Global Markets Weekly Update: May 06, 2022
U.S.
Stocks suffer fifth week of losses amid extreme volatility
Most of the major benchmarks endured a fifth consecutive week of losses as interest rate and inflation worries continued to weigh on sentiment, especially toward growth stocks. The losses briefly pushed the Dow Jones Industrial Average into correction territory, down more than 10% from its recent highs, where it joined the S&P 500 and S&P MidCap 400 indexes. The Nasdaq Composite and the small-cap Russell 2000 Index ended the week firmly in bear markets, down more than 25%.
Markets were especially volatile late in the week, although the Cboe Volatility Index (VIX) remained slightly below the intraday levels briefly reached in late January. T. Rowe Price traders also noted that the market did not appear to have difficulty with what were expected to be record flows of exchange-traded funds as investors unwound leveraged positions.
Powell takes 75-basis-point rate hikes off the table…
Wall Street had been bracing for a week of volatility given the Federal Reserve’s highly anticipated policy meeting on Tuesday and Wednesday, along with several important economic data releases. On Wednesday afternoon, Fed policymakers announced a 50-basis-point (0.50 percentage point) increase in the federal funds target rate, the largest since 2000, to a range of 0.75% to 1.00%. Officials also announced that the Fed would begin allowing its holdings of Treasuries and agency mortgage-backed securities to decline in June at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion.
The market’s initial reaction was muted, as the moves were largely in line with expectations. At his post-meeting press conference, however, Fed Chair Jerome Powell surprised many by stating that a hike of 75 basis points (0.75 percentage point) was “not something we are actively considering.” Together with his assurances that a recession was unlikely in the near term, his comments were generally perceived as more dovish than anticipated. Bond prices rose as longer-term bond yields decreased, and equity benchmarks rallied sharply in late Wednesday trading.
…or does he?
The market’s gains more than unwound on Thursday, however, as investors appeared to reconsider whether a 75-basis-point increase was in fact off the table—and would be confirmed as an ongoing possibility by other Fed officials scheduled to speak the next day. Some potentially worrisome inflation data probably reinforced such concerns. The Commerce Department reported that nonfarm unit labor costs jumped 11.6% in the first quarter, well above elevated consensus forecasts of a rise of around 9.9%. The increase was largely due to a 7.5% drop in productivity, the biggest quarterly decrease in nearly 75 years. While many economists cautioned that the figure was complicated by the surprise 1.4% annualized decline in first-quarter gross domestic product—which itself was further complicated by a record trade deficit—it was still a greater drop than most had anticipated.
Wall Street also appeared to react negatively to Friday’s closely watched nonfarm payroll report, even though it came in largely in line with expectations. Employers added 428,000 jobs in April, modestly above consensus expectations of around 390,000, but previous months’ gains were revised lower by nearly the same gap (39,000).
Payrolls firm ADP’s tally of private sector employment, released Wednesday, surprised to the downside (247,000 jobs added versus nearly 400,000 consensus), so investors may have been hoping for confirmation in the official data of some easing in labor market pressures. Those looking for such evidence may have taken some encouragement from average hourly earnings, which rose 0.3% in April, down from 0.5% in March and below expectations.
Benchmark 10-year U.S. Treasury yield breaks through 3% for first time since 2018
Amid a broad rise in Treasury rates, the 10-year U.S. Treasury note yield breached 3.00% for the first time since late 2018, climbing as high as 3.13% on Friday. The yield curve continued its recent steepening trend as long-term inflation expectations—and long-maturity Treasury yields—increased, and more investors eliminated bets that the yield curve would flatten. T. Rowe Price traders noted that thin liquidity in the Treasury market exacerbated the steepening move.
Tax-exempt municipal bonds continued to sell off but fared moderately better than U.S. Treasuries at the broad market level. Our traders observed thin liquidity amid persistent outflows from municipal bond funds industrywide and noted that a meaningful share of secondary market trading consisted of tax-loss swapping.
Corporate bond market weathers equity volatility
Within the investment-grade corporate bond market, our traders observed lower-than-average secondary trading volumes and a pickup in new issuance to start the week. In general, the new deals priced with attractive concessions and were met with strong demand. Amid risk-off sentiment in the wake of the Fed meeting, investment-grade corporate bonds lost ground, though the asset class outperformed equities. Our traders also noted an uptick in overnight demand from Asia, with inquiries mainly focused on longer-maturity bonds.
According to our traders, investors covering positions that would benefit from price declines drove most of the buying activity in the high yield market ahead of the Fed’s announcement on Wednesday. Despite broad risk-off sentiment, our traders noted that some CCC rated or out-of-favor names traded higher after reporting better-than-expected earnings. There were no new deals announced given that issuers were waiting for the Fed’s decision and due to the continued market volatility.
Our traders reported that buyers in the bank loan market were mostly focused on higher-quality names, while lower-rated loans and market segments more vulnerable to inflationary pressures, such as building products suppliers and retailers, underperformed. They also noted that buyers paused in the second half of the week given the broad market volatility.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,899.37 |
-77.84 |
-9.46% |
S&P 500 |
4,123.34 |
-8.59 |
-13.49% |
Nasdaq Composite |
12,144.66 |
-189.98 |
-22.37% |
S&P MidCap 400 |
2,480.95 |
-19.34 |
-12.70% |
Russell 2000 |
1,839.57 |
-24.53 |
-18.07% |
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 tumbled amid fears that central banks may have to step up their efforts to control inflation, potentially increasing the risk to economic growth. Lockdowns in China to curb the spread of the coronavirus and the Ukraine conflict added to the uncertainty. In local currency terms, the pan-European STOXX Europe 600 Index ended 4.55% lower, while France’s CAC 40 Index dropped 4.22%, Germany’s DAX Index fell 3.00%, and Italy’s FTSE MIB Index lost 3.20%. The UK’s FTSE 100 Index slid 2.08%.
Core eurozone government bond yields rose mostly in tandem with U.S. Treasury yields after the Fed’s 50-basis-point rate increase. Peripheral eurozone government bond yields tracked yields in core markets. UK gilt yields fell after the Bank of England (BoE) raised rates but cut its forecast for economic growth and warned of a potential recession.
EU envoys continue talks on Russian oil ban
European Union (EU) envoys will continue to discuss a possible embargo on Russian oil over the weekend after meeting resistance from Hungary, Slovakia, and the Czech Republic, which depend heavily on these energy imports. While most countries would be expected to impose a ban within six months, Brussels may now offer the Czech Republic a cutoff date of June 2024, while Hungary and Slovakia may have until the end of that year, the Financial Times newspaper reported, citing diplomats.
BoE raises interest rates; Norway’s central bank still aiming for June
The BoE raised its key interest rate 25 basis points to 1.0%, the highest level since 2009, seeking to dampen inflation. However, the central bank delayed reducing its stockpile of bonds bought under its asset purchase program. The bank also highlighted the potential of the UK slipping into a recession by year-end and warned that inflation could exceed 10% in the fourth quarter. These developments helped to push the British pound to a two-year low.
Norges Bank, however, kept its deposit rate unchanged at 0.75%, and Governor Ida Wolden Bache reiterated that the policy rate “will most likely be raised in June.”
More ECB policy makers hint at July rate liftoff
More European Central Bank (ECB) policymakers appeared to press for an early increase in interest rates after the end of the quantitative easing program sometime in the third quarter. Executive Board member Isabel Schnabel, Bank of France Governor Francois Villeroy de Galhau, Bank of Finland Governor Olli Rehn, and Bank of Austria Governor Robert Holzmann hinted that they would vote for a rate hike as early as July.
Coronavirus restrictions, Ukraine conflict hit German industry
German manufacturing orders fell a much-greater-than-expected 4.7% sequentially in March, driven by lower foreign orders, especially from outside the eurozone. Industrial production dropped 3.9%, the largest decline since the start of the coronavirus pandemic. The statistics office attributed the decline to supply chain disruptions due to pandemic restrictions and Russia’s invasion of Ukraine. Meanwhile, EU retail sales volumes slipped 0.4% on the month, with mail order and internet sales recording the biggest falls.
Japan
In a holiday-shortened week (the market was closed May 3‒5), Japanese equities rose modestly. The Nikkei 225 Index gained 0.58%, and the broader TOPIX Index was up 0.86%, despite the volatility induced by the U.S. Federal Reserve’s decision to implement the first 50-basis-point interest rate rise since 2000. Taking a directional cue from the move in U.S. Treasuries, the yield on the 10-year Japanese government bond rose to 0.24%, from 0.21% at the end of the previous week. The yen finished the period slightly weaker, at around JPY 130.51 against the U.S. dollar (from about JPY 129.76), continuing to hover at a two-decade low. Yen weakness lent support to exporters, boosting the value of their overseas earnings.
Tokyo inflation reading suggests the BoJ may be closer to reaching its inflation target
On the economic data front, the Tokyo core consumer price index (CPI) rose 1.9% year on year in April compared with 0.8% in March. Regarded as a leading indicator of countrywide price trends, the reading suggested an increased likelihood of Japan’s CPI reaching the Bank of Japan’s (BoJ’s) 2% inflation target in coming months. The BoJ recently raised its outlook for inflation, citing the impact of a significant rise in energy prices, although it said that the increase is likely to be temporary.
Japan to further ease border control measures in June
During a visit to the UK, Prime Minister Fumio Kishida announced that the next easing of Japan’s border control measures will take place in June, when a smoother entry process, similar to that adopted by other Group of Seven leading developed economies, will be introduced. However, he added that changes would be implemented in stages, in line with the advice of public health experts. As things stand, the number of people allowed to enter Japan is capped at 10,000 a day, and tourists are still not allowed in.
On a separate note, Kishida spoke about reducing Japan’s dependence on Russian energy, emphasizing that nuclear and renewables would be a part of the country’s future energy policy. He reasserted Japan’s commitment to carbon neutrality by 2050 and the goal of reducing greenhouse gas emissions by 46% by 2030 while ensuring a stable energy supply.
China
Chinese markets fell as Beijing showed no sign of relaxing its zero-tolerance approach to the coronavirus, raising worries about the economic cost of widespread lockdowns. The broad, capitalization-weighted Shanghai Composite Index fell 1.5%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, sank 2.7%.
Relaxing virus prevention and control measures will inevitably lead to large-scale infections, serious illnesses, and deaths, according to a statement released after a meeting of the Politburo, the decision-making body of the Chinese Communist Party. Unlike previous statements, the statement made no mention of reconciling China’s focus on eliminating the virus with economic growth or minimizing the damage to the economy.
Many of Shanghai’s 25 million residents remain under varying degrees of lockdown even though the city started to ease restrictions as infections have declined. Meanwhile, Beijing announced mass testing and increased restrictions in response to a growing outbreak. In a sign of how the virus restrictions have hit domestic consumption, spending over China’s five-day Labor Day holiday plummeted 43% from a year earlier to CNY 64.7 billion, or roughly USD 9.8 billion.
In economic news, China’s service sector activity shrank in April at the second-steepest rate on record, according to the latest Caixin services Purchasing Managers’ Index (PMI). The drop in the private Caixin survey was consistent with the official PMI, which fell for the second straight month in April as lockdowns curbed production and disrupted supply chains.
Tensions with the U.S. remained elevated as the U.S. Securities and Exchange Commission (SEC) added over 80 U.S.-listed Chinese companies to its list of entities facing possible delisting from U.S. exchanges. The SEC’s growing list of Chinese companies facing expulsion stems from a long-standing dispute with China over auditing standards, which could see dual-listed Chinese companies removed as early as 2024 if they fail to comply with U.S. auditing rules.
In another sign of growing tensions with the West, China has ordered central government agencies and state-backed companies to replace foreign-branded personal computers with domestic alternatives in two years, Bloomberg reported. The overhaul marks one of Beijing’s most aggressive moves to date to reduce the country’s reliance on U.S. technology.
Yields on Chinese government bonds declined after the People’s Bank of China said it would use incremental policy tools to support steady economic growth and stabilize employment and prices. The yuan weakened slightly against the U.S. dollar from the prior week as corporates rushed to hedge after the currency slumped 4% in April, its steepest monthly drop since foreign exchange reforms in 1994.
Other Key Markets
Poland
On Thursday, Poland’s central bank raised its key interest rate by 75 basis points from 4.50% to 5.25%. This was smaller than expected and surprising to T. Rowe Price credit analyst Ivan Morozov following the previous week’s very strong year-over-year inflation reading of 12.3% versus expectations of 11.4%. Morozov notes that inflation is being driven by rising food prices and, to a lesser extent, by fuel costs.
The pickup in food prices is not surprising given that Poland has accommodated about 3.1 million of the 5.7 million refugees that have left Ukraine, according to United Nations data. The clearest economic implication of the influx of refugees is increased demand for, and higher prices of, basic goods.
Morozov sees indications that the flow of refugees has slowed, so there are reasons to believe food prices might be peaking. However, he notes that core inflation is still pushing higher, and, in light of the recent strong inflation data, he believes that the central bank will continue raising rates and that inflation could peak at about 13% to 14% around mid-2022.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -2.4%. Late Wednesday, the Brazilian central bank decided to raise its key interest rate, the Selic rate, from 11.75% to 12.75%. Because the rate increase was widely expected, investors were particularly interested in policymakers’ forward guidance about future rate increases—following last week’s lower-than-expected inflation reading—to see if the central bank is nearing the end of its rate-hiking cycle.
In its post-meeting statement, the central bank projected that “a smaller adjustment” in the Selic rate at its next policy meeting is “probable.” Beyond that, however, it is unclear if policymakers are prepared to stop raising rates or prefer to pause while watching the economy evolve. Central bank officials specifically noted “that the high uncertainty of the current situation, in addition to the advanced stage of the adjustment cycle and its impacts yet to be observed, demand additional caution in its actions.”
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