Global Markets Weekly Update: November 11, 2022
U.S.
Indexes surge on cooling inflation
The major indexes recorded strong gains as investors celebrated reassuring inflation data and bond yields fell. The S&P 500 Index recorded its best week since June and hit its best intraday level in two months. After the release of consumer inflation data on Thursday, the index recorded its largest daily gain since April 2020. Growth stocks—technology and internet-related shares, in particular—benefited the most from falling yields, which typically increase the perceived value of future profits. T. Rowe Price traders reported that an index of nonprofitable tech stocks—where a large share of revenues is presumably being invested in future growth—jumped over 15% on Thursday.
The signal event of the week was Thursday morning’s release of the Labor Department’s consumer price data for October. The headline consumer price index (CPI) rose 0.4% in October, less than consensus expectations of roughly 0.6% and bringing the year-over-year increase to 7.7%—still well above the Federal Reserve’s target, but the slowest increase since January.
Core inflation retreats from 40-year high
Even more encouraging for investors may have been the year-on-year core (less food and energy) reading, which fell back to 6.3% from a 40-year high of 6.6% in September. Prices for used cars and trucks fell by 2.4% in October, while prices for apparel and medical services also pulled back. The cost of shelter continued to keep inflation elevated, however, rising 0.8% in October, the biggest increase in over 32 years.
Thursday’s rally may have also owed something to policymakers’ response to the data. Our traders noted that four Fed officials spoke on Thursday and stated that they thought the pace of rate increases should slow and perhaps stop at a lower terminal rate. Federal Reserve Bank of Cleveland President Loretta Mester took a more cautious tone, stating that policy should “become more restrictive.”
Consumers remain skeptical
Most of the rest of the week’s economic data were largely in line with consensus expectations. The notable exception was the Friday morning release of the University of Michigan’s preliminary gauge of November consumer sentiment, which fell unexpectedly to its lowest level since July. The survey’s lead researcher attributed the drop in part to poor buying conditions for durables given high prices and interest rates.
Tuesday’s midterm election results and the chance that the Democratic Party might retain some control of Congress may have weighed on markets when they opened on Wednesday morning, with some investors favoring a divided government that would restrain new spending and regulation. The collapse of a leading cryptocurrency exchange on the same day drove a further decline in Bitcoin and other currencies and appeared to foster some broader market volatility.
Long-term yields fall sharply
U.S. Treasury yields fell sharply in response to the lower-than-expected CPI readings, which also spurred an intense rally in risk assets. (Bond prices and yields move in opposite directions.) The benchmark 10-year U.S. Treasury note yield ended Thursday at 3.81%, down from 4.17% at the end of the previous week. (Bond markets were closed on Friday in observance of Veterans Day.)
The broad tax-exempt bond market also traded higher, with our municipal bond traders observing improved demand from crossover buyers—who typically invest in taxable fixed income markets—as well as retail investors. In credit-specific news, Moody’s Investors Service upgraded Chicago’s general obligation rating to Baa3, moving the city’s debt out of non-investment-grade status, thanks in large part to improved pension funding practices.
Our traders observed heightened activity in the investment-grade corporate bond primary market, with issuance largely front-loaded during the holiday-shortened week. The level of new deals surpassed weekly expectations, and the new issues were met with generally strong demand. Despite the uptick in supply, secondary trading volumes remained healthy. The October CPI print was constructive for sentiment and sent corporate credit spreads tighter across most sectors, with new issues outperforming.
Below investment-grade bonds rallied along with equities after the release of softer-than-expected CPI data. Only one new deal was announced, but our traders noted that a few additional deals are on deck if the market’s strong performance continues. The technical picture for bank loans continued to improve amid slowing outflows from loan funds as well as marginal positive flows for exchange-traded funds.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,747.86 |
1344.64 |
-7.13% |
S&P 500 |
3,992.93 |
222.38 |
-16.22% |
Nasdaq Composite |
11,323.33 |
848.08 |
-27.62% |
S&P MidCap 400 |
2,532.12 |
126.38 |
-10.90% |
Russell 2000 |
1,882.74 |
82.87 |
-16.15% |
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 rose on slowing inflation in the U.S. Better-than-expected results this earnings season also appeared to lift investor sentiment, although the economic backdrop remains challenging. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.66% higher, while Germany’s DAX Index surged 5.68%, Italy’s FTSE MIB Index climbed 5.04%, and France’s CAC 40 Index advanced 2.78%. The UK’s FTSE 100 Index gave up 0.23% after poor economic growth data eroded gains.
European government bond yields slipped from multiweek highs as weaker-than-expected U.S. CPI data fueled a global rally in bond markets. Germany’s 10-year bond yield eased to a two-week low on the back of a broad-based drop in U.S. Treasury yields. However, red-hot inflation data in the bloc kept yields near recent highs in in Italy, France, and Switzerland. In the UK, weak gross domestic product (GDP) data kept a downward bias on bond yields before the budget next week.
UK economy shrinks in third quarter, heralding recession
The UK’s GDP in the third quarter fell by 0.2% sequentially, the first quarterly decline since the start of 2021, when the country was in a coronavirus lockdown. However, analysts in a FactSet survey had expected the economy to shrink by 0.5%. Although output fell 0.6% in September, the quarterly contraction was smaller than expected because the drop in August was revised to 0.1% from a previous estimate of 0.3%, and the increase in July was revised up to 0.3% from 0.1%. The Bank of England (BoE) forecast in September that the third quarter would be the start of a recession that could last two years.
UK finance minister Jeremy Hunt said, after the release of the data, that tough decisions would need to be made on tax and spending in the November 17 budget. The Financial Times newspaper reported that Hunt is planning a three-year freeze in state spending after the next general election that could halve an estimated fiscal shortfall of GBP 55 billion.
BoE Governor Andrew Bailey said in a local newspaper interview that interest rates were likely to rise further in the coming months, although he was hopeful that inflation would peak this winter. He said it could take between 18 months and two years to tame inflation
European Commission predicts imminent recession, raises inflation forecast
The European Commission forecast that the eurozone economy would contract in the final quarter of this year by 0.5% and shrink by a further 0.1% in the first three months of 2023—a technical recession—due mainly to higher energy prices triggered by the war in Ukraine. Economic growth in 2023 is predicted to slow to 0.3% from 3.2% this year. The commission also raised its forecast for inflation to 8.5% this year, 6.1% next year, and 2.6% in 2024.
German industry output stronger than expected
After a string of soft German economic data for September, industrial production surprised on the upside, rising by 0.6%, sequentially. However, the drop in August was revised lower to 1.2%, largely due to logistics problems caused by low river levels and surging energy prices.
Japan
Japanese equity markets rose over the week, with the Nikkei 225 Index gaining 3.9% and the broader TOPIX Index 3.3%. Sentiment was shaped by the lower-than-expected U.S. consumer price inflation print, which raised expectations that the U.S. Federal Reserve could adopt a more dovish monetary policy stance. A relaxation of coronavirus restrictions in China also provided a boost. Meanwhile, the Bank of Japan (BoJ) asserted that it would retain its ultra-loose monetary policy to underpin the fragile economic recovery. The yield on the 10-year Japanese government bond fell to 0.23% from 0.25%, while the yen strengthened to around JPY 139.4 against the U.S. dollar, from about JPY 146.6 at the end of the previous week. The BoJ suggested that its interventions in the currency markets had worked, boosting the yen.
BoJ governor says rapid weakening of yen is undesirable
Following a meeting with Prime Minister Fumio Kishida, Haruhiko Kuroda, the governor of the BoJ, repeated the message that the “one-sided and rapid weakening of the yen is undesirable for the economy,” according to Bloomberg. The yen is hovering around a 32-year low against the U.S. dollar, largely due to the divergence in monetary policy between the U.S. and Japan. Kuroda reiterated that the central bank needs to continue supporting the economy and seek to ensure that sustainable inflation is achieved, primarily through wage growth.
Japan Tourism Agency aims for recovery in inbound tourism by 2025
The Japan Tourism Agency announced a plan outlining its goals for 2025, which is when it aims to have inbound tourism recover to levels seen before the coronavirus pandemic. The agency expects travel demand to rise in line with increased global air traffic. Furthermore, events to be held during that year, including the World Athletics Championships in Tokyo and the Expo 2025 in Osaka, are expected to give visitor numbers a boost. Yen weakness increases the attractiveness of Japan to foreigners as it means that their purchasing power is higher.
New investment in semiconductor development and production
Given its high dependence on other countries for computer chips and other key components, Japan’s government announced new investment in semiconductor development and production, looking to remain a key player in global technology. A new company will work on developing next-generation, or “post-5G,” semiconductors, which are expected to be crucial for artificial intelligence and automated driving systems. Japan will work closely with the U.S. on the endeavor, and the government anticipates that investing in such technology will lead to both growth and jobs.
China
Shares in China received a late boost from the surprise drop in U.S. inflation but trailed most other global markets as investors worried about new signs of economic fragility. The Shanghai Composite Index returned 0.54% for the week. News of additional support for the troubled housing market helped provide some relief to property stocks. Chinese officials ordered second-tier banks to extend another USD 56 billion in loans to developers, according to Bloomberg.
COVID cases surge, but travel restrictions ease
A surge in COVID cases, with the number of daily cases reaching above 10,000 for the first time in over a year, threatened further lockdowns and appeared to weigh on sentiment for much of the week. The rise in infection was broad-based and included Henan province, where Foxconn’s iPhone assembly plant was kept open but placed in a “closed loop,” with workers living on-site, according to Reuters.
Nevertheless, Friday’s rally also seemed to have been helped by a relaxation in China’s strict “zero-COVID” policy. Reports had surfaced over the previous week that the government was preparing to ease travel restrictions and other measures following the recent reelection of President Xi Jinping. Although Chinese officials stated that the policy remained firmly in place, the government announced on Friday afternoon reductions in the mandatory quarantine time for in-bound travelers as well as testing requirements.
Exports fall for first time in two years
The week’s economic reports were limited but demonstrated the toll that lockdowns and slowing global demand have taken on China’s economy. Exports fell 0.3% in October, well below the 4.3% increase that analysts polled by Reuters had predicted and the first drop since early in the pandemic. Imports also fell 0.7% as weakening domestic demand compensated for increases in purchases of most commodities.
In a hopeful sign of easing global inflationary pressures, Chinese producer prices fell 1.3% in October, their first decline in nearly two years. Global shipping costs have also plummeted over the past year, with container rates for shipments from the Far East to the U.S. West Coast falling nearly 88% since March, according to freight analytics firm Xeneta
Other Key Markets
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about 2.5%. The equity market was lifted this week, in part by news that inflation for October (0.5% month over month; 12.8% year over year) was weaker than expected.
According to an initial analysis from T. Rowe Price emerging markets sovereign analyst Aaron Gifford, most of the disinflation (a slowing in the rate of rising prices) seemed to stem from things like house furnishings and clothing. In contrast, services such as restaurants and hotels, recreation, and transportation are still pressing inflation higher. Nevertheless, he believes that central bank officials will be pleased with the latest data, as their preferred measure of inflation, which excludes volatile components of the headline number, rose only 0.1% month over month. Gifford also believes that Chilean inflation and interest rates may have reached their cyclical peaks.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -5.2%.
Brazilian assets struggled amid news that headline inflation for October was higher than expected. More significantly, investors reacted unfavorably to heightened fiscal and economic uncertainty stemming from actions and comments from President-elect Luiz Inácio Lula da Silva.
For example, Lula has yet to announce who will be members of his cabinet. As reported by Reuters, he will “start to consider ministerial appointments” when he returns from a UN Climate Change Conference held in Egypt from November 6–18.
Reuters also reported that Lula’s advisors and members of his transition team are in talks with legislators about the possibility of increasing government spending in the 2023 budget that is excluded from a mandatory spending cap intended to keep such spending in line with inflation. According to T. Rowe Price sovereign analyst Richard Hall, many view Lula’s decision to hold budget negotiations before choosing a finance minister as a seriously flawed process.
Finally, Lula’s rhetoric is raising worries for some about an erosion of fiscal discipline and structurally higher inflation during his administration, which begins on January 1, 2023. As reported by Reuters, Lula believes that many government expenditures should be considered “investments.” Lula has also questioned why Brazil tries to adhere to inflation targets, as opposed to growth targets.
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