Global Markets Weekly Update: December 23, 2022
U.S.
Markets end mixed in light holiday trading
The major indexes were mixed in a week of generally quiet holiday season trading. The Dow Jones Industrial Average and S&P MidCap 400 Index recorded modest gains, while the Nasdaq Composite dropped nearly 2% despite recording its best daily gain since November on Wednesday. Energy stocks outperformed as U.S. oil inventories came in well below consensus expectations. Consumer discretionary shares performed worst, dragged lower by a steep decline in Tesla following the electric vehicle maker’s announcement of increased price discounts. Semiconductor stocks also sold off on Thursday after chipmaker Micron Technology reported falling global demand. Bond trading closed early on Friday, and both equity and bond markets were set to be closed Monday in observance of the Christmas holiday.
T. Rowe Price traders reported that hawkish comments from the Federal Reserve and other global central banks over the previous week continued to be a key factor weighing on markets. In particular, stocks wavered on Monday, after former New York Fed President William Dudley told Bloomberg Television that optimistic markets could only result in the central bank tightening more aggressively.
U.S. growth bounces back solidly in third quarter
Some of the week’s economic signals may have intensified fears of future rate hikes. On Thursday, the Commerce Department upped its estimate of economic growth in the third quarter from 2.9% to 3.2%, boosted by upward revisions in health care spending and investment in equipment and intellectual property.
Meanwhile, weekly jobless claims surprised modestly on the downside, and continuing claims recorded their first weekly drop since October. Personal incomes rose 0.4% in November, a tick above expectations, but spending rose only 0.1%—remaining roughly flat in inflation-adjusted terms—as Americans cut back on purchases of autos and other goods. The personal consumption expenditure (PCE) price index also rose 0.1% in November, bringing its year-over-year increase to 5.5%, the lowest since October 2021 and perhaps contributing to a mid-morning rally on Friday. The 12-month rise in the core (less food and energy) PCE index—considered the Fed’s preferred inflation gauge—fell to a four-month low of 4.7%.
Consumer resilience was mirrored in the Conference Board’s index of consumer confidence, which reversed two months of declines and came in at 108.3, much higher than expected and its best level since April. However, the research institute noted that its expectations index remained around 80, typical of recession levels.
Housing data were mixed, with existing home sales falling a bit less than expected in November but new home sales rising 5.8% and defying consensus expectations of a roughly 4.7% drop. Forward-looking data were more negative, however, as building permits plummeted 10.6% and hit their lowest level since June 2020. Durable goods orders contracted 2.1% in November, their biggest drop since April 2020, but the decline was driven by an unexpected plunge in highly volatile aircraft orders.
Yields rise, partly in response to actions by Japan’s central bank
Led by increases in long-term yields, Treasury rates climbed through most of the week. (Bond prices and yields move in opposite directions.) The benchmark 10-year note yield traded around 3.73% early Friday morning, up from 3.48% at the end of last week.
T. Rowe Price traders cited the Bank of Japan’s (BoJ) surprise decision to widen the allowed band around 10-year Japanese government bond (JGB) yields (see below) as a driver of higher U.S. rates and a steeper Treasury curve. The Bank of England’s announcement that it will sell gilts early next year also contributed to higher U.S. yields, as did the slightly stronger-than-expected inflation data in the U.S.
The broad tax-exempt bond market sold off for most of the week but fared better than Treasuries. Our traders noted that widening credit spreads were partly due to reduced liquidity in the market and notable selling activity of higher-yielding bonds by exchange-traded funds.
The primary calendar for both the investment-grade (IG) high yield corporate bond and loan markets remained quiet, with no new deals coming to market and no issuance expected until 2023.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,203.93 |
283.47 |
-8.63% |
S&P 500 |
3,844.82 |
-7.54 |
-19.33% |
Nasdaq Composite |
10,497.86 |
-207.55 |
-32.90% |
S&P MidCap 400 |
2,435.15 |
18.66 |
-14.32% |
Russell 2000 |
1,760.93 |
-2.48 |
-21.57% |
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 gained ground amid signs of slowing inflation and an improvement in consumer confidence. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.64% higher. Major European indexes also advanced. Germany’s DAX Index ticked up 0.34%, France’s CAC 40 Index added 0.81%, and Italy’s FTSE MIB Index increased by 0.80%. The UK’s FTSE 100 Index climbed 1.92%, helped by the depreciation of the British pound against the U.S. dollar. A weaker pound usually lends support to the index because many of its companies are multinationals that generate meaningful overseas revenues.
Signs of waning inflation in Germany, France, and Spain
Producer price reports for November provided more signs that inflation may be waning in some large eurozone countries. Annualized producer prices fell markedly in Germany, France, and Spain as the costs of natural gas and electricity dropped. In Germany, factory-gate prices increased 28.2% year over year, lower than the 34.5% registered in the previous month.
Business confidence in Germany and Italy rises
Business and consumer confidence in Germany and Italy improved in December. In Germany, the ifo Institute’s business climate index rose to 88.6 from a revised 86.4 in November, helped by hopes of a milder recession. A report from GfK, a Germany-based market research firm, showed that consumer confidence also improved in December, perhaps reflecting measures to help households cope with higher energy prices.
In Italy, the composite business index compiled by the national statistics institute climbed to its highest level since August, even though optimism among manufacturers weakened as the outlook for orders worsened. The consumer confidence index advanced in December amid increased optimism about the economic outlook.
UK economic contraction worse than earlier estimates
The UK economy shrank more than first estimated in the third quarter. Growth in gross domestic product in the three months through September was revised lower to 0.3% sequentially from the first reading of 0.2% due to declines in manufacturing and construction. Business investment shrank 2.5%, a sharper contraction than the initial estimate of 0.5%.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index down 4.69% and the broader TOPIX Index declining 2.68%. The Bank of Japan announced that it would modify its policy of yield curve control (YCC), allowing 10-year Japanese government bond yields to rise as high as 0.50%, doubling its prior implicit cap of 0.25%. The timing of the move was unexpected—most market participants had not expected a shift in the BoJ’s YCC until next year. As a result, the JGB yield finished the week at around the 0.40% level, up sharply from the prior week’s 0.25%. BoJ policy developments also lent support to the yen, which strengthened to about JPY 132.55 against the U.S. dollar, from around JPY 136.71 the previous week.
BoJ surprises markets with earlier-than-anticipated policy tweak
While the central bank kept its ultralow benchmark interest rates unchanged, the decision to modify its YCC policy and double the range within which JGB yields can fluctuate—to half a percentage point on either side of 0%—came as a surprise. In its Statement on Monetary Policy, the BoJ cited the desire to improve market functioning and encourage smoother formation of the entire yield curve, while maintaining accommodative financial conditions. The tweak to the YCC framework is aimed at enhancing the sustainability of monetary easing, it stated.
Higher prices for processed foods pushed core consumer inflation to 3.7% over the 12 months ended in November, and many worry that building inflationary pressures could drive the BoJ toward more fully fledged monetary policy tightening, akin to that currently pursued by the other major central banks. With BoJ Governor Haruhiko Kuroda’s term ending in 2023, speculation is rife about the degree to which his successor will pursue policy continuity.
Japan solidifies commitment to revive nuclear energy use
In a redrafting of energy policy, a government advisory panel said that Japan would maximize the use of existing nuclear reactors by accelerating restarts, extend the lifespan of reactors, and develop advanced reactors to replace decommissioned ones. These steps to revive the use of nuclear energy come amid a serious electricity shortage and will help the country meet its net zero emissions targets (culminating in carbon neutrality by 2050).
China
Chinese stocks fell as a spike in coronavirus cases weighed on the country’s growth outlook. The Shanghai Composite Index sank 3.85% and the blue chip CSI 300 fell 3.19%. In Hong Kong, the benchmark Hang Seng Index added 0.7%, according to Reuters.
World Bank slashes China’s forecasts
The World Bank cut its China economic growth forecasts for this year and next due to the pandemic and the country’s ongoing property market slump. The bank projected that China’s economy would grow 2.7% this year and 4.3% in 2023, down from its September forecasts of 2.8% growth this year and 4.5% in 2023. The World Bank noted in a report that China’s economy is “subject to significant risks, stemming from the uncertain trajectory of the pandemic, of how policies evolve in response to the COVID-19 situation, and the behavioral responses of households and businesses.”
China’s broad budget deficit hit a record-low CNY 7.75 trillion from the start of the year, more than double that of 2021, as coronavirus-related disruptions weighed on the economy. Small business confidence remained on a downtrend as reports showed economic activity continuing to contract in December. Many analysts predict that business confidence will continue to fall into year-end as the virus keeps people at home.
Chinese officials signal support for bolstering growth
China’s government stepped up calls to bolster the economy in 2023 following the prior week’s Central Economic Work Conference, an annual meeting in which officials discuss policy goals for the coming year. The State Council urged the implementation of its previously announced stimulus measures to continue easing restrictions and make existing policies more effective. Meanwhile, the China Securities Regulatory Commission, the securities market regulator, outlined policies intended to help developers, including allowing qualified real estate developers to secure backdoor listings via other listed developers.
The People’s Bank of China issued a statement confirming that it would support a recovery in consumption and guide financial institutions to back property sector mergers and acquisitions. The central bank also pledged support for online platform companies to play a greater role in promoting technological innovation, enhancing international competitiveness, and expanding domestic demand.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 6.7% as some uncertainty about government spending under newly elected President Luiz Inacio Lula da Silva was removed.
A constitutional amendment waiving Brazil's spending cap in order to fund social welfare spending was passed. The final version of the bill will allow for up to BRL 168 billion in spending above the cap for one year, with a portion of this spending tied to tax receipts. The original proposal for the spending cap waiver was larger in size and for two years. Brazil's constitutionally mandated spending cap restricts growth in the federal budget to the rate of inflation and is highly regarded by investors. While the new spending is larger than it would have been had the spending cap remained in effect, T. Rowe Price sovereign analyst Richard Hall notes that the increase in spending levels is not as large compared with current policy due to some authorizations of additional spending that occurred this year.
South Africa
South African assets steadied somewhat following recent volatility. South Africa's ruling party, the African National Congress (ANC) held its party conference, where President Cyril Ramaphosa won reelection for a second five-year term as the party’s leader. Reform-oriented Ramaphosa recently avoided impeachment amid corruption allegations. Voting for the ANC’s leadership, the National Executive Committee came out generally supportive for Ramaphosa and his allies. T. Rowe Price sovereign analyst Roy Adkins sees this outcome as possibly supportive for South Africa’s reform momentum, though he anticipates South African markets could experience volatility as Ramaphosa still faces investigations into corruption.
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