Global Markets Weekly Update: August 19, 2022
U.S.
Stocks retreat on rate fears in light summer trading
Stocks gave back a portion of the previous week’s strong gains after a prominent “hawkish” Federal Reserve policymaker appeared to dampen hopes that inflationary pressures had peaked. The growth-oriented technology and communication services sectors underperformed within the S&P 500 Index, with the latter dragged down by a sharp decline in Facebook parent Meta Platforms. Subdued summer trading was accompanied by some volatility Friday as USD 2.3 trillion in options expired.
Bullard doesn’t see inflation peak
In an interview with The Wall Street Journal on Thursday, St. Louis Fed President James Bullard questioned whether inflation had really peaked despite the surprise downturn in the year-over-year increase in the consumer price index (from 9.1% in June to 8.5% in July) reported the previous week. “The idea that inflation has peaked is…not statistically really in the data at this point,” Bullard told the Journal, while stating that he was likely to vote in favor of another 75-basis-point (0.75 percentage point) increase in the federal funds target rate at the Fed’s next policy meeting.
Bullard’s comments came on the same day as the release of the Fed’s minutes from its July policy meeting, which T. Rowe Price traders noted contained few surprises. Stocks did rally a bit following the release, however, which may have reflected policymakers’ acknowledgment at the meeting of the risk of moving too aggressively. Fed officials discussed the recent slowdown in many areas of the economy—with the notable exception of the labor market. While concurring on the need to continue raising rates, “a number of participants posited that some of the effects of policy actions and communications were “showing up more rapidly than had historically been [due to] a significant tightening of financial conditions.”
July data generally surprise on the upside
Some upward surprises in the week’s economic data may have fueled rate fears, even as they offered hope that the economy would avoid a recession. Retail sales proved more resilient than expected in July, rising 0.7% once the volatile gas and auto segments were excluded. Notably, sales rose solidly on an inflation-adjusted basis given the smaller 0.3% increase in core (less food and energy) inflation. Industrial production was also strong, rising 0.6% in the month, roughly twice consensus expectations. Weekly jobless claims ticked lower, betraying expectations for an increase. On the downside, housing data remained weak, and Target reported a sharp decline in earnings as shoppers continued to pull back on discretionary purchases.
Investors continue to shun munis
Along with a generally dovish interpretation of the Fed’s July meeting minutes, the strong economic data appeared to fuel an increase in longer-term bond yields, with the yield on the benchmark 10-year note nearing 3.0% for the first time since July 21. (Bond prices and yields move in opposite directions.) The broad tax-exempt municipal bond market underperformed U.S. Treasuries by a wide margin. Selling pressures drove the benchmark yield on AAA rated one-year municipals to its highest level since March 2020, when yields spiked at the onset of the pandemic. T. Rowe Price municipal bond traders cited an increase in new issuance and industrywide outflows as headwinds, although they observed strong demand for a roughly USD 1.25 billion bond offering for the University of California system.
Trading volumes within the investment-grade corporate bond secondary market were below daily averages, and primary issuance exceeded expectations. Segments with more credit risk, including the banking and the technology, media, and telecom sectors, underperformed, while short-maturity and higher-quality credits performed relatively well. Our traders noted that the impact of the more supportive macroeconomic tone was muted by an uptick in issuance.
The below investment-grade market experienced low volumes throughout most of the week. However, high yield bond prices endured their largest setback since June 29 as a hot UK inflation reading (see below) and the resilient U.S. retail sales figures reignited Fed policy concerns. Several new deals were generally met with strong demand, however. The primary calendar is expected to be fairly quiet for the rest of the month with issuance picking up after Labor Day. Liquidity was relatively thin in the bank loan market amid the summer lull.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,706.74 |
-54.31 |
-7.24% |
S&P 500 |
4,228.48 |
-51.67 |
-11.28% |
Nasdaq Composite |
12,705.22 |
-341.97 |
-18.79% |
S&P MidCap 400 |
2,578.04 |
-36.97 |
-9.29% |
Russell 2000 |
1,957.34 |
-59.27 |
-12.83% |
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
Shares in Europe pulled back amid renewed fears that central banks would need to tighten their policies aggressively to stamp out persistently high inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.80% lower. Most of the major stock indexes fell. Germany’s DAX Index declined 1.82%, France’s CAC 40 Index slipped 0.89%, and Italy’s FTSE MIB Index lost 1.90%. However, the UK’s FTSE 100 Index added 0.66%, as the UK pound depreciated against the U.S. dollar. A weaker pound lends support to the index because many of its companies are multinationals with overseas revenues.
Core eurozone government bond yields rose following a double-digit increase in UK consumer prices and European Central Bank (ECB) official Isabel Schnabel’s comment that inflation could tick higher in the near term. Peripheral eurozone and UK government bond yields broadly tracked core markets.
UK inflation jumps, wages increase, and retail sales rise
The UK’s headline inflation rate hit 10.1% in July—the first double-digit reading since February 1982—fueled by sharply higher food costs. The year-over-year increase in consumer prices exceeded a consensus forecast of 9.8% in a FactSet survey of economists. The core rate, which excludes food and energy prices, also came in higher than expected, rising to 6.2%.
Meanwhile, underlying wage growth in the UK (excluding bonuses) rose to an annual rate of 4.7% in the second quarter. However, factoring in inflation, regular wages declined 3.0%—the fastest drop since comparable records began in 2001. Unemployment rose 0.1 percentage point to 3.8% in the same period. But job vacancies at 1.27 million in the three months to July, a small decrease from record levels, suggest that the labor market remained tight.
ECB’s Schnabel: No improvement in inflation outlook
ECB Executive Board member Isabel Schnabel said that the eurozone’s inflation outlook had not improved since July’s large interest rate hike, indicating that she might vote for another large increase next month. "In July, we decided to raise rates by 50 basis points because we were concerned about the inflation outlook," she told Reuters in an interview. "The concerns we had in July have not been alleviated.... I do not think this outlook has changed fundamentally."
Record eurozone inflation confirmed; German factory-gate prices surge
Eurozone inflation hit a record 8.9% in July. Meanwhile, Eurostat lowered its estimate of second-quarter economic growth to 0.6% from 0.7%. Factory-gate prices in Germany rose 37.2% in July from a year earlier, driven by strong increases in natural gas and electricity costs.
Norges Bank hikes interest rates
Norway’s central bank raised its key interest rate 0.5 percentage point to 1.75% in an effort to quell inflation. “The rise in prices has been broad-based in recent months and may entail that inflation will remain high for longer than expected,” the Norges Bank noted in a statement. “This suggests a faster rise in the policy rate than forecast in June.” The Bank stated it was planning to raise rates again next month.
Japan
Japanese equities post gains, but sentiment remains fragile
Japanese shares were solidly higher through the first half of the week as investors reacted to positive U.S. economic data released late last week. This raised hopes that the Federal Reserve may be less aggressive with rate hikes in the coming months. Indeed, despite a mixed bag of domestic economic releases and weak data out of China stoking concerns about slowing global growth, Japanese equity markets rallied on Wednesday, with both the Nikkei 225 Index and the TOPIX breaching the psychological 29,000- and 2,000-point levels, respectively.
The hopeful sentiment proved to be short-lived, however, after the minutes from the U.S. Fed’s July meeting, released on Thursday, pointed to rates staying higher for longer. The minutes also reaffirmed the central bank's plans to continue raising interest rates in an effort to return inflation to its 2% long-term objective. This saw Japanese stock markets close Thursday’s session notably lower, giving up the gains made in the previous session. Weakness was felt across most sectors, particularly technology stocks, which tracked U.S. peers in the tech-heavy Nasdaq Composite Index. Federal Reserve officials continued to talk up the need for further interest rate hikes on Friday, ensuring that Japanese equities finished the session without impetus. Over the week, however, both the Nikkei 225 and the TOPIX finished modestly higher, gaining 1.3% and 1.1%, respectively.
Economic data remain mixed
Japan's gross domestic product expanded by an annualized 2.2% in the second quarter of 2022, according to the Cabinet Office’s preliminary reading, released on Monday. This missed consensus expectations of around 2.5% growth, however. More positively, Japan's industrial production rose by more than anticipated in June, according to the Ministry of Economy, Trade, and Industry. Industrial production increased by a seasonally adjusted 9.2% in June, bettering initial expectations of 8.9%.
Meanwhile, inflation in Japan continued to remain above the 2% target, influenced by higher fuel prices and a weaker yen, official data showed on Friday. Excluding fresh food, core inflation increased to 2.4%, from 2.2% the previous month. This was in line with consensus expectations. Core inflation has now exceeded the central bank's 2% target for four consecutive months.
Fed’s Hawkish Tone Impacts Yen
Bullard’s comments (see above) helped the dollar strengthen against the Japanese yen. Having started the week around JPY 133.5, versus the USD, the yen weakened into the end of the period, ultimately closing at JPY 136.7. Meanwhile, on the bond market, benchmark 10-year JGB yields edged higher during the week, from 0.184% at Monday’s start to 0.191% by Friday’s close.
China
China’s stock markets posted a loss for the week in reaction to weak economic data and elevated levels of COVID cases, with drought conditions in parts of the country adding to the gloom. The broad, capitalization-weighted Shanghai Composite Index dipped 0.6% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, eased 1%, Reuters reported.
Data released during the week showed retail sales in July grew 2.7% year on year while industrial output was 3.8% higher than a year ago. Both data sets were below expectations. In the property sector, data showed China’s home prices fell for an 11th month in July. New home prices in 70 cities declined 0.11% from June, when they fell 0.1%, according to the National Bureau of Statistics. Existing-home prices fell 0.21%, the same as a month earlier.
It was the worst seven-day period for China in terms of COVID infections since mid-May, with more than 18,000 new local cases recorded, Bloomberg reported. The government also issued a national drought alert as soaring temperatures threatened crops and industrial activity, with regions from Sichuan in the southwest to Shanghai in the Yangtze Delta facing extreme heat. The severe heat wave has sparked power shortages and forest blazes. T. Rowe Price analysts note that Sichuan, which accounts for 5% of China’s gross domestic product , is exceptionally vulnerable due to its reliance on hydropower. A range of industries from steel to new electric vehicle batteries are likely to be affected.
The 10-year Chinese government bond yield fell sharply after the People’s Bank of China (PBOC), China’s central bank, unexpectedly cut a key interest rate. The PBOC lowered its seven-day reverse repo rate—the main rate at which it provides short-term liquidity to banks—to 2.00% from 2.10% and the one-year Medium-Term Lending Facility (MLF) rate to 2.75% from 2.85%. T. Rowe Price analysts attribute the policy action to July’s disappointing economic data. More steps could follow, including a cut in the loan prime rate (LPR). The LPR is a lending reference rate set monthly by 18 banks and announced by the PBOC. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate. The PBOC sets the MLF rate on which banks base the LPR, which then leads to actual loan rates.
The yuan struck a three-month low versus the dollar, as the currency reacted to soft economic data and tracked the central bank’s weakened midpoint guidance. The PBOC allows the exchange rate to rise or fall 2% from the official midpoint rate it sets each morning.
Other Key Markets
Turkey
Stocks in Turkey, as measured by the BIST-100 Index, returned about 5.4%. On Thursday, Turkey’s central bank unexpectedly reduced its key interest rate, the one-week repo auction rate, from 14.0% to 13.0%. According to the post-meeting statement, policymakers justified the rate cut by indicating that they expect the “disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability.” Policymakers also claimed that “leading indicators for the third quarter point to some loss of momentum in economic activity” and that it is “important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment.”
With headline consumer price index inflation in July at a year-over-year rate of nearly 80% and corporations lobbying for the ability to adjust or revise their financial statements to reflect the elevated inflation environment, T. Rowe Price sovereign analyst Peter Botoucharov believes that the rate cut confirms the central bank’s support for President Recep Tayyip Erdogan’s “New Economic Program”—at least until the June 2023 presidential and legislative elections. The goals of the program, which is based on a highly stimulative monetary policy and an exchange rate that increases the competitiveness of Turkish exporters in world markets, are stronger economic growth and job creation. The downside of these policies, however, is higher inflation and a weaker lira.
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