Global Markets Weekly Update: July 08, 2022
U.S.
Soft landing hopes sends stocks back higher
Stocks erased much of the previous week’s losses on optimism that the Federal Reserve will be able to curb inflation without tipping the economy into a recession. The gains pulled the S&P 500 Index out of bear market territory, leaving it down 19.1% from its January peak at the close of trading Friday. The large communication services, consumer discretionary, and information technology sectors performed best within the index. Energy shares fell sharply on Tuesday (markets were closed Monday in observance of Independence Day) as domestic oil prices fell back below USD 100 per barrel for the first time in nearly two months, but they rallied alongside crude prices later in the week.
The week’s heavy, if abbreviated, calendar of economic data appeared to dominate sentiment, as investors sought to assess the possible impact on Fed policy. On Wednesday, S&P Global and the Institute for Supply Management (ISM) both released their final estimates of services activity in June, both of which came in modestly above consensus estimates but indicated a continuing slowdown in growth. The ISM’s measure hit its lowest level since June 2020, and its employment gauge fell into contraction territory for the third time this year, according to Reuters.
Labor market remains tight even as wage gains cool slightly
The most closely watched data came in the form of Friday’s payrolls report from the Labor Department, which showed employers added 372,000 nonfarm jobs in June, well above consensus expectations of around 270,000. While the 0.3% increase in average hourly earnings was in line with expectations, investors may have been concerned that May’s increase was revised slightly higher, from 0.3% to 0.4%. For the 12-month period, earnings grew by 5.1%, marking the third monthly deceleration from March’s recent peak of 5.6%. Payroll processing firm ADP announced that it was suspending until August its monthly tally of private payrolls as it adjusted its methodology. The ADP and official reports have differed widely in recent months.
Our traders noted that the moderating economic data may have prompted some investors to brush off the hawkish stance that the Federal Reserve reiterated in its June meeting minutes, which were released on Wednesday. The minutes also revealed that policymakers acknowledged that “risks included the possibility that a further tightening in financial conditions would have a larger negative effect on economic activity than anticipated.”
Fed officials continued to publicly state their resolve to raise rates as much as necessary to keep inflation expectations anchored, however, with Fed Governor Christopher Waller telling an economists’ conference on Thursday that “we’ve got to chop this off now.” By the end of the week, federal funds futures tracked by CME Group were no longer pricing in any chance that the Fed would hike rates by less than 75 basis points (bps) at its upcoming policy meeting—and were even anticipating a small possibility of a 100bps hike.
The stronger-than-expected jobs report lifted the yield on the benchmark 10-year U.S. Treasury note to roughly 3.10% at the close of trading on Friday amid a broad rise in U.S. rates. The closely watched 2-year/10-year segment of the Treasury yield curve inverted as the 2-year yield climbed above the 10-year yield—a common, if imperfect, signal of a coming recession. Our traders noted that minutes released Wednesday from the Federal Reserve’s June policy meeting bolstered investors’ expectations for a higher terminal federal funds rate, supporting higher yields across the curve.
Trading picks up in corporate bond market, but issuance is still thin
Investment-grade corporate bonds were under pressure at the start of the week, led by more volatile and less liquid issuers. Technical conditions were mixed as trading volumes in the secondary market remained lower than daily averages, while long-term bonds saw healthy overnight demand. Outperformers included bonds in the banking and technology, media, and telecom (TMT) sectors, while the energy and auto sectors lagged.
Our traders observed that buyers were active in the high yield bond market when it opened after the holiday weekend. Most of the market’s appreciation followed the release of the Fed’s meeting minutes. Our traders noted that the BB credit quality tier fared better as CCC rated bonds underperformed and traded less frequently. The primary market was fairly quiet, however, with only one new deal announced. Negative flows drove most of the selling in the bank loan market. Our traders noted that overall trade activity in the loan market continued to be somewhat light.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
31,338.15 |
240.89 |
-13.76% |
S&P 500 |
3,899.39 |
74.06 |
-18.19% |
Nasdaq Composite |
11,635.31 |
507.47 |
-25.63% |
S&P MidCap 400 |
2,320.40 |
24.51 |
-18.35% |
Russell 2000 |
1,769.36 |
41.60 |
-21.20% |
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 advanced in the first week of July after three consecutive months of losses. However, the gains appeared to be restrained by China’s reimposition of some restrictions designed to curb the spread of the coronavirus and worries that an energy shortage might cause a recession in Europe. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.45% higher. Germany’s Xetra DAX Index rose 1.58%, France’s CAC 40 Index gained 1.72%, and Italy’s FTSE MIB Index added 1.96%. The UK’s FTSE 100 Index tacked on 0.38%.
Core eurozone sovereign yields were little changed. However, German bund yields began to climb after the better-than-expected employment report in the U.S. on Friday morning. UK gilt rates rose more meaningfully this week.
A sharp uptick in the U.S. dollar weighed broadly across all currencies, but the USD/EUR currency pair notably approached parity this week.
ECB minutes show most policymakers back rate hikes; eurozone producer prices surge
The minutes of the European Central Bank’s (ECB) June meeting showed most members agreeing to a 25-basis-point increase to the deposit rate in July and leaning toward a 50-basis-point move in September. The Governing Council noted that “it was widely felt that there was no room for complacency given the high costs of re-anchoring [inflation] expectations.” The minutes also clarified that “gradualism” in tightening monetary policy does not rule out larger increases in rates.
In the eurozone, producer prices surged an annual 36.3% in May. Excluding energy, prices rose 16.0%. Meanwhile, retail sales volumes increased sequentially in May by a smaller-than-expected 0.2%. Sales volumes in April were revised higher to 1.4%.
Germany posts first trade deficit since 1991
Germany's trade balance showed a deficit of EUR 1 billion in May—the first since 1991—as exports fell unexpectedly, in part due to supply constraints. Imports, meanwhile, surged on higher prices for food, energy, and materials.
German factory orders unexpectedly ticked up 0.1% after falling for three consecutive months. In addition, the magnitude of the month-over-month contraction in April’s factory orders was revised to -1.8% from -2.7%. However, industrial output rose sequentially by a smaller-than-expected 0.2% due to supply chain problems.
UK Prime Minister Resigns
Boris Johnson announced his intention to resign after more than 50 ministers and several Cabinet members stepped down in protest at his handling of a series of scandals that have rocked his administration. Despite calls for Johnson to step down, he said that he will remain as caretaker prime minister until the Conservatives choose a new party leader.
Japan
Campaigning for the parliamentary upper house election on July 10 was suspended after Shinzo Abe, Japan’s former and longest-standing prime minister, was shot and killed while giving a campaign speech in the western city of Nara. According to recent polls, the ruling Liberal Democratic Party (LDP) and its junior partner, Komeito, are on track to win a majority. After stepping down in 2020, Abe remained influential as a member of parliament and head of the LDP. The basic tenets of Abe’s signature economic policy, “Abenomics,” built on the three pillars of monetary easing, fiscal stimulus, and structural reforms, have largely been retained by current Prime Minister Fumio Kishida’s government.
Stocks gain; yen weakens
Japan’s stock markets gained during the week, with the Nikkei 225 Index up 2.24% and the broader TOPIX Index gaining 2.30%. In the fixed income markets, the yield on the 10-year Japanese government bond (JGB) rose to 0.24% from 0.23% at the end of the previous week. The Bank of Japan (BoJ) set a monthly record in June in its JGB purchases as it sought to stem the rise in long-term yields above the 0.25% cap it has set under its policy of yield curve control.
The central bank’s dovish stance has weighed heavily on the yen, which weakened to around JPY 135.90 against the U.S. dollar, from the prior week’s 135.22, remaining around its lowest levels in 24 years. The BoJ’s staunch commitment to monetary easing is in stark contrast to the tightening efforts of other central banks around the globe, which are seeking to tame surging inflation. While consumer prices have trended upward in Japan, inflation remains low compared with other developed economies.
Government focused on boosting startups as part of its “New Capitalism” policies
According to the Nikkei news agency, Japan’s Government Pension Investment Fund is to begin investing several tens of millions of dollars in startups, which could give momentum to the further development of the sector. Speaking about his government’s “New Capitalism” policies, Prime Minister Kishida has previously stated that he would seek to attract individual and foreign investments in Japanese startups. He has also said that he plans to review the country’s process for initial public offerings to ensure that startups have sufficient funds, as well as to centralize startup policy under a single cabinet position.
China
Chinese stocks eased as rising coronavirus cases and elevated geopolitical tensions hurt sentiment. Both the broad, capitalization-weighted Shanghai Composite Index and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell around 1%, Reuters reported.
China’s coronavirus caseload for Thursday totaled 478, up from Wednesday’s 409 count. Most cases were detected in the eastern province of Anhui, where more than 1 million people in small towns are locked down. Dozens of new cases also appeared in Jiangsu and other provinces. Shanghai, which recently ended a two-month-long lockdown, faces a “relatively high” risk of further community transmission of COVID-19, a senior health official said on Friday.
On the geopolitical front, Sino-U.S. tensions heated up after a senior Chinese military officer warned his U.S. counterpart that any “arbitrary provocations” would be met with a “firm counterstrike” by China.
The yuan currency was steady at CNY 6.70 to a U.S. dollar, Reuters data showed. The 10-year Chinese government bond yield rose slightly to 2.858% from 2.847% a week ago, according to Dow Jones, as the People’s Bank of China made its biggest cash withdrawal from the financial system in three months. Analysts said that the central bank’s move signaled that policymakers are gradually exiting crisis-mode monetary easing measures implemented during recent lockdowns across the country.
China’s Ministry of Finance is considering allowing local governments to sell CNY 1.5 trillion (USD 220 billion) of special bonds in the second half of this year to boost infrastructure funding, Bloomberg reported. Reuters reported that China will set up a state infrastructure investment fund worth CNY 500 billion (USD 74.69 billion) to spur infrastructure spending and support the economy. T. Rowe Price analysts said that Beijing appears to be trying to ensure that any momentum in infrastructure spending is sustained through the year’s second half and into early 2023. However, such a move would theoretically pull forward infrastructure spending from the second half of 2023 to the coming months. It also shows the government’s reluctance to expand overall fiscal stimulus spending.
In economic readings, the Caixin Services Purchasing Managers’ Index (PMI) for June surged to a better-than-expected 54.5 from 41.4 in May, the latest evidence that China’s economy is recovering from easing virus restrictions. This follows the previous week’s Caixin manufacturing PMI, which revealed that manufacturing activity expanded at its fastest pace in 13 months in June.
Other Key Markets
Hungary
Hungarian assets remained under pressure, as the forint continued to weaken versus the U.S. dollar amid expectations that the U.S. Federal Reserve will continue to fight U.S. inflation with aggressive interest rate increases. A weaker forint makes Hungarian exports more competitive on world markets, but it exacerbates Hungarian inflation by increasing the prices of imported goods and services.
On Thursday, the Hungarian central bank surprised investors with a larger-than-expected 200bps increase in the one-week deposit rate, from 7.75% to 9.75%. T. Rowe Price credit analyst Ivan Morozov believes policymakers acted aggressively to reduce pressure on the forint and to bring rates closer to where they need to be to temper inflation. With the central bank projecting 13% to 14% inflation for all of 2022, Morozov would not be surprised if more rate increases are in store—particularly if the forint fails to stabilize.
Poland
Poland’s central bank also raised rates on Thursday, although the 50bps increase in the benchmark rate, from 6.00% to 6.50%, was smaller than expected. Morozov notes that the magnitude of the increase is somewhat lower than expected considering that Polish consumer inflation in June was recently measured at a year-over-year rate of 15.6%.
In addition, he believes it is a sign that the central bank intends to slow the pace of rate increases—possibly in response to signs of a weakening economy. Recent PMI data indicated that Poland’s manufacturing sector is contracting; in contrast, Hungary’s recent PMI data continue to show expansion, though Morozov notes that the data for Hungary can be volatile. While PMI data do not have a strong correlation with gross domestic product in Central Eastern Europe, Morozov believes that PMI data are an important indicator of an economy’s health.
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