Global Markets Weekly Update: December 02, 2022
The major U.S. equity indexes ended higher, buoyed by the possibility that the Federal Reserve may slow the pace of its interest rate increases. Growth stocks outperformed their value counterparts in the S&P 500 Index, while the technology-heavy Nasdaq Composite Index posted solid gains. The “traditional economy” Dow Jones Industrial Average (DJIA), however, took a bit of a breather and ended modestly higher. Still, the DJIA did enter bull market territory on the final day of November, when it closed more than 20% above the low it hit in September 2022.
Comments from Fed Chair Jerome Powell signaling smaller interest rate hikes going forward drove U.S. Treasury yields lower this week. (Bond prices and yields move in opposite directions.) On Friday, however, yields partially retraced their earlier moves after U.S. employment data showed strong hiring and wage inflation in November. Municipal bonds extended their rally, aided by a pullback in interest rates. T. Rowe Price traders reported strong demand for short- and intermediate-term municipals from more tax-sensitive, retail-oriented products.
Powell says pace of tightening could slow but reiterates rates likely to be higher for longer
Equities rallied sharply on the final day of November as the market reacted to a speech that Powell gave at the Brookings Institution. In his remarks, Powell highlighted the risk of relaxing monetary policy too soon and reiterated that the peak interest rate for this tightening cycle is likely to be “somewhat higher” than previously estimated. Rates could also remain higher for longer, according to the Fed chair, who also acknowledged that the central bank is mindful that the effects of monetary policy take time to filter through to the economy. In light of this lag, Powell indicated that the Fed could slow the pace of rate increases as early as the Federal Open Market Committee’s mid-December 2022 meeting.
Number of job openings fell in October, but November job gains surprised to the upside
The jobs market was an area of focus, with Powell telling the audience at the Brookings Institution that labor demand would likely need to soften as the central bank seeks to bring inflation under control. Data from the Bureau of Labor Statistics showed that the number of job openings declined by about 353,000 to 10.3 million—a level that was slightly below a consensus estimate for 10.4 million available positions.
Nonfarm payrolls data showed that the U.S. economy added 263,000 jobs in November, exceeding a consensus estimate that had called for the pace to slow to about 200,000. The report called out job gains in leisure and hospitality, health care, and government as well as employment declines in retail, transportation, and warehousing. The unemployment rate remained at 3.7%.
Consumer confidence and manufacturing activity show signs of weakening
Consumer spending increased by 0.8%, or 0.5% on an inflation-adjusted basis, sequentially in October. The core personal consumption expenditure price index, which excludes volatile food and energy costs, increased 5.0% year over year, moderating from the 5.2% inflation rate recorded in September. However, the Conference Board’s gauge of consumer confidence slipped in November, with the survey registering an uptick in inflation expectations and increased reticence among households to buy big-ticket items over the next six months.
The Institute for Supply Management’s purchasing managers’ index (PMI) for manufacturing slipped to levels corresponding with a contraction in activity for the first time since May 2020, as the uncertain economic environment appeared to weigh on demand.
% Change YTD
S&P MidCap 400
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Shares in Europe rose for a seventh week running, as lower inflation spurred hopes that central banks could slow the pace at which they are tightening monetary policy. Signs that China was relaxing some coronavirus restrictions also buoyed sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.58% higher. Major country stock indexes were mixed. France’s CAC 40 Index added 0.44%, Germany’s DAX Index was roughly flat, and Italy’s FTSE MIB Index slid 0.39%. The UK’s FTSE 100 Index gained 0.93%.
European government bond yields fell after data showed that euro area inflation slowed more than expected in November. Comments by U.S. Fed Chair Jerome Powell suggesting that the central bank might slow the pace of its rate increases fueled a broader rally in bond markets, with Italian, French, and Swiss yields also declining. In the UK, 10-year gilt yields ended little changed.
Eurozone inflation slows, sentiment improves
Inflation in the eurozone slowed in November for the first time in 17 months. Smaller increases in energy and services costs helped push consumer price growth down more than expected to 10% from a record high of 10.6% in October. Inflation decelerated in 14 of the 19 eurozone member states.
The European Commission’s economic sentiment survey provided another sign that consumers and businesses are feeling less gloomy about the economic outlook. Eurozone economic confidence rebounded in November from a two-year low—the first increase since February, when Russia invaded Ukraine. In addition, inflation expectations fell sharply.
ECB’s Lagarde hints at more rate hikes
Central bank policymakers continued to indicate that interest rates are likely to rise further. Prior to the release of the latest data on consumer prices, European Central Bank (ECB) President Christine Lagarde told the European Parliament that inflation in the euro area had not yet peaked and could even accelerate in coming months.
UK housing market slows sharply; Wieladek sees smaller rate hikes
Mortgage approvals in the UK fell more than expected in October to the lowest level since the pandemic lockdown in June 2020 as borrowing rates surged, Bank of England (BoE) data showed. In another sign that the housing market may be cooling rapidly, mortgage lender Nationwide’s monthly survey showed that house prices fell in November by 1.4% sequentially—the biggest drop since the lockdown in June 2020. Annual house price growth slowed to 4.4% from 7.2%.
T. Rowe Price Chief European Economist Tomasz Wieladek said house prices could fall about 10% to 15% next year. Historically, the BoE has stopped hiking interest rates when house prices contract year over year. Wieladek believes that the BoE is likely to raise its benchmark rate by 0.5 percentage point in December and follow up with quarter-point increases in February, March, and May. However, if the economy continues to deteriorate at the pace of this week’s house price data, the BoE could stop even earlier.
Japanese equity market returns were negative for the week, with the Nikkei 225 Index falling 1.79% and the broader TOPIX Index down 3.17%, as exporters suffered amid yen strength. Investors’ focus was on COVID-related developments in China, where authorities indicated that a slight easing of strict coronavirus containment measures could be in the cards. Sentiment was also shaped by growing expectations that the U.S. central bank would slow the pace at which it raises interest rates.
The yield on the 10-year Japanese government bond moved little on the prior week—it was broadly unchanged at 0.25%, trading around the Bank of Japan’s (BoJ’s) implicit policy cap. Meanwhile, the yen strengthened to its highest level in over three months to about JPY 134.5 against the U.S. dollar, from around JPY 139.1 at the end of the previous week, in anticipation of the Fed pivoting to a more dovish stance.
Industrial production falls amid mixed economic signals
On the economic data front, Japan’s industrial production fell 2.6% month on month in October. This decline, which was more than expected, stemmed from decreases across the production machinery, electronic parts and devices, and chemicals industries. The Ministry of Economy, Trade and Industry expects production to increase in November and December, however. Unemployment in October stood at 2.6%, unchanged on the prior month. Declines in the labor force outpaced employment, as both applications and job offers fell. Consumer confidence weakened in November from October, led by a deterioration in the labor market and wage growth.
BoJ official says near-term exit from ultra-loose monetary policy is unlikely
BoJ Board Member Asahi Noguchi said that a near-term exit from ultra-loose monetary policy is unlikely, with more time needed to see wage growth come through to keep inflation around the central bank’s 2% target. He added that the chance of a positive cycle of wages and inflation rising in tandem was now higher than before the coronavirus pandemic and suggested that if trend inflation—focused on wage and service prices—reaches 2%, there could be a shift in the BoJ’s monetary policy stance.
Government to raise defense budget to 2% of GDP by fiscal 2027
Prime Minister Fumio Kishida signaled that Japan’s defense budget would be increased to 2% of gross domestic product (GDP) by fiscal 2027, representing a doubling in spending. Kishida stressed the urgency to increase the budget within five years, with reinforcing deterrence the government’s top priority.
Chinese stocks rose amid signs that the Fed would slow the pace of interest rate hikes and that Beijing was moving closer to fully reopening the economy after months of pandemic controls. The blue chip CSI 300 Index climbed 2.5% for the week, logging the best week in a month, Reuters reported.
Beijing eases quarantine measures following unrest
Chinese markets fell early last week following reports of civil unrest in major cities nationwide over the weekend. The unrest began after a fire in Urumqi, the capital of Xinjiang province, killed 10 people, which protestors attributed to coronavirus restrictions.
Signs that China was edging away from its zero-tolerance approach to the coronavirus lifted sentiment. China’s National Health Commission announced that it will boost vaccination rates among the elderly, a move seen as crucial for the economy to fully reopen. Days later, China’s most senior official in charge of the coronavirus response, Vice Premier Sun Chunlan, said that efforts to combat the virus were moving to a “new phase” as the omicron variant weakens and more people are vaccinated, state media reported. Beijing also plans to start allowing low-risk infected individuals to isolate from home rather than in government quarantine sites, Bloomberg reported, citing unnamed officials.
In economic news, official PMI readings for manufacturing and nonmanufacturing weakened in November. The private Caixin China General Manufacturing PMI rose more than expected to 49.4 from October’s reading. However, the measure remained under 50, indicating contraction as coronavirus outbreaks curtailed manufacturing activity nationwide.
Other Key Markets
On Wednesday, the European Commission (EC)—which creates proposals for European legislation and implements decisions made by the European Parliament and the Council of the European Union (EU)—concluded that Hungary has yet to fully implement the reforms needed to resolve the “rule of law” dispute it has had with the EU for much of the year. As a result, the EC is adhering to its proposal from September that the EU should “suspend” EUR 7.5 billion of the EUR 35 billion that Hungary anticipated receiving for the 2020–2027 time frame. The Council of the EU has until December 19, 2022, to vote in favor of or against the suspension of funds. However, the EC also accepted Hungary’s Recovery and Resilience Plan—albeit with some strict conditions—which means Hungary could still receive up to EUR 5.8 billion from the EU’s Recovery and Resilience Facility (RRF).
According to T. Rowe Price credit analyst Ivan Morozov, this outcome was not unexpected. He is encouraged that Hungary, if it meets the EU’s requirements, can ultimately receive all the EU money that the government had expected to receive. The near-term economic implications of the EC ruling are that Hungary will continue receiving EU money until the end of 2023 under a seven-year program that was already in effect. Hungary could receive more money in 2023 from the RRF, depending on the country’s compliance with the EC’s conditions. The medium-term outlook could be slightly more negative, in Morozov’s view, as Hungary might see reductions in EU transfers equivalent to about 0.5% of its GDP if it fails to comply with the conditions.
Turkish stocks, as measured by the BIST-100 Index, returned about 1.8% for the week. Turkish stocks rose sharply in November, surging 22.54% in U.S. dollar terms, as measured by MSCI. The market was lifted in part by expectations that the central bank—despite inflation exceeding 80%—would cut interest rates again, which it did on November 24. Policymakers reduced the one-week repo auction rate to 9.0% from 10.5%. This key interest rate had been as high as 14% in August.
In the central bank’s post-meeting statement, policymakers justified this latest rate cut by deeming it “critically important that financial conditions remain supportive for the sustainability of structural gains in supply and investment capacity by preserving the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as further escalation of geopolitical risks.” Policymakers also decided “to end the rate cut cycle” because they felt that the 9.0% repo auction rate was “adequate” in light of the “increasing risks regarding global demand.”
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