U.S.

Stocks end mostly lower as value outperforms

The major indexes were mostly lower this week, as third-quarter earnings reporting season began in earnest and investors weighed inflation data and their implications for Federal Reserve policy. By the end of the week, the S&P 500 Index had surrendered nearly half of its gains since its March 2020 bottom. Within the index, the typically defensive health care and consumer staples sectors outperformed, while consumer discretionary and communication services shares lagged, dragged lower by heavily weighted Amazon.com, Tesla, and Meta Platforms (parent of Facebook). Likewise, slower-growing value stocks handily outperformed their growth counterparts.

Stocks saw their biggest move on Thursday, with a sharp early drop followed by a 5.5% surge to the upside in the S&P 500 Index, marking its largest intraday move since March 25, 2020. The bond market was closed Monday in observance of Indigenous Peoples Day (previously known as Columbus Day).

Even as the week brought the release of the first major third-quarter corporate earnings reports, all eyes seemed to remain on the macroeconomic environment, particularly inflation. Futures fell before the start of trading on Wednesday, after the Labor Department reported that producer prices rose 0.4% in September, double consensus expectations for around a 0.2% increase. On a year-over-year basis, prices rose 8.5%, a tick above expectations but still the third straight monthly decline and well below March’s peak of 11.7%.

T. Rowe Price traders noted that the market response was rather benign, however, which may have been due in part to core (less food and energy) prices coming in roughly in line with expectations. Core prices rose 0.3% in September, and the year-over-year gain stayed at a one-year low of 7.2%, slightly below consensus expectations.

Core consumer price index (CPI) inflation at four-decade high

Unfortunately, Thursday’s CPI inflation data showed that lower wholesale prices were not yet filtering down in a significant way to consumers—the trend was, in fact, in the wrong direction. Core consumer prices rose 6.6% on a year-over-year basis in September. This was more than expected, above the previous March peak, and the fastest pace in four decades. Stocks fell sharply on the news but quickly rebounded, which T. Rowe Price traders attributed mostly to a general sense that negative sentiment had reached extreme levels as well as to technical factors, such as the recent build-up in put options, which give the holder the right to sell at a specific price. 

If there was a silver lining to the report, it was that the price increases were mostly concentrated in medical services, transportation, and housing. Shelter prices climbed 0.7% in September, accounting for 40% of the rise in the core index, but many observers expect the rapidly cooling housing market to eventually spill over into the Labor Department’s calculation of owner-equivalent rents and the rental market itself. 

Two-year U.S. Treasury note yield reaches 4.5%

The Treasury yields rose over the week, with the 10-year U.S. Treasury note yield moving above 4.0%, while the two-year yield hit 4.5%, its highest level since 2007. (Bond prices and yields move in opposite directions.) Yields broadly surged Thursday morning following the consumer inflation data release. According to our traders, industrywide outflows continued to impede the municipal bond market, but they observed strong demand for primary deals, including a bond issue for the New Jersey Turnpike.

In the investment-grade corporate bond market, banking sector bonds were notable detractors. Investment-grade corporates initially weakened on the consumer inflation data before rallying alongside strength in the equity market. Primary issuance was muted as no new deals were brought to market. Likewise, the high yield bond market was initially weaker following the CPI print but then recovered along with broader risk markets. Our traders noted that technical factors contributed to the high yield market’s recovery, and investors’ focus will now likely shift to corporate earnings. The bank loan market’s performance was bifurcated, with higher-quality loans holding up fairly well while lower-quality issues received limited support.

U.S. Stocks

^{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 were little changed after suffering a sharp pullback in the week prior. In local currency terms, the pan-European STOXX Europe 600 Index ended slightly lower. Major indexes on the Continent rose. Germany’s DAX Index advanced 1.34%, France’s CAC 40 Index gained 1.11%, and Italy’s FTSE MIB Index tacked on 0.14%. However, the UK’s FTSE 100 Index lost 1.89%.

European government bonds capped a volatile week of trading, with the yield on Germany's 10-year government debt falling from more than 11-year highs hit earlier this week. However, higher-than-expected U.S. CPI data kept yields in a range, with French and Italian sovereign bond yields enduring a roller-coaster ride. In the UK, yields on 10-year gilts retreated from near 14-year highs after the government reversed some of the controversial fiscal policy changes it announced in late September.

Some ECB policymakers grow more cautious

European Central Bank (ECB) Governing Council member Pablo Hernandez de Cos, governor of the Bank of Spain, said some shocks in the ECB's downside scenario appear to have materialized, indicating that the economy could soon contract. ECB Vice President  Luis de Guindos reportedly said that the central bank is prepared for a possible technical recession (two consecutive quarters of negative growth) accompanied by high inflation. Meanwhile, Austria’s central bank governor, Robert Holzmann, appeared to strike a less hawkish stance. He said that the bank needs to hike interest rates by only 1.25 percentage points by year-end to get close to neutral, or the rate at which monetary policy neither stimulates nor impedes growth. Some policymakers, including ECB President Christine Lagarde, have indicated that rates might have to keep rising into next year.

UK economy shrinks, labor market tightens

The UK economy unexpectedly shrank 0.3% sequentially in August due to a fall in industrial output. Meanwhile, the labor market tightened further. The unemployment rate fell to 3.5% in the three months through August, the lowest level since 1974, as the number of economically inactive people (those neither working nor seeking a job) jumped by a record amount. Wages, including bonuses, rose 6.0% year over year.

Continued fallout in the UK prompted the government to significantly alter its proposed tax plan. Prime Minister Liz Truss replaced Kwasi Kwarteng as chancellor of the exchequer, appointing Jeremy Hunt, a former health and foreign secretary. She also reversed a key proposal to scrap the increase in corporation tax, having earlier bowed to pressure to keep the top income tax rate of 45 pence per pound.

Eurozone industrial output rebounds; Germany cuts growth forecast

Industrial production in the eurozone climbed 1.5% sequentially in August—much more than forecast and partially reversing a 2.3% monthly drop in July. Industrial output in France and Italy rose sharply but fell in Germany. The trade deficit, meanwhile, swelled for a 10th consecutive month in August to almost EUR 51 billion, up from EUR 34 billion in July, due to the higher cost of energy imports.

The German government slashed its economic forecasts for the next two years because of price increases, energy shortfalls, and supply chain disruptions caused by Russia’s invasion of Ukraine. Output this year is now expected to be 1.4%, down from the previously projected rate of 2.2%. The forecast calls for gross domestic product to shrink 0.4% in 2023.

Japan

Markets recover after difficult week

Japanese equity markets started the shortened week trending sharply lower as traders returned from the long weekend on Tuesday. Fears around hawkish signals from the U.S. Federal Reserve, as well as a weak currency that has, so far, failed to respond to government intervention measures, undermined sentiment for much of the week.

Only on Friday did Japanese stocks snap a four-day losing streak, soaring in response to a remarkable Thursday turnaround in the U.S., where equity markets closed sharply higher despite higher-than-expected U.S. inflation numbers. The Nikkei average jumped 3.3% on Friday to finish the week essentially flat at 27,091, while the broader TOPIX index rose 2.4%, to also finish essentially even at 1,898.

Focus on U.S. signals

While U.S. news was a key driver, Japanese markets also digested local data releases. A survey released midweek showed business confidence among big manufacturers fell for a second straight month to its lowest level in five months. However, this disappointment was followed by data showing that Japanese corporate goods prices grew the most in five months in September, according to the Bank of Japan.

The yen’s struggle against a soaring U.S. dollar continues

In the currency market, hawkish Fed rhetoric saw the yen weaken further against the greenback. Finance Minister Shunichi Suzuki said that the government is ready to respond to excessive currency volatility as the dollar/yen exchange rate rose above 146, touching a 32-year low for the Japan currency. In the fixed income market, the yield on Japan's 10-year government bond briefly rose to 0.255% during the week, before dipping to 0.254% in late trading on Friday.

China

China’s stock markets rose after the weeklong National Day Holiday, lifted by supportive central bank comments and anticipation of policy signals during the Communist Party Congress, a twice-a-decade gathering of the country’s political elite that began on Sunday. The broad, capitalization-weighted Shanghai Composite Index added 2.07% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, gained 1.32% from the pre-holiday closing levels, Reuters reported.

The People’s Bank of China (PBOC) will focus on supporting infrastructure construction and enabling quicker delivery of home projects, according to PBOC Governor Yi Gang. The central bank will also step up the implementation of prudent monetary policy and provide stronger support for the real economy, he added.

The yuan, which fell to a near 28-month low in September, traded at 7.191 per U.S. dollar late on Friday after hitting a two-week low on Thursday, when U.S. inflation data stoked concerns of more outsized rate hikes. The yuan has lost more than 10% against the dollar this year and is on track for its biggest annual loss since 1994, when China unified its official and market rates, according to Reuters.

The yield on the 10-year Chinese government bond fell to 2.719% from September’s close of 2.776%, according to Dow Jones, after September inflation data came in slightly lower than forecast. The benign readings spurred hopes of supportive monetary policy from the PBOC to bolster the economy.

In economic news, China reported that tourism revenue during the weeklong National Day break, typically a peak period for travel and consumption, fell 26% from a year ago and was equal to 44% of the revenue in 2019 as coronavirus restrictions led many people to stay close to home.

Last week, the state-run newspaper People’s Daily stated in a commentary that China must stick to zero-COVID because the policy is key to stabilizing the economy and protecting lives. The commentary dampened hopes that Beijing would relax the country’s zero-tolerance approach to the coronavirus anytime soon, despite its impact on China’s economy.

Other Key Markets

Chile

Chilean stocks, as measured by the S&P IPSA Index, returned about -2.2%. On Wednesday, Chile’s central bank held its scheduled monetary policy meeting and increased its key interest rate by 50 basis points (one-half of one percentage point, or 0.50%), from 10.75% to 11.25%. The vote among policymakers was unanimous.

According to the post-meeting statement, Chile’s rate-hiking cycle seems to be over. Policymakers estimate that “the monetary policy rate has reached its maximum level of the cycle that began in July 2021, and that it will remain there for as long as necessary to ensure the convergence of inflation” to the central bank’s 3% target over a two-year policy horizon. Policymakers also noted that Chile’s financial markets have “mirrored the recent global trends,” such as heightened volatility, rising long-term interest rates, and a weaker currency versus the U.S. dollar. In addition, they noted other negatives for the economy, including a continued deceleration in bank credit and “stagnant” job creation with vacancies continuing to decline.

Peru

Late the previous week, Peru’s central bank raised its key interest rate by 25 basis points (0.25%), from 6.75% to 7.00%, as was widely expected. This rate increase matched the size of the central bank’s previous rate hike, which represented a downshift from 50-basis-point rate increases.

According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement was neutral. While year-over-year inflation for September increased marginally, inflation expectations 12 months ahead continued to decrease despite still being well above the central bank’s 1% to 3% inflation target. With regard to economic growth, policymakers noted that economic activity picked up in September, but they concluded that the majority of economic indicators are still in pessimistic territory.

In terms of forward guidance, central bank officials asserted that their policy actions will be data dependent. However, Gifford notes that policymakers referred to their latest monetary policy action as an “adjustment” rather than a “normalization.” He believes that board members may see the tightening process as nearly complete, which would be consistent with the smaller magnitude of rate increases following the last two policy meetings.