Global Markets Weekly Update: October 07, 2022
U.S.
Stocks end the week higher after giving back most of their earlier gains
Stocks ended higher for the first time in four weeks but surrendered most of their gains, as some data suggested that the economy was not slowing enough to satisfy Federal Reserve policymakers. Energy was the standout performer in the S&P 500 Index as oil prices surged following a decision by major exporters to cut global production. T. Rowe Price traders noted that volumes were muted as investors awaited the start of earnings season and some observed the Yom Kippur holiday.
Stocks bounce by most since 2020 to start the week
Stocks bounced off nearly two-year lows on Monday and Tuesday, with the S&P 500 rising 5.6%, its best two-day move since 2020 and the third-best start to an October since 1930. Our traders noted that some downside surprises in economic reports also boosted sentiment by raising hopes that the Fed might slow its rate hikes to tamp down on inflationary pressures. The Institute for Supply Management’s (ISM) gauge of manufacturing activity fell to 50.9 in September (levels under 50 indicate contraction), below consensus expectations and its lowest level since 2020.
Encouragingly, the ISM reported that price pressures facing manufacturers fell to their lowest level since soon after the start of the pandemic, while nonmanufacturing prices rose at the slowest pace since January 2021. Further calming inflation fears, job openings fell to their lowest level in over a year. A smaller-than-expected rate hike from the Australian central bank may have also boosted sentiment.
Inflation fears resurface following OPEC move; jobs data
Inflation worries seemed to resurface somewhat after the so-called OPEC+ group of oil exporters announced a 2 million-barrel per day cut in target production on Wednesday. Although many observers expect the actual cutback will be smaller, the benchmark price for a barrel of domestic oil rose by roughly USD 10 over the week, crossing the USD 90 mark for the first time since late August.
Signs of labor market strength also seemed to deepen inflation fears. On Friday, the Labor Department reported that the economy had added 263,000 jobs in September, while the unemployment rate had fallen back to multiyear lows of 3.5%. More concerning may have been a surprise drop in the participation rate, to 62.3%, indicating that competition for available workers would remain intense. Nevertheless, the increase in wages appeared to be slowing, with average hourly earnings continuing to decline on a year-over-year basis to 5%, compared with March’s peak of 5.6%.
Munis see strong demand
U.S. Treasury yields increased Friday morning after the nonfarm payrolls data, reversing their decline earlier in the week on the decline in job openings and the Australian central bank’s decision to raise rates by 0.25% instead of 0.50%. (Bond prices and yields move in opposite directions.) The broad municipal bond market rallied through most of the week and meaningfully outperformed Treasuries. A light issuance calendar helped the tax-exempt market’s technical backdrop, and our traders reported that primary market offerings—including New York City and California general obligation deals—were met with strong demand. Our traders also observed a concentration of retail investors at the short end of the market, while institutional buyers were evident in longer-maturity segments.
Our traders observed the positive impacts of a rebound in risk sentiment on investment-grade corporate bonds as they tracked equities and other risk assets higher. While the rally moderated around midweek alongside the rise in Treasury yields, credit spreads of investment-grade corporates tightened week over week. Technical conditions provided additional support as new issuance was relatively subdued.
According to our traders, the broad risk rally as buyers stepped in after a weak close to September bolstered the performance of leveraged loans. Collateralized loan obligation buyers were more active, as were retail investors, who seemed to be mostly focused on higher-quality loans. Our traders noted that the prevailing thought seems to be that the new issue calendar will remain light until we see some prolonged stability as issuers appear unwilling to bring new deals to the market in the current environment.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
29,296.79 |
571.28 |
-19.38% |
S&P 500 |
3,639.66 |
54.04 |
-23.64% |
Nasdaq Composite |
10,652.40 |
76.78 |
-31.91% |
S&P MidCap 400 |
2,266.90 |
63.37 |
-20.24% |
Russell 2000 |
1,702.15 |
37.44 |
-24.19% |
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 gained ground, following global peers, on hopes that central banks might start scaling back interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.98% higher. Major indexes also climbed. France’s CAC 40 Index put on 1.82%, Germany’s DAX Index added 1.31%, and Italy’s FTSE MIB Index advanced 1.22%. The UK’s FTSE 100 Index added 1.41%.
Germany's 10-year government bond yields headed back toward recent highs, as minutes of the European Central Bank’s (ECB) September meeting showed policymakers are increasingly worried about high inflation, potentially paving the way for another large rate hike in October. Yields rose broadly in the eurozone. French, Spanish, and Italian sovereign bond yields climbed from the week's lows after data showed that eurozone inflation accelerated to 10% last month. In the UK, yields on 10-year gilts climbed after Fitch Ratings cut the UK's credit outlook to negative following a similar move by Standard & Poor’s last week.
ECB minutes show rising worries about inflation
The minutes from the ECB’s September monetary policy meeting showed relatively clear-cut support for aggressive action due to rising concerns about high inflation becoming entrenched. Some policymakers initially backed increasing a key interest rate by 0.50%, but, after discussion, a “very large” number favored taking it up 0.75%. Some rate-setters backed a more modest move because the looming risk of recession might mitigate inflationary pressure and be sufficient to return inflation to target. However, others argued that policy would remain expansionary even after a 0.75% hike and that this larger move would be a major step to frontload the transition from the prevailing highly accommodative policy and ensure a timely return of inflation back to target. Chief Economist Philip Lane, who has a track record of being dovish, proposed the larger move and indicated that further rate rises would be needed. Eurozone inflation accelerated to 10% in September.
Eurozone price pressures intensify; data show deeper German slowdown
A higher-than-forecast jump in eurozone producer prices in August highlighted the upside risk to headline inflation. Factory gate prices rose 5.0% sequentially and 43.3% year over year, mainly driven by surging energy costs. Price pressures continued to mount in September, the final version of S&P Global's survey of manufacturing and services purchasing managers’ indexes (PMIs) showed. Both the composite input and output price indexes accelerated higher, with companies opting to pass on rising costs to customers. In addition, a growing number of German companies were planning to raise prices, according to the Ifo Institute.
Weaker-than-expected industrial output and retail sales for August suggested that the economic slowdown in Germany could be deepening.
Japan
Equities rebound
Following a rough September for Asian markets, the first full week in October saw a solid bounce, with Japanese equities finishing the week notably higher. The Nikkei average finished back above the 27,000 level at 27,116 (+4.55%), while the broader TOPIX climbed above 1,900 to finish at 1,907 (+3.86%).
The week started positively amid hopes for a dovish pivot from the U.S. Federal Reserve. Tuesday saw the largest single-day increase in Japanese shares since March 10, as confident investors sought bargains in beaten-down heavyweights and growth stocks. Despite the week’s strong gains, however, the market finished on a downbeat note, with Japanese equities ending lower on Friday, snapping a four-day winning streak. Solid private payrolls and services sector data from the U.S. released on Thursday dampened hopes for a policy pivot, while confidence was also undermined by hawkish comments from U.S. Fed officials on Friday.
Yen remains a key focus
The yen rallied midweek, briefly strengthening to high JPY 143 levels against the U.S. dollar. However, this proved to be short-lived, and by the end of the week, the yen was back trading in the high JPY 144 range and testing JPY 145 versus the U.S. dollar. This was on the back of a strengthening U.S. dollar after comments from Fed officials backing further rate rises.
Meanwhile, Japan’s Ministry of Finance announced that Japan's foreign reserves fell by a record USD 54 billion to USD 1.238 trillion at the end of September, as reported by Kyodo News. This was a result of the government's dollar-selling intervention, a move specifically aimed at arresting the yen’s steep decline.
In the bond market, the yield on Japan's 10-year government bond dipped sharply midweek, falling to 0.210% as U.S. Treasuries strengthened. However, yields rallied late in the week, briefly moving above the Bank of Japan’s 0.25% curve control tolerance level before settling around 0.245%.
A mixed inflation picture
Core consumer prices in Tokyo rose 2.8% in September for the year-over-year period, the biggest gain since 2014. However, data released on Friday also showed that Japanese households cut back on spending for a second month in August, as rising living costs weighed on consumers’ budgets. August household spending rose 5.1% year over year, but this was down from July and well short of the forecast 6.7%. Separate data on Friday also showed that Japanese real wages fell for a fifth straight month in August. The plunge in the yen has lifted consumer prices significantly, outstripping modest pay growth.
Expansion in manufacturing and services
In other economic news, Japan’s services sector climbed into expansion territory in September, the latest survey from Jibun Bank revealed, with a PMI score of 52.2. That was up from 49.5 in August, and above the 50 mark separating expansion from contraction. The survey also recently showed that the composite index (manufacturing and services) improved to 51.0 from 49.4 in August.
China
China’s stock markets were shut for the National Day holiday from October 1 to October 7, otherwise known as Golden Week. The weeklong break followed a risk-off September for Chinese assets as foreign investors sold off Chinese stocks and bonds and pushed the offshore yuan to a record low against the U.S. dollar at month-end. The onshore yuan exchange rate ended September near levels not seen since the 2008 global financial crisis, according to Bloomberg.
Investors sold USD 1.4 billion in Chinese bonds and USD 700 million in stocks in September, according to the Institute of International Finance, in response to the country’s weakening outlook made worse by Beijing’s zero-tolerance approach to the coronavirus. China reported the highest number of new infections in about a month, driven by people traveling over the holiday, sparking a fresh round of lockdowns in several cities. China’s finance ministry has said it will issue an additional CNY 5.5 billion (USD 773.18 million) worth of yuan-denominated sovereign bonds in Hong Kong on October 12.
Beijing has stepped up measures to support the country’s debt-laden property sector ahead of China’s Communist Party congress, which is slated to start October 16 and last about one week. Chinese President Xi Jinping is widely assumed to secure an unprecedented third term at the twice-a-decade gathering, which analysts will parse for clues about China’s future leadership and policy direction, including a possible relaxation of the government’s zero-COVID policy.
In Hong Kong trading, China property stocks rose on reports that mainland financial regulators instructed the largest state-owned banks to extend at least CNY 600 billion (USD 85 billion) of net financing to the embattled property sector in the coming months.
China’s foreign exchange reserves fell to USD 3.029 trillion at the end of September from USD 3.055 trillion at the end of August. September’s decline marked the third month of losses for China’s foreign exchange reserves, the world’s largest, bringing it closer to the psychologically important USD 3 trillion threshold.
Other Key Markets
Poland
Early in the week, S&P Global reported that a manufacturing PMI reading for Poland in September was 43.0. This was higher than expected, and higher than the PMI reading of 40.9 for August, but still indicating rapid contraction in the manufacturing sector. According to T. Rowe Price analyst Ivan Morozov, all three of the major Central and Eastern European economies—Poland, Hungary, and the Czech Republic—have manufacturing PMIs below 50 and are experiencing a significant slowdown in economic activity.
Morozov believes that it is too soon to conclude that these three economies will fall into a recession, as a large part of their growth is generated by domestic demand, which remains steady. However, Poland’s central bank seems to have taken a cautious approach on Wednesday by holding its key interest rate steady at 6.75%, despite year-over-year inflation of about 17%. This surprised many investors who expected policymakers to authorize a 25-basis-point rate increase, as they did in early September.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 5.6%.
Brazilian assets rallied this week following the results of the general election on Sunday and the first round of the presidential election. Although former President and Workers’ Party candidate Luiz Inácio Lula da Silva won 48.4% of the votes and surpassed incumbent President Jair Bolsonaro (who won 43.2% of the votes), the latter performed better than recent polls suggested he would. In addition, because neither candidate received more than 50% of the votes, they will face each other in a runoff election on October 30—though Lula, at present, seems to have an advantage. Given the clear division among Brazilians, Lula would likely need to moderate his agenda and policies to govern effectively if he wins the second round.
The makeup of the new Congress could be the biggest surprise following the elections. Bolsonaro’s center-right Liberal Party will be the biggest party in both the House and Senate; coupled with his current right-leaning coalition partners, they could be very close to having a simple majority in both houses. So Lula, if elected, could be facing an opposition-controlled Congress, which would be a major constraint on policy in his administration.
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