Global Markets Weekly Update: June 10, 2022
U.S.
Hotter-than-expected inflation drags stocks down
Stocks finished with steep losses despite some early-week strength. The equities market turned south on Thursday afternoon, and the selling accelerated on Friday following the release of hotter-than-expected consumer price index (CPI) data for May. At the beginning of the week, trading volumes were light, and volatility measured by the Chicago Board Options Exchange (CBOE) Volatility Index, known as the VIX, was relatively low, but volatility turned sharply higher at the end of the week.
Oil prices climbed for most of the week before falling on Friday, finishing the week modestly higher and supporting energy sector stocks to some degree. Losses in the tech-heavy Nasdaq Composite were worse than in the broad market as higher interest rates reduced the appeal of companies that may not generate meaningful earnings until well into the future. Value stocks held up better than growth stocks.
More retailer inventory problems
In the latest sign of major retailers struggling with mismatches of supply and demand, Target guided profit estimates lower on Tuesday for the second time in three weeks. The company cited large stockpiles of goods like electronics and patio furniture that have fallen out of favor with consumers, forcing the retailer to discount them, as well as higher transportation and energy costs. However, Target announced on Friday that it will increase its annual dividend by 20%.
Headline inflation accelerates
The May CPI release was the focus of the week’s economic data. The report showed that headline inflation was 8.6% from a year earlier, topping consensus estimates. May’s headline CPI was also higher than April’s 8.3% reading, disappointing investors who had been looking for price increases to slow. Core CPI, which excludes food and energy, climbed 6% from a year ago, also faster than consensus estimates.
In a sign that the labor market may be loosening, weekly initial jobless claims increased and hit their highest level since January. However, the acceleration in headline inflation is keeping pressure on the Federal Reserve (Fed) to raise rates aggressively and leading to anticipation of more hikes of 50 basis points each—rather than 25—into the second half of the year. (A basis point is 0.01 percentage points). The next Fed policy meeting is June 14‒15.
Shorter-term U.S. Treasury yields jump
U.S. Treasury yields increased, with yields on short- and intermediate-term maturities climbing sharply after the CPI release. According to our traders, hawkish policy signals from the European Central Bank and soft demand for the Treasury Department’s sale of new 10-year notes helped drive U.S. government debt yields higher. (Bond prices and yields move in opposite directions.)
The broad municipal bond market slumped through most of the week, with yields increasing in intermediate- and long-maturity segments, according to our traders. Meanwhile, reinvestment proceeds from June bond maturities and coupon payments flowed to shorter-term issues, anchoring the short-maturity segment of the yield curve. Sizable outflows from municipal bond funds industrywide posed a meaningful headwind to the market.
Our traders noted that the investment-grade corporate bond market experienced a glut of new issuance. The primary calendar exceeded weekly expectations, and the new deals were met with generally solid demand. Later in the week, a risk-off tone gripped the market, and investment-grade corporates traded lower alongside equities. According to the firm’s traders, the high yield bond market experienced lower-than-average trade volumes as lower-quality bonds within the high yield universe slightly outperformed.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
31,392.79 |
-1,506.91 |
-13.61% |
S&P 500 |
3,900.86 |
-208.64 |
-18.16% |
Nasdaq Composite |
11,340.02 |
-672.71 |
-27.52% |
S&P MidCap 400 |
2,403.06 |
-118.06 |
-15.44% |
Russell 2000 |
1,800.29 |
-83.56 |
-19.82% |
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
European shares fell sharply after the European Central Bank (ECB) suggested that it may increase interest rates at a faster-than-expected pace after July, when it plans to end its ultra-loose monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index ended 3.95% lower. Germany’s DAX Index pulled back 4.83%, while France’s CAC 40 Index lost 4.60%. Italy’s FTSE MIB Index dropped 6.70% amid concerns about the country’s ability to manage its national debt load without central bank support. The UK’s FTSE 100 Index slid 2.86%.
Core eurozone government bond yields jumped, mostly in response to the ECB policy meeting, which markets perceived as more hawkish. Peripheral eurozone and UK government bond yields broadly tracked core markets.
ECB set to raise rates, end quantitative easing in July
The ECB signaled that it plans to start raising its key deposit rate, which stands at -0.5% currently, by a quarter point in July to contain record inflation. However, the central bank added: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” The ECB also confirmed it would end net purchases of bonds under its asset-buying program on July 1.
The ECB lowered its outlook for economic growth and raised its projection for inflation, which it now sees staying above the 2% target over the three-year forecast period. Inflation is expected to accelerate to 6.8% in 2022—compared with 2.6% last year—before declining to 3.5% in 2023 and 2.1% in 2024. The ECB called for the economy to expand 2.8% this year, down from its previous forecast of 3.7%. The central bank’s projections show economic growth slowing to 2.1% in 2023 and 2024.
Factory orders in Germany fall for third month running
Seasonally adjusted German industrial orders fell for a third consecutive month in April, declining 2.7% sequentially, amid uncertainty caused by the Ukraine conflict and weaker demand. The revised March data showed a month-over-month decline of 4.2%.
UK PM Johnson survives confidence vote
British Prime Minister Boris Johnson saw off a challenge to his leadership, winning 59% of votes in a ballot held by the members of parliament of his Conservative party. Johnson has come under fire for holding parties in the prime minister’s office during coronavirus lockdowns in the UK.
Japan
Stocks in Japan registered moderate gains for the week, with the Nikkei 225 Index rising 0.23% and the broader TOPIX Index up 0.51%. Sentiment was supported by Cabinet Office data showing that Japan’s economy shrunk by an annualized 0.5% over the first quarter of the year, less than the initial estimate of a 1.0% contraction. Japan’s reopening to tourism provided a further boost. In the fixed income markets, the yield on the 10-year Japanese government bond rose to 0.25% from 0.23% at the end of the prior week. Meanwhile, yen weakness continued to provide a boost to Japan’s exporters—the currency finished the week at around JPY 133.9 against the U.S. dollar (from the previous week’s JPY 130.8), continuing to hover around two-decade lows.
Senior officials voice concerns about rapid yen weakening
Late Friday, senior officials from the Bank of Japan (BoJ), Japan’s Ministry of Finance, and the country’s Financial Services Agency issued a joint statement voicing concerns about rapid yen weakening. Earlier in the week, BoJ Governor Haruhiko Kuroda told a Financial Times conference that the exchange rate is not a target of any central bank, including the BoJ. He also said that, with Japan’s economic growth still below pre-pandemic levels, the BoJ must extend its support for economic activity by continuing with current monetary easing. While Kuroda conceded that monetary easing had not been fully successful, given that the BoJ had not achieved its 2% inflation target in a stable and sustainable manner (with current inflationary pressures largely attributable to rising energy prices), he gave assurances that the target is achievable in the coming years.
Growth in Japan’s producer prices slowed in May, to 9.1% from a year earlier compared with 9.8% in April, suggesting that the government’s efforts to ease the pain of rising prices, including increased fuel subsidies, were having some impact.
Japan’s Cabinet approves plans for government’s “new form of capitalism”
Prime Minister Fumio Kishida’s Cabinet approved plans for the government’s fiscal and economic policy program, which had initially been presented as a “new form of capitalism” with a strong focus on income redistribution. The plan has now shifted to emphasize policies designed to raise economic growth, with redistribution initiatives such as a higher capital gains tax excluded. Alongside investment in human capital, science and technology, start-up companies, and digital transformation, an important focal point will be green transformation—including decarbonization efforts—to boost Japan’s economic growth prospects over the medium term.
China
Stocks in China rallied amid hopes for looser monetary policy and signs that Beijing was easing its years long crackdown on the technology sector. The broad, capitalization-weighted Shanghai Composite Index rose 2.7% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed about 3.7% in its biggest weekly gain since February 2021, according to Reuters.
China’s regulators are ending their probe into DiDi Global and will restore the ride-hailing giant’s mobile apps back on domestic app stores, The Wall Street Journal reported. Separately, media outlets reported that authorities are in talks about reviving the initial public offering for Ant Group, which was pulled in December 2020 after the fintech company’s founder Jack Ma made critical comments about China’s financial regulators. Both developments signaled that Beijing is dialing back its regulatory clampdown on the tech sector that started in late 2020. In a further sign of policy relaxation, China’s gaming regulator granted publishing licenses to 60 online games, the biggest approval of titles for computers and smartphones since July 2021.
In economic readings, exports grew at a double-digit pace and imports expanded for the first time in three months in May, as factories reopened and supply chain issues improved. China’s trade surplus rose to a higher-than-expected USD $78.76 billion last month, up from USD $51.12 billion in April. The private Caixin services purchasing managers’ index rose to 41.4 in May from April’s 36.2 reading. Despite the monthly improvement, the gauge remains well below the 50-point mark separating growth from contraction as coronavirus lockdowns and other restrictions weighed on the services sector.
New bank lending in China rose more than expected in May, and broader credit growth also quickened, reflecting policymakers’ efforts to reverse the country’s coronavirus-driven slump. Factory-gate inflation cooled to its slowest pace in 14 months in May, and consumer inflation also stayed subdued, raising expectations that China’s central bank will roll out more stimulus to spur the economy.
In coronavirus news, last weekend, Shanghai planned to lock down millions of residents for mass coronavirus testing over the weekend, days after the last lockdown was lifted on June 1. Meanwhile, Beijing shut down entertainment and internet venues in two of the capital’s largest districts. The latest restrictions came after a handful of community cases were found in both cities, reflecting the Chinese government’s determination to eradicate the virus through a zero-tolerance approach even as other countries try to live with the virus.
The yield on China’s 10-year government bond ended the week at 2.82%, roughly unchanged from a week ago, as investors awaited U.S. inflation data that could offer insight into the pace of the Federal Reserve’s interest rate increases. A faster pace of tightening in the U.S. would narrow the interest differential on Chinese and U.S. government debt yields, reducing the attractiveness of buying higher-risk Chinese assets.
Other Key Markets
Hungary
Hungarian assets remained under pressure this week amid expectations that the central bank will need to continue raising interest rates in an attempt to get inflation under control. During the week, the government reported that headline inflation in May was 10.7%. This was higher than expected and higher than the 9.5% reading for April.
According to T. Rowe Price credit analyst Ivan Morozov, the overall inflation trend still has strong momentum, as indicated by a 12.2% year-over-year core inflation rate through May versus 10.3% for the year ended in April. He expects inflation to continue rising to the 13.0% to 14.0% range by the end of the summer, which would prompt the central bank to continue pushing interest rates higher, particularly if the forint weakens on foreign exchange markets.
As for the implications for fiscal policy, Morozov believes that existing price ceilings for food and fuel—which are scheduled to end on July 1—will likely to be extended into 2023. Nevertheless, he believes that the fiscal consolidation trend will continue and that the government will not alter its fiscal targets. With both fiscal and monetary policy in Hungary tightening, it remains to be seen if the authorities will succeed in reducing inflation pressures and avoiding a further economic overheating.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about -3.5%.
On Tuesday, Chilean central bank officials, in a unanimous decision, decided to raise the key interest rate by 75 basis points, from 8.25% to 9.00%. This rate increase was generally in line with expectations, although some economists anticipated a larger, 100-basis-point increase.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the statement issued after the policy meeting was hawkish given better-than-expected economic growth and recent inflation readings that surprised to the upside. Nevertheless, the rate increase was smaller than the 125-basis-point jump at the previous policy meeting—which Gifford believes is because monetary policy has become increasingly restrictive. He believes that the central bank is getting close to the point where policymakers will decide to pause their rate increases and watch for signs that the economy and inflation are moderating.
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