Global Markets Weekly Update: January 14, 2022
U.S.
Inflation and rate worries weigh as earnings season begins
The large-cap indexes recorded their second consecutive weekly loss to start the year—and the technology-heavy Nasdaq Composite its third—as the unofficial start of earnings season began. Financials shares came under pressure on Friday as JPMorgan Chase and Citigroup, typically among the first major companies to release results, reported lower profits in the fourth quarter. Utilities, real estate, and health care shares were also weak within the S&P 500 Index. Energy shares outperformed as oil prices continued their climb back to late-October highs. T. Rowe Price traders noted that technical factors, such as inflows from retail investors, drove some of the week’s volatility.
Inflation signals and concerns about rising interest rates seemed to loom large over sentiment throughout the week. Stocks started the week on a down note on news that more Wall Street analysts were expecting the Federal Reserve to hike rates four times in 2022—a consensus implied in futures markets.
In his renomination hearing before Congress on Tuesday, Fed Chair Jerome Powell assured lawmakers that the central bank would not hesitate to contain inflation. Investors seemed to take the news in stride, but follow-up comments from other Fed officials over the next two days may have unsettled markets. In particular, Fed Governor Lael Brainard, President Joe Biden’s nominee for vice chair of the central bank and a noted inflation “dove,” repeated Powell’s assurances for strong action if needed in her nomination hearing.
Repeat of a wage-price spiral?
The week’s inflation data did little to calm fears but came in largely in line with expectations. On Wednesday, the Labor Department reported that overall consumer prices had risen 7.0% over the past year, the largest gain on a 12-month basis since June 1982. Core inflation excluding food and energy rose 5.5%, the most since February 1991. Core producer prices, reported Thursday, rose 8.3%, the most in records going back to 2011. While the consensus among analysts and policymakers is that much of 2021’s inflation spike will prove temporary, talk seemed to increase of a possible wage-price spiral—in which higher prices cause workers to demand higher wages, which in turn leads companies to raise prices.
Other data offered mixed signals about the possibility of such a 1970s-style spiral. The week’s biggest surprise, arguably, was a 1.9% drop in retail sales in December—a decline that would be magnified by excluding the volatile auto market and adjusting for inflation. Many analysts pointed to caution over the omicron variant of the coronavirus in restraining shoppers, but online sales also fell sharply. Relatedly, retail inventories rose 1.3% in November, the biggest increase since February and perhaps an indication of easing supply challenges. Import and export prices also reversed course and fell during the month, while industrial production contracted slightly.
Consumers remain worried about inflation, taper spending
Weekly jobless claims rose unexpectedly to 230,000, the highest number since mid-November. Continuing claims fell more than expected to 1.56 million, however—the lowest number since June 1973, when the civilian labor force was just over half (55%) its current size. The University of Michigan’s index of consumer sentiment ticked down to a new pandemic-era low of 73.2, with many surveyed citing inflation worries.
After climbing above 1.80% during intraday trading Monday, the yield on the benchmark 10-year U.S. Treasury note slid to 1.74% by Friday morning, as longer-term U.S. government debt rallied amid wavering risk sentiment. Meanwhile, short-term rates continued their ascent in anticipation of tighter monetary policy, leading to a flatter yield curve. Our traders noted that slightly higher-than-anticipated monthly increases in the headline and core consumer price index (CPI) readings contributed to a flatter curve, based on the market’s initial reaction to the data.
Investment-grade corporate bond spreads widened alongside an active primary calendar. Issuance was met with generally tepid demand, but recent new issues in the banking sector outperformed late in the week. Macroeconomic sentiment was bolstered by Fed Chair Jerome Powell's comments, in which he reassured investors that the Fed would control inflation as the economy rebounds.
According to our traders, the high yield and broader risk markets recovered from recent weakness following Powell’s commentary on inflation and the central bank’s balance sheet reduction. Our traders also noted a sense of relief among investors that the CPI numbers did not surprise significantly on the upside, which led to more buying across sectors and ratings with a focus on recently underperforming names. However, the high yield market traded lower late in the week amid broad macro volatility as the rate hike picture weighed on equity performance.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,911.81 |
-319.85 |
-1.17% |
S&P 500 |
4,662.85 |
-14.18 |
-2.17% |
Nasdaq Composite |
14,893.75 |
-42.15 |
-4.80% |
S&P MidCap 400 |
2,782.63 |
-10.52 |
-2.09% |
Russell 2000 |
2,162.45 |
-17.36 |
-3.69% |
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 Associates’ presentation thereof.
Europe
Shares in Europe pulled back on signals that the U.S. Federal Reserve would tighten monetary policy at a faster rate than the market had previously expected. In local currency terms, the pan-European STOXX Europe 600 Index ended the week about 1% lower. France’s CAC 40 Index pulled back 1.06%, Germany’s Xetra DAX Index slipped 0.40%, and Italy’s FTSE MIB Index eased 0.27%. However, the UK’s FTSE 100 Index advanced 0.77%.
Core eurozone bond yields ended lower, mostly tracking moves in U.S. Treasury yields. Peripheral eurozone bonds and UK gilts broadly followed core markets. However, data showing stronger-than-expected UK economic growth in November appeared to moderate the decline in gilt yields.
Some countries ease coronavirus restrictions
The Netherlands is set to ease its nationwide lockdown from Saturday, local media reported, citing government sources. Nonessential stores, hairdressers, and gyms would be able to open, albeit with a cap on customer numbers. The UK, Switzerland, and Norway cut the self-isolation period for those who test positive for COVID-19, suggesting a belief that the coronavirus is becoming endemic. France eased restrictions on travelers from the UK. Spain is changing its strategy from quarantines and restrictions to a monitoring system resembling the one applied to seasonal flu, according to the newspaper El País. However, Germany plans to further restrict access to bars and restaurants, while anyone 50 years or older in Italy and 60 years or older in Greece will be fined if they are unvaccinated.
German economy recovers in 2021; UK economy strengthens
The German economy expanded 2.7% last year after contracting 4.56% in 2020. However, the growth rate remained below pre-pandemic levels, in part due to coronavirus restrictions and supply bottlenecks. The statistics office said that an initial estimate indicated that the economy came close to stagnating in the final three months of 2021.
The UK economy grew 0.9% sequentially in November 2021, beating consensus expectations for a 0.4% expansion. The Office for National Statistics said the economy was 0.7% bigger than it was in February 2020, when the UK first went into lockdown to curb the spread of the coronavirus. However, official data showed much higher staff absences in December due to a surge in COVID-19 infections caused by the omicron variant.
Eurozone industrial production rebounds
Industrial output in the euro area surged 2.3% sequentially in November—well above a consensus forecast for 0.5%. However, Eurostat revised its October industrial production number to a 1.3% contraction from an earlier estimate that showed a 1.1% uptick.
Japan
Japan’s stock market returns were negative for the week, with the Nikkei 225 Index falling 1.24% and the broader TOPIX Index down 0.90%. Concerns about more aggressive monetary policy tightening by the U.S. Federal Reserve continued to weigh on sentiment, leading to investors’ preference for value stocks over high-growth stocks and, in particular, technology names. Confidence was also dented by the government extending the ban on nonresident foreigners entering Japan until the end of February, as well as an apparent sixth wave of the coronavirus hitting the country’s capital, Tokyo.
Against this backdrop, the yield on the 10-year Japanese government bond (JGB) rose to 0.15%, from 0.12% at the end of the previous week. JGB yields tracked U.S. Treasury yields higher amid expectations that the Fed could raise interest rates as early as March to curb inflationary pressures. This contrasts with the dovish stance of the Bank of Japan (BoJ), which continues to signal its commitment to monetary easing and is unlikely to raise short-term interest rates anytime soon. Rising JGB yields supported the yen, which strengthened to around JPY 113.8 against the U.S. dollar, from the prior week’s JPY 115.6.
Government extends ban on nonresident foreigners entering Japan
Prime Minister Fumio Kishida announced that the ban on nonresident foreigners entering Japan, which came into force on November 30, 2021, would be extended until the end of February. Kishida said that because of the strictest border restrictions among the Group of Seven nations, Japan has been able to minimize the influx of the omicron variant of the coronavirus and buy time to prepare for a surge in domestic cases. The overall number of cases in Japan remains relatively small compared with the fifth wave that prompted the government to implement states of emergency, and the country’s coronavirus vaccination rates are among the highest in the world.
Pickup in regional economies suggests impact of coronavirus waning somewhat
The BoJ’s January Regional Economic Report, which provides details on economic assessments from regions across Japan, showed that all regional economies had been picking up or shown signs of a pickup. This was attributed to the impact of the coronavirus waning somewhat, primarily on services consumption. The Reuters Tankan indices for January suggested that the mood among services sector firms rose, while manufacturers turned less positive about business conditions, due, in part, to higher raw materials prices pressuring margins. Producer prices rose 8.5% year on year in December, following the previous month’s 9.2%.
China
Chinese markets fell for the week. The Shanghai Composite Index shed 1.6%, and the CSI 300 Index retreated 2%, weighed by headlines about refinancing difficulties in the country’s troubled property sector.
China’s largest banks have grown more selective about funding real estate projects by local government financing vehicles, while several developers scrambled to obtain creditors’ consent for maturity extensions and exchange offers, Bloomberg reported. Other developers have intensified fundraising campaigns as traditional financing routes like presales have dried up.
China Evergrande Group, the world’s most indebted property company, secured a crucial approval from onshore bondholders to delay payments on one of its bonds. Shimao Group, which missed payment on a USD 101 million trust loan earlier this month, will meet with creditors to vote on payment extension proposals after denying reports of a fire sale, Reuters reported. Credit rating agencies Moody’s and S&P downgraded their ratings on Shimao again last week, and S&P said it withdrew its rating at the company’s request. A severe and prolonged downturn in China’s real estate sector would have significant economy-wide reverberations, the World Bank warned in its Global Economic Prospects report.
In economic news, consumer and producer price inflation slowed more than expected in December, while new bank lending fell more than expected. China’s trade surplus rose to a record USD 676.43 billion in 2021, the highest since 1950, when the country began recording data. The moderating inflation signs raised expectations that China’s policymakers would lower interest rates and possibly the required reserve ratio for banks to bolster the economy. Any easing in China would mark a divergence with policy in the U.S., where Federal Reserve officials have telegraphed the central bank’s intention to raise interest rates several times this year to curb a surge in inflation.
Yields on China’s 10-year government bonds fell to 2.809% from last week’s 2.837%. The yuan ended domestic trading at RMB 6.3435 per U.S. dollar, the strongest such close since May 2018. It ended the previous week at RMB 6.376.
On the pandemic front, China suspended dozens of international flights and issued more restrictions in response to the global surge in omicron cases. Hong Kong, which had reported no local infections for months, reimposed some social and travel restrictions after a string of positive cases, dealing a setback to the city’s reopening hopes. Shanghai curbed tourist activity as it rushed to head off local infections as imported cases rose.
Other Key Markets
Russia
Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about -3.8%.
Geopolitical tensions remained in focus during the week. One positive development was that the Russia-led Collective Security Treaty Organization began to withdraw its peacekeeping forces from Kazakhstan following the end of violent protests and the restoration of order in Russia’s resource-rich southern neighbor. However, tensions between Russia and the U.S. regarding a buildup of Russian military forces near its border with Ukraine remained elevated. No diplomatic breakthroughs were reached despite several high-profile meetings between representatives of Russia and the U.S., NATO, and the Organization for Security and Cooperation in Europe (OSCE). Russia asserts that it has no intention of invading Ukraine and can station troops anywhere on Russian soil. At the same time, Russian leaders insist on receiving “security guarantees” that would, among other things, keep former Soviet nations from joining NATO.
Several senators may have upped the ante on Wednesday by proposing legislation and conditional sanctions on Russia with the “Defending Ukraine Sovereignty Act of 2022.” The bill envisages retaliation in case of Russia’s military aggression against Ukraine, and sanctions, which are conditional on an actual invasion, would be determined by the U.S. president. According to T. Rowe Price sovereign analyst Peter Botoucharov, the list of potential sanctions include targeted sanctions against certain officials, including the Russian president; sanctions against all newly issued Russian sovereign debt; and sanctions targeting the Nord Stream 2 natural gas pipeline—which is complete but not yet operational—as well as Russian industries involved in extracting natural resources.
Chile
Stocks in Chile, as measured by the S&P IPSA Index, returned about 4.4%. Chilean assets were supported, in part, by rising commodity prices and firming regional currencies amid expectations that central banks in the region will continue to raise short-term interest rates in response to inflation pressures. A more significant development, however, was that President-Elect Gabriel Boric gave a speech to business leaders in Santiago—as reported by Bloomberg—in which he spelled out a number of his economic objectives and intentions once he takes office in March.
Bloomberg reported that Boric considers Chilean public finances to be “under strain.” He also cautioned that the spending boom in 2021—which T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes was funded in part by several pieces of legislation permitting pension withdrawals for emergency purposes—is “unsustainable.” Against this backdrop, Boric pledged, among other things, that changes brought about by his government would be gradual and done with fiscal responsibility, that economic growth will be driven by investment, that tax reform is needed to increase revenues, and that his government will begin to reduce the country’s structural deficit starting in 2023.
Gifford believes Boric’s speech was reflective of the president-elect’s need to moderate his leftist campaign positions in order to maintain strong popular support and work well with a number of recently elected centrist lawmakers.
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