Global Markets Weekly Update: May 27, 2022
U.S.
The large-cap S&P 500 Index and the tech-heavy Nasdaq Composite Index gained ground, breaking a string of seven consecutive weekly declines. Every sector in the S&P 500 advanced, with consumer discretionary and energy stocks performing especially well. The health care sector lagged. This cross-sector strength appeared to reflect optimism that inflationary pressures could be peaking.
Signs of softening in some economic data
Inflationary pressures contributed to some softening in early readings for U.S. purchasing managers’ indexes (PMIs) that are based on roughly 85% of survey responses. The S&P Global Flash U.S. PMI receded to 57.5 in May, down from 59.2 in April. (PMI readings greater than 50 indicate an expansion in activity.) Manufacturing output and new orders were strong, but the survey indicated that input costs and output charges also increased meaningfully. On the services side of the economy, the flash PMI reading came in at 53.5, down from 55.6 in the preceding month. New sales growth slowed, while input costs increased to the highest level on record.
Meanwhile, the U.S. Commerce Department reported that nondefense capital goods orders, excluding aircraft, increased 0.3% sequentially in April—a slowdown from the 1.1% recorded in March and a possible indication that business investment may be moderating. The April data from the Census Bureau showed that core durable goods orders, which exclude transportation, likewise grew 0.3%. This print was below expectations.
Few surprises in Fed minutes; consumer spending remains solid despite inflation
The minutes from the early-May meeting of the Federal Open Market Committee contained few surprises, with all members voicing support for 50-basis-point rate increases over the next few meetings in an effort to bring interest rates to a neutral level that neither inhibits nor stimulates economic growth. Some participants indicated that a more “restrictive” approach to tightening monetary policy could be in order, depending on how the economic outlook evolves.
The core personal consumption expenditures price index, which excludes food and energy, ticked up 0.3% in April, in line with expectations and little changed from the preceding three months. On an annual basis, this inflation metric came in at 4.9%, a moderation from March’s 5.2% reading. Personal consumption expenditures grew at a faster pace than inflation, increasing 0.9% sequentially in April.
10-year U.S. Treasury yield declines; municipal bonds rally
The benchmark 10-year U.S. Treasury yield traded lower, as the market appeared to focus on signs of slowing growth in the economy that could lead to a slower pace of Federal Reserve rate hikes. (Bond prices and yields move in opposite directions.) Municipal bonds rallied, with T. Rowe Price traders attributing this strength to investors seeking out attractive relative valuations. The decline in Treasury yields and a light new issuance calendar ahead of the holiday weekend may have also aided the rebound, according to T. Rowe Price traders. Spreads in the U.S. investment-grade corporate market tightened as investors’ risk appetite increased. T. Rowe Price traders observed that demand for high yield bonds was stronger across sectors.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,212.96 |
1,951.06 |
-8.60% |
S&P 500 |
4,158.24 |
256.88 |
-12.76% |
Nasdaq Composite |
12,131.13 |
776.51 |
-22.46% |
S&P MidCap 400 |
2,539.84 |
155.03 |
-10.63% |
Russell 2000 |
1,887.86 |
114.59 |
-15.92% |
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 rose as confidence grew that inflation may be peaking and as central banks signaled that interest rate increases are likely to be gradual. Market volumes were light, however, due to holidays. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.98% higher. The main market indexes also posted gains. France’s CAC 40 Index climbed 3.67%. Germany’s DAX Index advanced 3.44%. Italy’s FTSE MIB Index added 2.25%. The UK’s FTSE 100 Index rose 2.65%.
Core eurozone bond yields fluctuated but ended slightly higher. Yields initially ticked up after European Central Bank (ECB) President Christine Lagarde suggested the possibility of positive rates by year-end. Yields retreated somewhat on weaker-than-expected eurozone PMI data. UK gilt yields broadly tracked core markets, while peripheral eurozone bonds yields fell.
ECB’s Lagarde signals positive rates in euro area
Lagarde appeared to side with hawkish colleagues in a blog post, confirming an early end to the ECB’s bond-buying program in the third quarter and making her first explicit call for interest rate increases. “I expect net purchases under the asset purchase program to end very early in the third quarter,” she wrote. “This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.” The key deposit rate is currently -0.5%.
Strong eurozone PMI slows
Eurozone business activity in the private sector held up better than feared in May amid strong demand for services, particularly from households, a purchasing managers’ survey showed. The S&P Global Flash Eurozone Composite PMI, a monthly gauge of the services and manufacturing industries, dipped to 54.9 from 55.8 in May. Input cost inflation for firms eased for a second month.
BoE’s Pill: Rate hikes still needed; UK PMI falls to 15-month low
Bank of England (BoE) Chief Economist Huw Pill told Welsh newspaper The Western Mail that he thought more interest rate increases would be needed to curb inflation in the UK but that too much tightening may run the risk of a deep recession. “I personally think there is more that needs to be done...and we need to go not necessarily to a super restrictive stance but to a stance that takes some of that support away,” Pill was quoted as saying.
A UK purchasing managers’ survey showed that business activity came close to stagnating in May. The S&P Global/CIPS Flash PMI Composite Output Index was 51.8 in May—a 15-month low that was down from 58.2 in April.
Japan
Japan’s stock market started the week positively, only to be dragged lower by three consecutive session losses. A late rally on Friday, however, not only helped to snap the losing streak, but also saw Japanese equities end in positive territory. The Nikkei 225 finished 0.16% higher in local currency terms, while the broader TOPIX posted a weekly gain of 0.53%.
The yield on the 10-year Japanese government bond fell, while the yen strengthened against the U.S. dollar.
A positive start, but undermined by weak data
The Nikkei 225 Index jumped around 1% on Monday, taking positive cues from the U.S., to close above the psychological 27,000 level. The TOPIX similarly ended up 0.9%. However, this positivity was short-lived following the release of a survey showing activity in the country’s manufacturing sector grew at the slowest pace in three months in May amid supply bottlenecks.
Economic slowdown fears also weighed on confidence
Meanwhile, a further surge in coronavirus cases in Beijing ignited fears of an economic slowdown amid supply chain concerns. Worries about tightening global financial conditions and the potential impact on economic growth similarly weighed on Japanese sentiment. Further losses in the U.S. tech space also hurt investor confidence.
Positive cues from the U.S. spark rally
On Friday, however, Japanese equities rallied after Wall Street closed sharply higher overnight. Optimistic retail earnings outlooks and waning concerns about overly aggressive interest rate hikes by the U.S. Federal Reserve put investors in a buying mood. As the Nikkei 225 moved closer to the 27,000 level, however, investors looked to book profits, ultimately capping market gains.
China
Chinese markets weakened amid concerns over slowing growth exacerbated by the government’s zero-tolerance approach to the coronavirus. 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, slipped 1.9%. Data revealing that profits at China’s industrial firms fell at their fastest pace in two years in April also weighed on sentiment.
The yield on China’s 10-year government bond eased to 2.756% from 2.836% a week ago amid expectations of policy support. The yuan weakened to CNY 6.71 per U.S. dollar from CNY 6.68 a week earlier. The trade-weighted yuan fell below 100 for the first time in seven months, reflecting expectations for further capital outflows from China as the Fed’s looming interest rate hikes in the U.S. reduced the relative attractiveness of Chinese assets.
Shanghai gradually eases lockdown restrictions, but economic concerns persist
Worries about a prolonged slowdown grew more prominent after Premier Li Keqiang held a rare video call with thousands of government officials in which he reportedly warned of dire consequences for China’s economy if they didn’t take measures to reverse the slowdown, Bloomberg reported. Chinese officials are reportedly conflicted between the views of President Xi Jinping, who continues to emphasize the country’s zero-COVID policy, and Premier Li Keqiang, who last week called for a better balance between pandemic controls and economic growth.
Shanghai, which has been under lockdown since late March, is gradually easing restrictions as officials have started allowing more people out of their homes and businesses to reopen. Meanwhile, Beijing ramped up quarantine efforts to stamp out a small but persistent outbreak.
Property developers under pressure
China’s debt-laden property developers continued their efforts to emerge from a liquidity crisis. Evergrande Group is considering repaying its offshore public bondholders with cash installments and equity in two of its Hong Kong-listed units, Reuters reported.
Meanwhile, Greenland Holdings, a mid-size developer long regarded as one of the strongest players in China, asked holders of a USD 488 million note due June 25 to delay repayment by a year, triggering a sell-off in its bonds. The news from Greenland is concerning given that the Shanghai municipal government is one of the company’s shareholders, signaling that even state-backed companies are not immune to the credit crisis hitting China’s property sector.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned 2.8%. On Thursday, the central bank held its regularly scheduled monetary policy meeting and, as expected, kept its key interest rate—the one-week repo rate—at 14.0%.
In their post-meeting statement, central bank officials noted that “domestic economic activity remains strong” and attributed the increase in inflation to factors such as “rising energy costs resulting from geopolitical developments” and “strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices.” T. Rowe Price sovereign analyst Peter Botoucharov also noted that policymakers identified “credit growth” as being “important for financial stability” and committed themselves to “decisively continue to implement the strengthened macroprudential policy set by taking additional measures.”
Brazil
Shares in Brazil, as measured by the Bovespa Index, returned more than 3%.
During the week, the government reported that its mid-May inflation reading came in at 0.59% month over month, which was much higher than expected. According to T. Rowe Price sovereign analyst Richard Hall, food prices were the largest driver of inflation, but there was also some marginal pressure on core inflation and services prices showing that inflationary inertia remains strong.
Hall notes that recent strength in the Brazilian real could be helpful in reducing food pressure from global grain prices, though he believes that there is probably some additional inflationary pressure from prices of meat and other proteins. He also notes that fuel prices haven’t really dropped as local currency appreciation has essentially offset the uptick in fuel prices.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
This material is provided for general informational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. All other trademarks shown are the property of their respective owners. Use does not imply endorsement, sponsorship, or affiliation of T. Rowe Price with any of the trademark owners.
T. Rowe Price Investment Services, Inc., Distributor.