Global Markets Weekly Update: June 17, 2022
U.S.
Fears of a “hard landing” send stocks sharply lower
The Federal Reserve’s most aggressive rate hike since 1994 raised recession fears and sent stocks sharply lower for a second consecutive week. The S&P 500 Index recorded its worst weekly decline since March 2020 and entered a bear market, ending the week nearly 24% below its January peak. Meanwhile, the percentage of S&P 500 members that were trading above their 50-day moving average sank below 5% during the week, the lowest level since pandemic fears battered shares more than two years ago.
On Monday, T. Rowe Price traders noted two other negative multiyear thresholds: Every member of the S&P 500 was in negative territory at one point, something that hasn’t happened since at least 1996, while the NYSE advance/decline ratio was the most negative it has been since 2007.
Our traders attributed the negative start to the week to continuing inflation fears, which had been fanned the previous Friday by an upside surprise in May consumer inflation data. On Monday, The Wall Street Journal reported that Fed officials were considering raising rates by 75 basis points (bps, or 0.75 percentage points) at their meeting concluding Wednesday—an outcome on which the markets had priced in only a 2% likelihood the previous week. The odds seemed to increase further on Tuesday after former New York Fed President William Dudley told a conference that he expected a 75 bps hike. Investors did not appear reassured by downside surprises in core (less food and energy) producer price inflation data reported the same day.
Indeed, the Fed’s policy committee announced on Wednesday afternoon that it was raising the federal funds rate by 75 bps to a target range of 1.50% to 1.75%, its highest level since early 2020, although one member dissented. Stocks rallied as investors appeared to welcome what Fed Chair Jerome Powell termed the “strong move” in his post-meeting press conference, as well as his expressed willingness to raise rates in another 75 bps increment if necessary—although he does not expect rate increases of this magnitude to be “common.” At the same time, Powell insisted that “there's no sign of a broader slowdown that I can see in the economy.”
Housing market sees impact of rising mortgage rates
The mood on Wall Street seemed to sour on Thursday, however, perhaps due to worrisome signs that the economy might be more vulnerable to a slowdown than Powell envisioned. In particular, several reports indicated that the housing sector was already feeling the impact of Fed tightening and the surge in mortgage rates: Building permits fell 7% in May to their lowest level since last September, while housing starts sank 14.4%, the biggest drop since the onset of the pandemic. Weekly jobless claims also came in higher than expected (229,000 versus roughly 210,000), and a surprise contraction in Mid-Atlantic factory activity—the first since May 2020—mirrored a contraction and weaker-than-expected reading in the New York region reported earlier in the week.
Retail sales data, reported Wednesday, further stoked recession fears. Overall sales fell 0.3% in May, dragged lower by a sharp decline in auto purchases, which partly reflected higher rates on car loans. Sales excluding autos also surprised on the downside, however, rising only 0.5% versus consensus expectations of around 0.8%. Excluding gasoline, sales rose only 0.1%. The data confirmed that consumers were buying less in real terms given the higher year-over-year increase in consumer inflation (8.6%) than in non-inflation-adjusted retail sales (8.1%).
Longer-term Treasury yields touch highest levels since 2011
Inflation and rate fears pushed the yield on the benchmark 10-year Treasury note briefly to 3.49% on Tuesday, its highest level in more than a decade. (Bond prices and yields move in opposite directions.) Powell’s reassurances and the sluggish economic data sparked a relief rally to end the week, sending the 10-year note yield down to 3.24% by the close of trading on Friday, above the previous week’s level but down sharply from its intraweek high.
Tax-exempt municipals registered firmly negative returns as severe outflows from municipal bond funds industrywide exacerbated selling pressures. At the broad market level, municipals underperformed U.S. Treasuries by a wide margin. According to our traders, few new deals came to market as continued interest rate volatility and thin liquidity effectively halted issuance.
Investment-grade corporate bonds declined amid risk-off sentiment and relatively challenging liquidity early in the week, with more-volatile bonds and bank-sector debt underperforming. After rallying in the wake of the Fed meeting, corporate bonds traded lower once again, in line with other risk assets. Primary issuance stalled as no new deals reached the market.
High yield bonds experienced weakness, with riskier market segments underperforming and a pickup in outflows industrywide. The asset class retracted some of its earlier losses after the Federal Reserve’s meeting, but the positive sentiment was short-lived as risk assets traded lower on Thursday. Our traders noted that the new issue market remained quiet throughout the week as volatility kept issuers on the sidelines.
Bank loans were mixed as the week began. However, our traders noted that sentiment turned increasingly bearish after investors appeared to contemplate what a continued upward move in rates will do to economic growth.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
29,888.78 |
-1504.01 |
-17.75% |
S&P 500 |
3,674.84 |
-226.02 |
-22.90% |
Nasdaq Composite |
10,798.35 |
-541.67 |
-30.98% |
S&P MidCap 400 |
2,220.44 |
-182.62 |
-21.87% |
Russell 2000 |
1,665.68 |
-134.61 |
-25.82% |
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
Shares in Europe fell sharply on concerns that economic growth may stall after several central banks announced rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 4.60% lower. Major indexes also recorded material declines. Germany’s DAX Index dropped 4.62%, France’s CAC 40 Index declined 4.92%, and Italy’s FTSE MIB Index lost 3.36%. The UK’s FTSE 100 Index pulled back 4.12%.
ECB holds unscheduled meeting amid fears of new debt crisis
The European Central Bank’s (ECB) Governing Council held an unscheduled meeting after a jump in borrowing costs for some heavily indebted member states stoked fears of another eurozone debt crisis. In a statement released after this ad hoc meeting, the ECB indicated it would take action to stem the widening yield spreads between member states’ sovereign bonds. These measures would include targeted adjustments to how it reinvests the proceeds from maturing debt in the portfolio associated with the central bank’s pandemic emergency purchase program. The ECB will also seek to develop a new tool to help alleviate the “fragmentation” in borrowing costs.
Swiss central bank hikes rates unexpectedly
The Swiss National Bank unexpectedly raised interest rates for the first time in 15 years, by half a point to -0.25%, in an effort to subdue inflation. The central bank increased its inflation forecasts substantially and said further rate hikes could not be ruled out.
BoE raises rates for fifth time; UK economy shrinks for second month running
The Bank of England (BoE) raised its key interest rate to 1.25%, an increase of 25 basis points. Three of the nine policymakers voted for a 50-basis-point increase. The bank said: “The committee will be particularly alert to indications of more persistent inflationary pressures and will, if necessary, act forcefully in response.” The BoE revised its inflation outlook higher, projecting that the year-over-year change in consumer prices would be slightly above 11% in October, in part reflecting expectations for higher household energy costs. The updated forecast also calls for an economic contraction of 0.3% in the second quarter, as opposed to the 0.1% expansion projected in the BoE’s May policy report.
Official data showed that the UK economy unexpectedly shrank 0.3% in April, after contracting 0.1% in March. The unemployment rate rose to 3.8% in the three months to April, the first increase since 2020. Growth in total pay, including bonuses, slowed to 6.8% from 7.0%, as fewer employers offered incentives to attract and retain staff.
Japan
Japan’s stock markets registered sharp losses for the week, with the Nikkei 225 Index down 6.69% and the broader TOPIX Index falling 5.52%. Recession fears were sparked by the U.S. Federal Reserve’s announcement of its steepest interest rate rise since 1994, alongside other central banks’ moves to curb surging inflation. Continuing its divergence from global peers, the Bank of Japan (BoJ) maintained its ultralow interest rates. Against this backdrop, the yield on the 10-year Japanese government bond (JGB) fell slightly to 0.24%, from 0.25% at the end of the previous week. It briefly breached the top of the BoJ’s 0.25% policy band early in the week, prompting the central bank to announce an additional, unscheduled outright purchase of JGBs. The yen continued to hover around a 24-year low but strengthened modestly over the week, to around JPY 134.3 against the U.S. dollar, from the prior week’s JPY 134.4.
BoJ maintains ultralow interest rates
At its June monetary policy meeting, the BoJ kept overnight interest rates at minus 0.1% and said it would conduct daily purchases of 10-year JGBs at a yield of 0.25%. In addition to sticking to its policy of yield curve control, the BoJ reiterated its commitment to quantitative and qualitative monetary easing in the pursuit of its 2.0% price stability target for as long as it is necessary to maintain that target in a stable manner. The BoJ remained firmly in easing mode—despite rising inflation and a sliding yen—continuing its monetary policy divergence from global peers.
While the BoJ said that inflation expectations, particularly short-term ones, have risen, it expects the year-on-year increase in the consumer price index to decelerate as the positive contribution from the rise in energy prices wanes. Given that a high level of uncertainty remains, the BoJ added that it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices. While BoJ Governor Haruhiko Kuroda said that the recent sharp depreciation of the yen is negative for the economy, he also reiterated that central banks do not target exchange rates and that the BoJ’s monetary policy is guided solely for the purpose of achieving price stability.
Imports surge, outpacing rise in exports
Data from the Ministry of Finance showed that Japan’s imports surged 48.9% in the year through May 2022, on account of soaring commodity prices and a weak yen, outpacing the 15.8% rise in exports over the same period. Strong overseas demand for steel and mineral fuels supported the growth in export volumes. Elsewhere on the economic data front, the Reuters Tankan survey showed that amid resilient demand confidence among Japanese manufacturers rose in June and was steady among services sector firms.
China
Chinese stock markets advanced on hopes that a pickup in fixed asset investments would put the country’s economy back on track. The broad, capitalization-weighted Shanghai Composite Index added 1.0% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose 1.4% to its highest level in three months, according to Reuters.
China’s state planner approved 10 fixed asset investments worth CNY 121 billion (USD 18.1 billion) in May, a more than sixfold jump from April. Sentiment also received a boost after data showed surprising growth in industrial production in May and from hopes of increased policy support following weak housing market data. News of relatively relaxed coronavirus curbs in Beijing also lifted investors’ optimism. The city is returning to regular testing and targeted lockdowns rather than mass testing and lockdowns of entire districts.
The yuan remained broadly flat against the U.S. dollar and ended at 6.70 against the greenback from 6.69 last week. The yield on the 10-year Chinese government bond rose to 2.83% from 2.81% a week ago after the U.S. Federal Reserve raised interest rates and signaled more policy tightening in the months ahead. These expectations were reflected in another month of large outflows from onshore bond markets in May at USD 16 billion—the fourth straight month of sales—bringing the total drawdowns since February to USD 61 billion.
China’s holdings of U.S. Treasuries tumbled in April to their lowest level since May 2010, as Treasury prices fell during the month in anticipation of the Fed tightening. China is the second-biggest non-U.S. holder of Treasuries after Japan.
The economic picture showed some improvement. May industrial production rose slightly year on year versus expectations of a contraction, and fixed asset investments increased more than expected in the first five months of the year. Retail sales contracted less than forecast as virus restrictions in Shanghai and other areas were eased during the month, allowing production to gradually resume. Property sales as measured by floor space showed a marginal improvement, declining 31.9% year on year in May compared with April’s 39.0% contraction. However, home prices fell in May for the ninth month. China’s labor market also showed signs of weakness. The unemployment rate in 31 major cities rose to a record high of 6.9%, while the youth jobless rate rose to a record 18.4%, Bloomberg reported, citing official statistics.
Other Key Markets
Brazil hikes rates amid political uncertainty
Brazilian stocks dropped sharply as the country’s central bank hiked its benchmark Selic lending rate by 50 basis points to 13.25%, meeting consensus expectations amid the global monetary policy tightening cycle. (A basis point is 0.01 percentage points.) The central bank also signaled that it is likely to raise rates again at its next policy meeting, although it has already increased the Selic rate from a low of 2% in March 2021. The Brazil Stock Exchange, or Bovespa, was closed on Thursday for the Corpus Christi holiday.
Brazil’s political situation remains in some turmoil in the runup to the country’s presidential election in October, when current President Jair Bolsonaro takes on Luiz Inacio Lula da Silva, a leftist who was president from 2003‒2010. Reports surfaced that Bolsonaro had asked U.S. President Joe Biden for reelection help when they met on the sidelines of the previous week’s Summit of the Americas, which Bolsonaro denied.
Inflation pressure in Australia triggers government bond sell-off
Wage inflation in Australia rose sharply, triggering a rapid increase in the country’s government bond yields that roughly paralleled the sell-off in other developed markets. (Bond prices and yields move in opposite directions.) The yield on Australia’s three-year sovereign bond increased more than 50 basis points, reaching a 10-year high during the week. The country’s unemployment rate stayed steady at 3.9% in May.
Consensus economist expectations are for a 50-basis-point rate hike from the Reserve Bank of Australia in July following June’s increase of 50 basis points. Such a move in July would mark the Australian central bank’s first back-to-back rate increase of that magnitude, but inflation pressures are continuing to build in the Australian economy.
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