Global Markets Weekly Update: July 29, 2022
U.S.
Equities shrug off downbeat GDP report
Stocks posted solid gains despite another outsized 75-basis-point rate hike from the Federal Reserve (Fed) and news that the economy contracted at a 0.9% annual rate in the second quarter. (A basis point is 0.01 percentage points.) A “bad news is good news” dynamic appeared to have taken hold, with investors seemingly penciling in a lower terminal federal funds rate after the second-quarter economic contraction. Growth stocks outperformed value stocks on weakness in the retail sector.
Better-than-feared earnings from tech giants
Early-week trading was subdued on very low volumes, although a downbeat second-quarter earnings pre-announcement from Wal-Mart weighed on broad sentiment. The retail bellwether said that food inflation was cutting into consumers’ discretionary spending, causing it to lower its earnings guidance.
With 50% of the companies in the S&P 500 Index expected to report earnings during the week, investors focused on quarterly numbers from technology giants such as Amazon.com, Apple, and Google parent Alphabet. Amazon.com and Alphabet jumped on Wednesday after posting better-than-feared earnings results after the market closed on Tuesday.
Fed hikes rates again
All eyes were on this week’s Federal Open Market Committee (FOMC) meeting, which concluded with Fed policymakers announcing a widely expected 75-basis-point rate increase on Wednesday. The FOMC statement noted some softening of spending and manufacturing, and many market participants seemed to interpret Fed Chair Jerome Powell’s post-meeting press conference as surprisingly dovish. Combined with the stronger-than-expected quarterly earnings reports from Alphabet and Amazon.com, this led to a one-day gain of over 4% for the Nasdaq Composite Index and sharp gains for other indexes.
On Thursday, the Commerce Department reported that gross domestic product (GDP) contracted by an annual rate of 0.9% in the second quarter. Consensus expectations were for an increase of 0.5%. The second-quarter GDP number marked the second consecutive quarter of contraction, which is one common definition for a recession. However, T. Rowe Price U.S. Economist Blerina Uruci is focusing on job growth, which remains strong, as a primary indicator for the turning point in the current business cycle.
The market seized on this downbeat news about the economy as a sign that the Fed could slow or stop its rate hikes sooner than expected, extending the stock rally through the end of the week.
U.S. Treasury yield curve steepens
Sparked by Powell’s dovish post-FOMC meeting comments, the U.S. Treasury yield curve steepened, with intermediate- and short-term yields decreasing and long-maturity rates holding generally steady. Confirmation that GDP contracted over the first two quarters of the year also fueled demand for short- and intermediate-term Treasuries, according to our traders. (Bond prices and yields move in opposite directions.)
The broad tax-exempt municipal bond market traded higher, aided by lower Treasury yields and a constructive technical outlook ahead of August coupon payments. T. Rowe Price municipal traders reported that demand was strongest in the intermediate-term segment of the municipal yield curve, paralleling moves in the Treasury market.
Our traders noted that heavy new issuance, predominantly in the financials and banking sectors, created a difficult technical environment for investment-grade corporate bonds at the start of the week. However, investment-grade corporates began to rally after the dovish Fed press conference and as primary calendar activity slowed.
Similarly, high yield bond market sentiment improved after the Fed meeting, according to our high yield traders. However, Wal-Mart’s earnings outlook weighed on the retail sector and the broader high yield market amid fears of a less healthy consumer. Our bank loan traders reported that the loans market was somewhat mixed throughout the week, as earnings season progressed and investors focused on the FOMC meeting and quarterly GDP figure.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,845.13 |
945.84 |
-9.61% |
S&P 500 |
4,130.29 |
168.66 |
-13.34% |
Nasdaq Composite |
12,390.69 |
556.58 |
-20.80% |
S&P MidCap 400 |
2,512.73 |
115.97 |
-11.59% |
Russell 2000 |
1,885.23 |
78.33 |
-16.04% |
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, boosted by data showing that the eurozone economy expanded at a higher-than-expected rate of 0.7% in the second quarter. Markets largely shrugged off concerns about rising natural gas prices due to reduced Russian supply. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.96% higher, while Germany’s Xetra DAX Index rose 1.74%, France’s CAC 40 Index increased 3.73%, and Italy’s FTSE MIB Index returned 5.63%. The UK’s FTSE 100 Index returned 2.02%.
Core eurozone bond yields fell as concerns about global growth increased after Russia reduced its gas supplies into Europe. The International Monetary Fund (IMF) downgraded its global growth forecast while the U.S. entered a technical recession. Peripheral government bond yields broadly tracked core markets. UK gilt yields also largely followed core markets but ended the week broadly level.
Eurozone inflation hits new high; European natural gas prices surge
An early estimate of euro area inflation came in above expectations, hitting 8.9% in July—up from the 8.6% registered in June. The rise in headline inflation was driven by food and energy prices.
European natural gas prices rose after Russia reduced gas supplies from the Nord Stream pipeline to 20% of capacity, citing the need for maintenance on another turbine. European Union (EU) energy ministers agreed that member states would cut their natural gas use by 15% over the winter. Only Hungary, which is heavily dependent on Russian energy exports, voted against the proposal.
Economic sentiment falls across the eurozone
The Economic Sentiment Indicator for the EU fell below its long-term average, with confidence declining the most in the industry, services, retail trade, and consumer categories. Confidence decreased more mildly in the construction industry. Consumer confidence has largely been impacted by the deteriorating outlook for personal finances.
The German Ifo Business Climate Index also fell in July, reaching its lowest reading in two years.
IMF cuts euro area growth forecast to 2.6%
The IMF reduced its outlook for euro area economic growth in 2022 to 2.6% from its previous projection of 2.8% in April and lowered its projection for 2023 to 1.2% from 2.3%. The downward revision reflects the impacts of the war in Ukraine, particularly rising energy prices, as well as the potential for tighter financial conditions as the European Central Bank tightens monetary policy.
Japan
Japan’s stock markets finished the week slightly lower, with the Nikkei 225 Index declining 0.40% and the broader TOPIX Index falling 0.80%, weighed down by a stronger yen, mixed domestic earnings releases, and the government downgrading its estimates for Japan’s economic growth. Global risk appetite over the week was boosted by tentative expectations that the U.S. Federal Reserve may need to slow down the pace of its interest rate hikes, given the U.S. economy contracted for the second straight quarter in the three months ended June 30.
Yen strengthens to six-week highs
Against this backdrop, the yen recovered from 24-year lows, strengthening to six-week highs of around JPY 133 against the U.S. dollar, from about JPY 136 at the end of the previous week. While the Deputy Governor of the Bank of Japan (BoJ), Masayoshi Amamiya, reiterated the view that that the BoJ must maintain massive stimulus for the time being, he added that the central bank must always be thinking about what means are available to exit easy policy. Amid some fears of a global recession, the yield on the 10-year Japanese government bond fell to 0.18% from the prior week’s 0.22%.
BoJ highlights possible U.S. recession and domestic COVID-19 resurgence as risks
The Summary of Opinions at the BoJ’s July monetary policy meeting showed that the central bank considers the prospect of the U.S. economy falling into recession and global financial markets experiencing a negative shock as risks that could affect Japan’s economy. On the domestic front, the recent resurgence of COVID-19 has been extremely rapid, and the BoJ will examine how it will affect the financial positions of small and medium-sized firms.
According to the central bank, Japan’s economy has picked up, mainly led by private consumption, which is expected to continue to recover. Inflation has trended upward recently due to higher import prices, but these pressures are expected to subside for a while in the next fiscal year—under these circumstances, the BoJ considers it necessary to persistently continue with current monetary easing under the price stability target of 2%. Data released during the week showed that Tokyo core consumer prices, a leading indicator of nationwide trends, rose 2.3% year on year in July. However, inflation in Japan remains low compared with other developed economies.
Inaugural government meeting for “green transformation”
At an inaugural meeting for green transformation, or GX—a critical component of Prime Minister Fumio Kishida’s new capitalism policy agenda—the government and business leader debated Japan’s transition to a greener economy. Topics included how Japan can achieve carbon neutrality by 2050 and the ways in which to ensure a stable energy supply, with a focus on the restart of nuclear plants. The government is aiming to restart nine nuclear reactors that have passed stringent safety standards implemented after the 2011 Fukushima nuclear disaster.
China
China’s stock markets eased after a high-level meeting of the ruling Communist Party dropped calls that it will strive to meet its 2022 growth target and gave no indication of new stimulus. The broad, capitalization-weighted Shanghai Composite Index eased 0.5% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.6%, Reuters reported.
“The meeting urged efforts to consolidate the upward trend of economic recovery, keep employment and prices stable, keep the economy running within an appropriate range, and strive for the best possible outcome,” state media reported. T. Rowe Price analysts said that the statement signaled that the government was implicitly giving up on its annual growth target of about 5.5% without setting a new number. On Thursday, the IMF lowered its full-year growth forecast for China to 3.3% from its April forecast of 4.4% and reduced its 2023 forecast by half of a percentage point to 4.6%.
The tech sector was weak after The Wall Street Journal reported that Jack Ma, founder of e-commerce giant Alibaba Group, was planning to cede control over Ant Group, the financial technology group spun off from Alibaba in 2011. Ant operates the world’s largest mobile payment app Alipay, which has more than 1 billion users and is indirectly controlled by Ma. On Monday, Alibaba announced plans for a primary listing in Hong Kong while keeping its U.S. listing.
The 10-year Chinese government bond yield eased to 2.775% from last week’s 2.806%, according to Dow Jones. T. Rowe Price analysts expect that China’s government will ensure that fiscal and monetary policies continue to support the economy and make up for weak private demand while maintaining ample liquidity in the financial system. The yuan was flat against the U.S. dollar in a week when most currencies gained against the greenback.
The property sector received a boost after Reuters reported that Beijing plans to set up a real estate fund worth CNY 200 billion to CNY 300 billion to support distressed developers. The government used a similar program to buy between 5 million and 6 million units per year from 2016 to 2018 at its peak, according to T. Rowe Price analysts, who noted that the latest program appeared modest by comparison as policymakers remain concerned about delivering too much stimulus to the sector.
U.S.-China tensions prevailed amid reports that the U.S. public company accounting regulator would not accept any restrictions on its access to the audit papers of U.S.-listed Chinese companies, the latest development in a long-running auditing dispute between both countries. On Wednesday, U.S. Securities and Exchange Commission Chair Gary Gensler said that U.S. and Chinese officials must reach an agreement “very soon” over access to audit work papers for Chinese companies to avoid being delisted from U.S. stock exchanges, which could happen as soon as 2024.
Other Key Markets
National Bank of Hungary raises interest rates
On Tuesday, the National Bank of Hungary, as expected, decided to raise its base rate by 100 basis points, from 9.75% to 10.75%. The central bank also raised other key interest rates by the same amount.
According to the post-meeting statement, policymakers acknowledged that “real-time data suggest a considerable slowdown in growth,” reflecting factors such as “restrained government investment and companies’ rising costs in addition to the deterioration in external economic activity.” As for inflation, central bank officials determined that the “upside risks” to inflation, which was measured at a year-over-year rate of 11.7% in June, “have strengthened further” and that “the risk of second-round inflationary effects has increased.”
Policymakers concluded that it will be necessary to maintain “tighter monetary conditions for a longer period” and that they intend to “continue the cycle of interest rate hikes until the outlook for inflation stabilizes” around the central bank’s 3% target “in a sustainable manner.” As a result, additional interest rate increases in Hungary seem likely.
Hawkish signs from Chile’s central bank
Chilean stocks, as measured by the S&P IPSA Index, returned about 0.6%.
On Thursday, the central bank published the minutes from its July 13 policy meeting, at which policymakers unanimously decided to raise the key interest rate by 75 basis points, from 9.00% to 9.75%. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the minutes leaned hawkish, as did the statement issued immediately after the policy meeting.
Gifford notes three important reasons for the central bank to be more cautious: high and persistent inflation with risks to the upside given recent currency weakness, growth that has remained resilient on the back of private consumption, and Chile’s large current account deficit. On the other hand, policymakers highlighted that weak private investment, a deterioration in financial conditions, and greater macro uncertainty were weighing on the growth outlook.
Overall, central bank officials believe that more rate hikes in the near term are required in order to return inflation—recently measured at a 12.5% year-over-year rate—to the 3% target over the central bank’s two-year policy horizon. Gifford notes that the Board considered rate increases of 50, 75, and 100 basis points but opted for the middle option to signal greater urgency while still giving themselves some flexibility as the tightening cycle is well advanced and new macro projections will be released when the quarterly Monetary Policy Report is issued in September.
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