Global Markets Weekly Update: October 21, 2022
U.S.
Stocks regain upward momentum
Stocks recorded strong gains, as investors appeared to react to some prominent earnings reports and hints that the Federal Reserve might moderate its pace of interest rate hikes. The S&P 500 Index enjoyed its best weekly gain in nearly four months, while the Dow Jones Industrial Average marked its third consecutive week of gains. Energy shares outperformed within the S&P 500, as oil prices proved resilient despite the announcement of a release from the U.S. Strategic Petroleum Reserve. The small real estate sector lagged. Trading remained active and volatile, which T. Rowe Price traders attributed in part to the expiration of USD 2 trillion in options contracts on Friday.
The week started off on a strong note, which our traders partly chalked up to a reversal in the UK government’s fiscal stimulus plans (see below). They also noted that investors appeared to be climbing the proverbial “wall of worry” after the previous Friday’s steep decline and a perceived surplus of short positions taken by hedge funds. Better-than-expected quarterly results, guidance, and buybacks from Goldman Sachs and Lockheed Martin also seemed to provide a broad boost to sentiment.
Some Fed officials warn of higher rates for longer, but others urge caution
More tough talk from Fed officials appeared to cause a pullback at midweek. On Tuesday afternoon, Minneapolis Fed Bank President Neel Kashkari said in a speech that “if we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping [rate hikes] at 4.5%, or 4.75% or something like that.” Futures markets reacted by pricing in the federal funds rate nearing 5% by the Fed’s March 2023 meeting and remaining at that level into the second half of next year.
Friday morning, however, stocks bounced after The Wall Street Journal reported that “some officials have begun signaling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy.” In particular, the paper cited recent warnings from Kansas City Fed President Esther George that “a series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points.” The journalist behind the story, Nick Timiraos, has earned the reputation of “Fed whisperer” for accurate advance reporting of previous changes in Fed policy.
Homebuilder sentiment falls to lowest level in a decade
The week’s economic calendar offered mixed evidence on how deeply the Fed’s rate hikes are cutting into growth. Our traders reported that the weak housing market was a focus in Wednesday’s pullback following sharp declines in mortgage applications and housing starts, along with analysts’ downgrades of home supply stores Home Depot and Lowe’s. An index of homebuilder sentiment also fell more than expected and hit a 10-year low. On the other hand, manufacturing production rose more than expected in September (up 0.4%), and jobless claims for the week ended October 15 fell much more than anticipated to their lowest level since late September.
Ten-year U.S. Treasury note yield hits 14-year high
The hawkish Fed comments pushed the yield on the benchmark 10-year U.S. Treasury note to a 14-year high of 4.33% on Friday morning. (Bond prices and yields move in opposite directions.) Municipal bonds produced modestly negative returns over most of the week as rising U.S. Treasury yields and a heavier-than-average new issue calendar presented headwinds for the asset class.
Investment-grade corporate bonds performed well at the start of the week alongside a move higher in equity futures, although our traders noted that expectations of an active primary calendar limited positive momentum. While this expected uptick in supply did not fully materialize, moves lower in the equity market and hawkish Fed rhetoric weighed on the asset class later in the week. Our traders also observed swift reactions to earnings releases and noted that fundamentals were still a driving force.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
31,082.56 |
1447.73 |
-14.46% |
S&P 500 |
3,752.75 |
169.68 |
-21.26% |
Nasdaq Composite |
10,859.72 |
538.33 |
-30.59% |
S&P MidCap 400 |
2,312.21 |
66.99 |
-18.64% |
Russell 2000 |
1,742.24 |
59.84 |
-22.41% |
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 the resignation of UK Prime Minister Liz Truss and the scrapping of her fiscal policies. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.27% higher. The main stock indexes rose as well. France’s CAC 40 Index gained 1.74%, Germany’s DAX Index advanced 2.36%, and Italy’s FTSE MIB Index climbed 3.04%. The UK’s FTSE 100 Index added 1.62%.
European government bond yields climbed ahead of a European Central Bank meeting that is expected to result in another 0.75-percentage-point increase in interest rates. Yields on Germany's 10-year debt rose to their highest levels in more than a decade. In the UK, the 10-year gilt yields surged above 4% in another volatile week of trading amid political uncertainty and data indicating that inflation jumped to a 40-year high in September. In addition, the Bank of England (BoE) confirmed it will begin selling bonds on November 1 that it accumulated under its quantitative easing program.
UK PM Truss resigns after short-lived government collapses
Political and economic confusion deepened in Britain as Truss resigned after 45 tumultuous days in office, making her the shortest-serving prime minister. Her government collapsed in the wake of the market turmoil sparked by her proposals to slash taxes and boost borrowing and spending. Conservative Members of Parliament—not the entire party membership—will hold a vote on a new leader on October 28. Still, Chancellor of the Exchequer Jeremy Hunt pressed on with a new budget due October 31 that will seek to undo most of Truss’s tax pledges and cut spending to plug a GBP 40 billion hole in the public finances.
UK inflation jumps, shoppers cut spending, confidence at record low
A surge in food prices reignited an acceleration of UK inflation in September. The consumer price index rose 10.1% year over year—matching July’s 40-year high—an acceleration from the 9.9% inflation rate registered in August. Core inflation, which excludes food and energy prices, also climbed, hitting a 30-year high of 6.5%. British shoppers cut their spending that month as well. Retail sales volumes dropped 1.4% in September from August. A sharp fall in fuel sales and a bank holiday marking Queen Elizabeth II’s funeral drove the decline. Meanwhile, GFK’s consumer confidence index, a closely watched measure of how people view their finances and economic prospects, plumbed 50-year lows in October.
German producer prices surge again, investor sentiment struggles near lows
German producer prices in September climbed 2.3% sequentially and 45.8% year over year, as energy prices continued to soar. Metals, intermediate goods, capital goods, durable, and non-durable goods also recorded significant price increases. Meanwhile, investor sentiment in Germany ticked up in October from near record lows, a survey by the ZEW economic research institute showed. Pessimism about current conditions increased markedly, however, as the economic outlook deteriorated further.
Japan
Recession concerns sap investor confidence
Japanese equities ended a choppy week of trading lower than they began as global recessionary fears and further currency weakness remained prevalent themes. Despite a solid midweek rally, as investors picked up battered stocks at knockdown prices following recent market weakness, the benchmark Nikkei 225 ended the week 0.7% lower at 26,891, while the broader TOPIX index fell 0.8% to 1,882. U.S. inflation data released the previous week seemed to hit Japan’s markets with delayed impact, amid growing expectations that the Federal Reserve could announce another 75-basis-point hike in interest rates at its November meeting.
Pressure on yen and yields
Yen weakness was again in the spotlight after moving above the 150 level versus the U.S. dollar, a 32-year low. By Friday’s close, further dollar strength saw the yen testing 151 territory (150.9 USD/JPY). Amid some expectations this level would trigger a meaningful policy response, Finance Minister Shun’ichi Suzuki merely reiterated that he is “ready to take decisive action” against the currency’s sharp moves.
In a move to curb rising bond yields, particularly at the longer end, the Bank of Japan initiated emergency bond-buying operations late in the week, purchasing bonds with maturities between 10 and 25 years on Thursday and Friday. The rising trend represents a further challenge to the central bank’s ultra-easy policy stance. The yield on Japan's 10-year benchmark bond traded above the 0.250% level late Friday.
Inflation hits three-decade high
Data late in the week showed that Japan’s core inflation, excluding the impact of tax hikes, hit 3% for the first time in over three decades. Meanwhile, Japan's largest labor organization, the Japanese Trade Union Conference, announced that it will seek the biggest pay raise for union members in nearly 30 years in response to high inflation.
China
China’s stock markets recorded a weekly loss after Beijing delayed releasing key economic data without explanation. The broad, capitalization-weighted Shanghai Composite Index eased 1.1%, and the blue chip CSI 300 Index (which tracks the largest listed companies in Shanghai and Shenzhen) slipped 2.6%, Reuters reported.
China’s statistics bureau announced last Monday that it would postpone releasing third-quarter gross domestic product (GDP) and other key indicators, including monthly readings of industrial production, fixed asset investment, and retail sales. The data were originally scheduled for release the next day. The bureau did not say when it would publish the data.
The delay raised speculation that the third-quarter GDP report would show that China’s economy was on track to miss the official growth target of around 5.5% this year and that officials sought to avoid any fallout from its release during the weeklong Communist Party congress, which began October 16. The twice-a-decade gathering of the country’s top leadership was expected to wrap up on October 23 and hand President Xi Jinping a third five-year term as party chief.
The onshore yuan fell to its weakest closing level against the U.S. dollar since the 2008 global financial crisis despite the efforts of state banks to support the currency. The onshore yuan closed Friday at 7.2494 per dollar, its lowest close since January 14, 2008, Reuters reported. The yuan and most other developed and emerging markets currencies have been pressured by the surging greenback as the Fed has aggressively hiked interest rates to fight inflation, while China’s central bank has been easing policy to support a slowing economy. Last week, the People’s Bank of China left its benchmark one-year and five-year loan prime rates steady.
Chinese technology shares retreated, pressured by reports that officials from the Ministry of Industry and Information Technology held emergency meetings with domestic chipmakers regarding the Biden administration’s recently announced restrictions on tech exports to China. The U.S. export curbs will likely have a chilling effect on U.S.-China relations over the long term and push both countries further down the path of decoupling, T. Rowe Price analysts believe.
Property developer shares advanced, aided by reports that the China Securities Regulatory Commission will allow certain companies with small property interests to raise money by selling domestic shares. The yield on the 10-year Chinese government bond rose to 2.75% from 2.719% the prior week, according to Dow Jones, tracking multiyear highs struck by U.S. Treasury yields.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about 8.5%. T. Rowe Price Sovereign Analyst Peter Botoucharov continues to see signs that the central bank and the government are coordinating their efforts to support President Erdogan’s “New Economic Program” and stimulate the economy ahead of elections in June 2023. For example, the central bank this week reduced its key interest rate, the one-week repo auction rate, by 150 basis points—from 12.0% to 10.5%—even though inflation was recently measured at a year-over-year rate exceeding 83%. The rate cut, which was larger than expected, follows on the heels of 100-basis-point rate cuts in August and September, and Botoucharov would not be surprised to see the central bank reduce rates further in November. Also, the government is pushing ahead with an estimated USD 50 billion state-subsidized social housing project for lower-income citizens. In addition, Botoucharov expects the government to mandate a substantial increase in the minimum wage, as well as civil servants’ salaries and pensions, as of the beginning of 2023.
Hungary
Late the previous week, in response to financial market turbulence and a weakening forint currency, Hungary’s central bank unexpectedly authorized an enormous increase in the overnight collateralized lending rate, from 15.5% to 25.0%. This interest rate is considered the upper limit of an interest rate “corridor” for the central bank base rate, which remained at 13.0%. The lower limit of the corridor is the overnight deposit rate, which remained at 12.5%.
According to a statement published on October 14, the central bank also decided to use some “targeted and temporary instruments” in an attempt to restore and maintain market stability. Specifically, the central bank’s Monetary Council decided to create a one-day foreign exchange swap instrument and begin daily overnight deposit quick tenders “at higher interest rate levels than before.” Policymakers asserted that these actions are “designed to ensure the rapid and flexible implementation of tighter monetary conditions.”
In addition, the central bank—recognizing Hungary’s precarious position as a major importer of Russian energy exports at a time when Russia and the European Union are attempting to cut each other off—is committing itself to “directly meeting major foreign currency liquidity needs arising from covering the energy import in the coming months.” Policymakers noted that Hungary’s current account situation—excluding energy—is positive, and they believe that this commitment “will have a substantial impact on the supply and demand conditions in the foreign exchange market.”
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