Global Markets Weekly Update: May 20, 2022
U.S.
Consumer fears briefly push S&P 500 into bear market
Wall Street continued its weekly losing streak as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 Index was down roughly 20.9% from its January intraday high, exceeding the 20% threshold for a bear market and placing it back at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. T. Rowe Price traders noted that market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week.
Disappointing earnings and revenue results from several of the nation’s major retailers appeared to spill over into negative broader sentiment. Most dramatically, shares in Target fell roughly 25% after earnings fell short of estimates by nearly a third, which the company attributed to a combination of reduced sales of discretionary items, such as televisions, and higher costs. Results from Walmart, Lowe’s, and Home Depot also fell short of expectations—while Costco shares may have tumbled in part on rumors that it was raising the price of its popular café hot dog. Aside from the hit to profit margins, investors seemed to worry that major retailers would be forced to pass on more of their higher input costs to customers in coming months, keeping inflation elevated.
Powell acknowledges “some pain” ahead if necessary to control inflation
Comments from Federal Reserve officials during the week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant “some pain [was] involved.” On Thursday, Kansas City Fed President Esther George acknowledged to CNBC the “rough week” in equity markets but seemed to welcome it as “one of the avenues through which tighter financial conditions will emerge.”
The week’s economic data offered mixed signals about whether a recession was imminent, and Wall Street’s reaction to the data was also arguably hard to decipher. On Tuesday, investors seemed to welcome news that retail sales, excluding the volatile auto segment, had risen more than expected in April (0.6% versus roughly 0.4%), while March’s gain was revised upward to 2.1%. Industrial production, manufacturing production, and capacity utilization figures in April also surprised on the upside.
On Thursday, however, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, reflecting the pressure from higher mortgage rates. Our firm’s traders noted that the downside surprises appeared to spark brief rallies in stock prices, however, perhaps because they drove a sharp decline in longer-term interest rate expectations.
Bond yields decrease on manufacturing and housing data
Indeed, the yield on the benchmark 10-year U.S. Treasury note fell as low as 2.77% in intraday trading on Thursday, its lowest level in nearly a month. (Bond prices and yields move in opposite directions.) The broad tax-exempt bond market registered negative returns through most of the week and underperformed U.S. Treasuries. However, our municipal bond traders observed more constructive market conditions on Thursday, as yields partly retraced their early-week increase. General obligation debt offerings from New York City and the state of Illinois were met with strong demand, providing further signs of stabilization in the muni market.
Investment-grade corporate bonds weakened as an active primary calendar weighed on market technicals. Also, the earnings misses from some prominent retailers resulted in growing fundamental concerns across the market. Despite these concerns, newly issued bonds performed well in general as attractive concessions bolstered investor demand.
Conversely, high yield bond performance marginally improved early in the week as the earnings season progressed. However, the market later retraced the gains with CCC rated names faring worse than higher-quality bonds. Our traders noted that the recent acceleration of outflows industrywide contributed to the unwinding of the significant inflows the asset class experienced in 2020, while the primary market remained quiet with minimal issuance.
Our traders reported that the recent volatility in the bank loan market subsided as the week began, which led to a few new deal announcements. They also noted increased demand from bank buyers as recent paydowns resulted in elevated cash balances. However, the hawkish Fed commentary fostered broad risk-off sentiment.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
31,261.90 |
-934.76 |
-13.97% |
S&P 500 |
3,901.36 |
-122.53 |
-18.14% |
Nasdaq Composite |
11,354.62 |
-450.38 |
-27.42% |
S&P MidCap 400 |
2,384.81 |
-46.02 |
-16.09% |
Russell 2000 |
1,773.27 |
-19.39 |
-21.02% |
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 pulled back amid fears of slowing economic growth and faster interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.55%. Germany’s Xetra DAX Index dropped 0.33%, France’s CAC 40 Index lost 1.22%, and the UK’s FTSE 100 Index gave up 0.24%. Italy’s FTSE MIB Index, on the other hand, advanced modestly.
Core eurozone government bond yields fluctuated, ending roughly unchanged. Hawkish signals from several European Central Bank (ECB) officials caused yields to rise early in the week. ECB Governing Council member Klaas Knot, for example, appeared to suggest the possibility of a 50-basis-point interest rate increase in July. Yields subsequently pulled back, as weak retail earnings in the U.S. worsened fears of an economic slowdown. Peripheral eurozone bond yields, which broadly tracked core markets over the week, ended slightly higher. UK gilt yields rose on inflation reaching its highest level in 40 years, better-than-expected employment data, and hawkish comments from Bank of England Chief Economist Huw Pill.
UK inflation soars; confidence slumps
The latest macro data provided more evidence that the UK economy may be on the brink of stagnation. Inflation accelerated in April to the highest level since 1982, hitting 9.0% on surging electricity and gas prices, according to the Office for National Statistics. The unemployment rate in the three months ended March 31 fell to 3.7%—the lowest level since 1974—with job vacancies exceeding the number of jobless for the first time on record. Weekly earnings growth (including bonuses) rose by 7.0% sequentially over this period.
Meanwhile, retail sales volumes in April unexpectedly increased 1.4% month over month. However, a survey conducted by research company GfK showed that UK consumer confidence dropped to its lowest level in nearly 50 years in May.
European Commission cuts growth forecast; energy prices drive inflation
The eurozone economy was more resilient than previously thought in the first quarter. Gross domestic product (GDP) growth was revised higher to 0.3% sequentially from the previous estimate of 0.2%. Even so, the European Commission (EC) cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices.
German producer prices rose by a record amount in April, surging 33.5% year over year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas.
EU unveils plan to end dependence on Russian energy
The EC announced a EUR 300 billion plan called REPowerEU that aims to end the European Union’s (EU’s) dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery program will provide most of the cash for the plan.
Japan
Japan’s stock market returns were positive for the week, with the Nikkei 225 Index gaining 1.18% and the broader TOPIX Index up 0.71%. Regional sentiment toward the end of the week was boosted by China’s action to support its property sector, the latest in a series of monetary easing measures aimed at boosting an economy weighed down by coronavirus lockdowns. An announcement by Japan’s government that the country’s strict border control measures would be eased further also lent some support. Against this backdrop, the yield on the 10-year Japanese government bond fell to 0.23% from 0.24% at the end of the previous week, while the yen strengthened to around JPY 127.98 against the U.S. dollar, from about JPY 129.27 the prior week.
Japan’s economy contracted in Q1; consumer price inflation exceeded BoJ’s 2% target in April
Japan’s economic recovery lagged that of its global peers, with the country’s GDP contracting by an annualized 1% quarter on quarter during the first three months of 2022. Factors behind the contraction included deteriorating trade as import prices soared and sluggish consumer spending due to the coronavirus restrictions that had been in place. The Bank of Japan (BoJ) has repeatedly said that it will continue with its massive monetary stimulus to support the post-pandemic recovery—the relatively weak GDP data are likely to reinforce this stance. Inflation exceeded the BoJ’s 2.0% target in April, as the core consumer price index rose 2.1% from a year earlier. However, consumer price pressures remained far weaker in Japan than elsewhere in the world, also supporting the case for continued easing.
Separate data showed that Japan’s exports rose 12.5% year on year in April, led by U.S.-bound shipments of cars, while shipments to China fell sharply as the economic slowdown caused by the country’s coronavirus lockdowns weighed on demand. Imports increased by 28.2% after energy prices soared due to the war in Ukraine.
Government announces a further easing of border controls in June
Starting in June, the cap on overseas arrivals to Japan will be doubled to 20,000 per day, as the government announced its latest steps to ease the strict border control measures that have been in place to contain the spread of the coronavirus. COVID-19 testing and quarantine rules will also be relaxed for travelers from countries with the lowest infection rate. Prime Minister Fumio Kishida previously promised to align Japan’s border control measures with those of the other Group of Seven developed nations in June.
China
Chinese stocks rose as the central bank cut interest rates to support the country’s flagging property sector even as disappointing economic data weighed on sentiment. The broad, capitalization-weighted Shanghai Composite Index advanced 2.0% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.2%.
The previous Friday, the People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR), a reference for home mortgages, by an unexpectedly large 15 basis points to 4.45%. That rate cut came after the central bank cut the lower limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC’s rate cuts followed data showing a plunge in home sales in April. (China’s five-year and one-year LPRs are based on interest rates that 18 banks offer to their best customers. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.)
The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand, according to T. Rowe Price analysts. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant, they added. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, which has affected how people view housing as an investment. China’s policymakers are trying to strike a balance between supporting first-time homebuyers and discouraging speculation and not offering relief to developers, T. Rowe Price analysts noted.
Economic data released last week pointed to slowing growth. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Fixed asset investment rose 6.8% from January to April from a year ago but also missed the consensus forecast. Home prices in China fell in April for the eighth straight month, declining 0.3% from March, marking the fastest decline in five months.
The yield on China’s 10-year government bond edged up to 2.836% from 2.834% a week ago. In currency trading, the yuan firmed to 6.68 from 6.80 per U.S. dollar. The International Monetary Fund said it increased the yuan’s weighting in the Special Drawing Rights (SDR) currency basket following its first review of the SDR since China joined the basket in 2016. The SDR is an international reserve asset made up of five global reserve currencies (the U.S. dollar, euro, yuan, yen, and British pound).
Other Key Markets
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about 3.1%.
The first draft of the new constitution was completed early in the week, after 10 months and more than 100 plenary sessions within the Constitutional Assembly. The document, which totals 160 pages and includes 499 articles, is being reviewed by three internal committees to harmonize drafting, to set up rules for the transition to a new constitution, and to create a preamble. This process is expected to continue until June 9 in order to allow for a plenary vote by June 29 and to deliver a final draft to the nation by July 4. The general public will vote for or against the new constitution in a mandatory referendum on September 4.
According to a recent survey, voting intentions for the new constitution stand at 38% in favor, 46% against, and 16% undecided. T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that the margin between the “no” vote and the “yes” vote has decreased over the last week. However, he believes that President Gabriel Boric’s government will need to rally support if it wants the new constitution to become the country’s new basic law.
Gifford notes that the draft completed during the week should be close to the final draft, as no new laws can be introduced during the harmonization process. On a positive note, he sees that many radical proposals have not made it into the draft. However, political uncertainty, as well as regulatory uncertainty for businesses, will continue for some time, as many proposals are open to interpretation.
Mexico
Mexican stocks, as measured by the IPC Index, returned about 3.9% through the close of business on Thursday. The equity market performed well—despite significant volatility in the neighboring U.S. market—helped in part by a stronger peso stemming from several factors. These include hopes that China, a major global economy, will soon end its COVID-19 lockdowns in Shanghai and other places, as well as rising expectations for a more aggressive pace of interest rate hikes following the Bank of Mexico’s increase in its key interest rate late last week from 6.5% to 7.0%, which would increase the peso’s relative appeal.
According to T. Rowe Price’s Gifford, the central bank’s post-meeting statement was hawkish, as policymakers acknowledged more inflationary pressures, specifically China's zero-COVID policy, which now joins the list of other shocks—including supply chain bottlenecks and the Russia-Ukraine war—for them to be worried about. Notably, policymakers introduced the following sentence in the statement: “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” The central bank also increased its near-term inflation forecasts.
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