Japanese manufacturers’ business confidence improved for a second month in April, according to the Reuters Tankan poll. However, trends in the foreign exchange market and rising raw materials prices were cited as factors clouding the outlook.
China
Chinese markets retreated in the week to Thursday as a surging coronavirus outbreak in Shanghai fueled concerns about supply chain disruptions. The broad, capitalization-weighted Shanghai Composite Index eased 0.8%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, declined 0.92%.
Shanghai reported more than 27,000 coronavirus cases on Thursday, a new record, as the city experiences its worst outbreak since the virus first emerged in Wuhan in 2019. Shanghai’s 25 million residents have been under lockdown since March 28.
Supply chain paralysis gripped parts of China’s manufacturing sector as a growing number of Chinese cities reimposed restrictions to quash the virus. Tesla, Volkswagen, Bosch, and domestic automakers Nio and SAIC Motor are among the companies that have suspended production. More than 30 Taiwanese companies, many making electronics parts, have also suspended production in eastern China. In response to the growing outbreak, China’s President Xi Jinping said that the country must not relax control and prevention measures.
In economic readings, China’s consumer price index accelerated in March, while the producer price index declined from February’s reading but still exceeded forecasts. China’s exports rose a better-than-expected 14.7% in March from a year ago, but imports unexpectedly declined, falling short of forecasts for growth and marking the first drop since August 2020.
Despite a pickup in credit in March, overall credit demand in China remains weak, underscoring the difficulty that China’s central bank faces in trying to bolster lending, even after cutting its policy interest rate in January. Last Wednesday, China’s State Council said that China would use monetary policy tools, including a cut in banks’ required reserve ratio, at “an appropriate time,” which investors interpreted as a possible rate cut in the near term.
China’s cash-strapped property sector continued to generate negative headlines. Zhenro Properties became the latest developer to default, after the company revealed that it failed to pay interest payments totaling USD 20.4 million on two offshore bonds. Property developer Fantasia Holdings, which defaulted in October, appointed a consultant to review its financial position and devise plans for possible asset sales, as well as help implement an overall debt restructuring plan.
T. Rowe Price analysts noted that 14 Chinese cities this month have reportedly loosened homebuying restrictions, including limits on nonresident buyers and lowering interest rates. Such locally driven, piecemeal easing measures will likely take longer to filter through the economy than a centrally driven, nationwide policy relaxation, they added.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 3.4% through the close of business on Thursday.
According to T. Rowe Price sovereign analyst Peter Botoucharov, the fallout from the conflict between Russia and Ukraine—which is Turkey’s southern neighbor, across the Black Sea—is starting to have an impact on Turkey’s external accounts. In fact, Botoucharov considers Turkey to be one of the countries in the emerging markets universe that is most exposed to higher energy costs and higher prices of soft commodities (e.g., agricultural products like corn and wheat), as well as potentially lower tourism revenues.
Botoucharov says that Turkey’s current account deficit in January‒February 2022 was USD 12.1 billion, up from USD 4.3 billion in the same two-month period in 2021. He projects that the full-year 2022 current account deficit could be around 4.0% to 4.5% of the country’s gross domestic product compared with a 1.7% deficit in 2021.
Mexico
Mexican stocks, as measured by the IPC Index, returned about -0.9% through the close of business on Wednesday. The market was closed on Thursday and Friday.
Last weekend, President Andrés Manuel López Obrador (AMLO) survived a recall referendum—Mexico’s first recall election, as reported by Reuters—with about 92% of the votes cast in favor of the president to remain in office. T. Rowe Price emerging markets sovereign analyst Aaron Gifford acknowledges that this is a favorable outcome for AMLO, but he also notes that the result was largely expected and that less than 20% of the voting population participated in the referendum.
Nevertheless, Gifford believes AMLO will likely use the results as cover to continue pushing forward his agenda. Despite a small win recently for his electricity reform law not getting entirely ruled unconstitutional by the Supreme Court, AMLO continues to lack the constitutional majorities required to initiate strong change. For now, Gifford considers the referendum results to be largely symbolic.
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