Global Markets Weekly Update: November 4, 2022
U.S.
Stocks sink on dashed hopes for a Fed pivot
Stocks fell after the Federal Reserve dashed market hopes for an impending pivot in monetary policy in the form of a pause or slower pace of rate hikes. The technology-heavy Nasdaq Composite Index was hit particularly hard as growth stocks declined more than value companies. The Dow Jones Industrial Average held up much better, extending its relative outperformance from October.
Tech stocks suffered as the fallout from a largely disappointing earnings season for bellwethers such as Facebook parent Meta Platforms, Amazon.com, and Microsoft continued. Late in the week, Amazon.com announced that it was pausing its corporate workforce hiring, further dampening sentiment. Although it is now a private company, the deep job cuts expected at Twitter under new owner Elon Musk added to the malaise of the tech sector.
Dovish Fed statement, hawkish press conference
Wednesday’s Federal Open Market Committee (FOMC) announcement and Fed Chair Jerome Powell’s post-meeting press conference were the focus of the week. Stocks were little changed until the release of the post-meeting statement, which T. Rowe Price traders noted is a typical pattern for an FOMC announcement day. As was widely expected, the committee said that it was raising rates by 75 basis points. (A basis point is 0.01 percentage points.) The statement referred to the FOMC taking cumulative policy tightening into account and being aware of the lagged effects of monetary policy, which markets took as a dovish signal, briefly pushing stocks higher.
However, Powell’s press conference took a hawkish turn. He said that the FOMC had revised its estimate of the terminal rate (the highest federal funds rate in the hiking cycle) up from its September projections, and he referred to the pace of hikes not being as important as the terminal rate or how long rates stay there. Notably, Powell stated that it is “very premature” to consider pausing rate hikes, and the S&P 500 Index finished the day down 2.50%.
Mixed picture of labor market in October
On Friday, stocks wavered after the October employment report painted a mixed picture of the labor market. The Labor Department report showed that employers added 261,000 jobs to nonfarm payrolls, above consensus estimates, and revised its September jobs figure higher. However, the unemployment rate rose to 3.7% from 3.5% in September as the labor force participation rate moved slightly lower.
Treasury yields increase
U.S. Treasury yields increased through most of the week, with short-term rates climbing more than yields on long-maturity bonds. The two-year U.S. Treasury note yield reached a 15-year high above 4.75% on Friday morning. Municipal bonds generated positive returns for most of the week, although municipal fund outflows industrywide continued to hold back market performance, according to our muni traders.
Early in the week, investment-grade corporate bonds benefited from hopes for a dovish pivot by the Fed. According to our traders, bonds in the banking and automotive sectors outperformed, and demand for longer-maturity debt was strong. However, investment-grade corporates traded lower after the FOMC meeting. High yield corporate bonds also fell after the Fed policy meeting, with bonds in the media, telecommunications, and mining sectors declining more than the broad high yield market.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,403.22 |
-458.58 |
-10.83% |
S&P 500 |
3,770.55 |
-130.51 |
-20.89% |
Nasdaq Composite |
10,475.25 |
-627.20 |
-33.04% |
S&P MidCap 400 |
2,405.74 |
-29.19 |
-15.35% |
Russell 2000 |
1,799.87 |
-47.05 |
-19.84% |
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 for a third week running, as central banks signaled that they may curb the pace of rate increases. Investor sentiment also received a boost from hopes that China might walk back its zero-COVID policies. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.51% higher. Germany’s DAX Index added 1.63%, France’s CAC 40 Index gained 2.29%, and Italy’s FTSE MIB Index advanced 3.34%. The UK’s FTSE 100 Index climbed 4.07%.
European government bond yields headed back toward 11-year highs after record inflation data for October kept pressure on the European Central Bank to raise interest rates aggressively. The moves were broad-based, with the yields on French, Italian, and Swiss sovereign bonds also rebounding from recent lows. In the UK, 10-year gilt yields climbed after the Bank of England (BoE) raised borrowing costs by a large amount (see below).
Eurozone inflation surges, growth slows
Year-over-year inflation in the eurozone accelerated by more than expected to 10.7% in October from 9.9% the previous month, fueled by higher energy prices. Food and imported industrial goods prices also rose sharply. The core rate, which excludes volatile food and energy prices, increased to 6.4% from 6.0%. Meanwhile, an early estimate showed gross domestic product growth expanded 0.2% in the third quarter, a slowdown from the 0.8% growth rate recorded in the April through June period.
BoE delivers largest rate hike in 30 years; Norway slows increases
The BoE increased its benchmark interest rate by 0.75 percentage point to 3%, the highest level since 2008, to contain inflation. BoE Governor Andrew Bailey said he would make no promises about future increases but signaled that borrowing costs may not rise by as much as the market expects. The BoE also warned that the UK faces a “very challenging” two-year slump and predicted that inflation would stay above 10% for the next six months and above 5% in 2023. Against this backdrop, the central bank forecasts that unemployment may rise to almost 6.5% by 2025.
Separately, Norway’s central bank raised its key interest rate by 0.25 percentage point to 2.50% and said it was likely to increase it again in December to curb inflation, which is running at 5.0%. The benchmark rate was increased by 0.5 percentage point at the central bank’s two previous meetings.
UK’s Hunt reportedly aims to raise more tax from dividends and oil and gas company profits
Speculation on the taxes that may be unveiled in the November 17 budget ran rife in the media this week. Newspapers and television channels cited unnamed government officials as saying that UK finance minister Jeremy Hunt is considering whether to raise taxes on dividend income and capital gains tax. Other options reportedly could include increasing a proposed windfall tax on oil and gas company profits to 30% from 25% and extending this levy to include electricity generators.
Japan
Equity market returns in Japan were positive for the week, with the Nikkei 225 Index gaining 0.35% and the broader TOPIX Index up 0.86%. Sentiment was supported by data showing expansion in Japan’s services sector in October and some speculation about China’s reopening. The U.S. Federal Reserve’s hawkish stance curbed gains somewhat.
The yield on the 10-year Japanese government bond rose to 0.25%, up from 0.23% at the end of the previous week. The Bank of Japan (BoJ) reiterated its commitment to ultra-loose monetary policy, but BoJ Governor Haruhiko Kuroda suggested that the central bank may reassess its policy of yield curve control with a view to fighting inflation. Should inflation continue to exceed the BoJ’s 2% target and wages rise, it could become necessary to tweak monetary policy, he added.
The yen weakened to around JPY 148.0 against the U.S. dollar, from about 147.5 the prior week. The currency has come under pressure due to the Fed’s monetary policy tightening. Authorities have intervened on several occasions to prop up the yen.
Services sector expands at a stronger rate
Japan’s services sector expanded at a stronger rate in October, according to fresh Purchasing Managers’ Index (PMI) data from au Jibun Bank. Activity levels were supported by the reopening of the domestic economy following the coronavirus pandemic. Service providers registered among the highest levels of confidence that prevailing demand conditions would continue. Price pressures continued to pose a headwind, however. Meanwhile, in the manufacturing sector, both output and new orders contracted.
Increasing trend seen in exports and industrial production
Minutes of the BoJ’s September Monetary Policy Meeting suggested that Japan’s economy had picked up as activity had resumed and public health had been protected from COVID-19, although rising commodity prices continued to have a negative effect. While supply side constraints have lessened, leading to an increasing trend in exports and industrial production, the outlook remains clouded by the slowdowns in overseas economies. There were some signs that private consumption had returned to a moderate upward path, with consumer confidence rising slightly month on month.
Government asks households and businesses to save electricity in winter
Prime Minister Fumio Kishida’s government made an electricity-saving request ahead of the onset of winter, asking households and businesses to cut consumption. Amid tight electricity supply, the government has asked for idle thermal power plants to be reactivated, as well as speeding up efforts to restart nuclear reactors.
China
China’s stock markets rallied amid speculation that the country was preparing to relax its zero-tolerance approach to the coronavirus. The broad, capitalization-weighted Shanghai Composite Index gained 5.3% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, advanced 6.4%, Reuters reported.
Several reports surfaced last week saying that China was preparing to retreat from the zero-COVID approach that has hurt the country’s economy. An unverified report widely circulated on social media stated that high-level officials met the prior weekend at the request of President Xi Jinping to discuss a conditional opening plan aimed at substantially opening by March 2023, Bloomberg reported. Separately, a report in a state-run newspaper stated that China must strive to control coronavirus outbreaks and “correct mistakes from overly strict measures that have caused damage to people's properties and lives.”
Signs of progress in a longstanding auditing dispute between the U.S. and China also bolstered sentiment. U.S. audit officials completed their first on-site inspection round of Chinese companies ahead of schedule, with dozens of accounting inspectors scheduled to leave Hong Kong over the weekend, Bloomberg reported. The news was seen as a positive development in the yearslong standoff over the audit inspections of publicly traded companies in the U.S. that threatened to kick off hundreds of Chinese companies listed on U.S. exchanges. However, the U.S. will likely take its time to file an initial report on its findings and could seek additional information from China, analysts believe.
Foreign investors quickened the pace of selling their Chinese bond holdings in September, the eighth consecutive month of outflows triggered by the weak yuan and U.S. monetary tightening, central bank data showed. The yield on the 10-year Chinese government bond rose to 2.721% last Friday from 2.691% a week earlier, according to Dow Jones.
In economic news, official PMI readings for manufacturing and non-manufacturing activity in October both missed forecasts and landed below 50, the level separating growth from contraction. The private Caixin PMI readings also remained in contractionary territory, although the manufacturing PMI rose slightly last month. Taken together, the data indicated the toll of China’s protracted coronavirus restrictions on the economy.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 3.4%. The market was closed for a holiday on Wednesday.
On Sunday, October 30, Brazil held the second round of the presidential election, featuring former president and Workers’ Party candidate Luiz Inácio Lula da Silva (Lula) versus incumbent President Jair Bolsonaro. Lula prevailed by a narrow margin, with 50.9% of the votes to the incumbent’s 49.1%.
In the immediate aftermath of the election, there were both political uncertainty and social disruption. Bolsonaro did not formally concede, though many of his allies, especially those that were elected to other positions, acknowledged Lula’s victory. Also, a number of highways in Brazil were being blocked by truckers and other Bolsonaro supporters protesting the election results, with Bolsonaro’s initial silence seen as a quiet endorsement of their actions.
Eventually, however, Bolsonaro gave a half-hearted speech in which he promised to follow the country’s constitution, though he did not explicitly concede to Lula. He also later called upon his supporters to stop blocking the roads, though the judiciary had already been responding to the situation aggressively, with the Supreme Court backing up the electoral authorities in ordering federal and state-level police to unblock the roads.
By the end of the week, Lula’s vice president-elect, Geraldo Alckmin, had met with and began working with Bolsonaro’s officials to facilitate a smooth power transfer to the incoming administration. Some economic and political uncertainty remains, however, as investors are waiting to learn Lula’s choices for key positions in his cabinet.
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about 0.5%. The market was closed for holidays on Monday and Tuesday.
On Wednesday, President Gabriel Boric unveiled his plans to reform Chile’s pension system. As was generally expected, the pension reform will create a mixed public/private system with three pillars: a basic guaranteed pension to be reinforced with new public funds generated from the forthcoming tax reform, the introduction of a pay-as-you-go social security pillar financed by employers, and private capitalized accounts to be funded with personal contributions.
One important detail, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, is that the government will disband the current private pension fund managers, known locally as AFPs. However, they could apply to become private investment managers that could manage the stock and flow of the private capitalized accounts. In addition, there will be a new state-run pension fund to compete with the private managers, with savers free to choose between the public or the private option.
While Gifford believes that the reform proposal is missing some important details, he generally believes that the proposal is sensible in that it should increase savings to finance current and future pensions at a much better replacement rate. Considering that President Boric lacks majorities in Congress, Gifford would not be surprised to see the reform proposal watered down somewhat as it passes through Congress. However, he believes Boric’s opponents are also on the hook to deliver a credible pension reform, so he doesn’t expect significant changes.
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