Global Markets Weekly Update: October 28, 2022
U.S.
Stocks manage gains even as mega-caps tumble
Stocks rose but offered widely divergent returns for the week, as investors reacted to a busy calendar of third-quarter earnings reports. Energy and other industrial economy stocks handily outperformed growth shares, with the latter weighed down by steep declines in several mega-cap technology and internet-related stocks, including Microsoft, Amazon.com, Alphabet (parent of Google), and especially Meta Platforms (parent of Facebook), following earnings misses and lowered outlooks. T. Rowe Price traders noted that the Cboe Volatility Index (VIX), widely considered Wall Street’s “fear gauge,” fell below its 50-day moving average on Wednesday—only the fourth time that has happened since February.
Sentiment gets a boost from across the border
Hopes that the Federal Reserve might slow its pace of rate increases seemed to be a driver of positive sentiment during the week. Our traders noted that stocks rose after the Bank of Canada’s unexpected decision on Wednesday to raise rates by only 0.50% instead of the 0.75% widely anticipated, leading to hopes that the Fed might follow its example. Worries that the Fed’s aggressive rate hikes and the consequent steep rise in the U.S. dollar might spark instability in the global financial system have led to speculation that the Fed might soon dial back its pace of rate hikes or even pause them.
The week’s economic data offered conflicting signals on how much room the Fed has to maneuver. S&P Global’s gauge of U.S. manufacturing activity fell into contraction territory for the first time since June 2020, while its service sector gauge also surprised on the downside and indicated an even sharper slowdown in activity. The Conference Board’s index of consumer confidence fell for the first time in three months, reflecting persistent inflation fears, but weekly jobless claims surprised on the downside.
Economy expands for the first time this year
The Commerce Department released its first estimate of gross domestic product (GDP) growth in the third quarter, which showed the economy expanding at an annualized rate of 2.6%, above consensus estimates of around 2.4% and the first positive reading this year. Resilient consumer spending and business investment, along with increased government outlays, helped offset a steep decline in residential investment—perhaps the first clear victim of the Fed’s rate hikes. Pending home sales fell 10.2% in September, their sharpest monthly drop since the early days of the pandemic.
A mid-week rally in Treasuries sent the benchmark 10-year U.S. Treasury note yield back below 4.00% before rising a bit on Friday. In addition to the Bank of Canada’s smaller-than-expected rate hike, our traders pointed to technical indicators as a catalyst for the rally. Despite the pullback in Treasury yields, the broad municipal bond market produced negative returns amid increased issuance and continued outflows industrywide. Our traders observed softness in the secondary market but noted that several new deals were oversubscribed and repriced to lower yields.
Risk-on sentiment helps corporate bonds
Investment-grade corporate bonds posted gains as risk assets rallied. Corporate credit spreads tightened, although our traders noted that spread movements were varied across issuers, with earnings releases and new issuance serving as drivers. The primary calendar was active throughout the week, with the level of new deals surpassing weekly expectations.
High yield bonds also traded higher as broader risk markets rallied. No new issues were announced, but our traders noted that the market is anticipating increased leveraged buyout activity given the recent stability. Conversely, leveraged loans were under pressure due to the slowdown in collateralized loan obligation formation—an important source of demand—and selling pressure on the retail side. Downgraded concerns weighed on the performance of lower-quality issues.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,861.80 |
1779.24 |
-9.57% |
S&P 500 |
3,901.06 |
148.31 |
-18.15% |
Nasdaq Composite |
11,102.45 |
242.73 |
-29.04% |
S&P MidCap 400 |
2,434.93 |
2261.34 |
-14.32% |
Russell 2000 |
1,846.92 |
104.68 |
-17.74% |
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 strongly on hopes that central banks might slow the pace of interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.65% higher. The main stock indexes also surged. Germany’s DAX Index advanced 4.03%, France’s CAC 40 Index added 3.94%, and Italy’s FTSE MIB Index climbed 4.46%. The UK’s FTSE 100 Index gained 1.12%.
European government bond yields softened across the board. The yield on Germany's 10-year government bond fell to a three-week low. Italian bond yields also retreated, with the 10-year yield falling to a five-week low. UK gilts enjoyed a week of calm amid hopes the new conservative government could offer more stability. Ten-year yields also slipped to a five-week low.
ECB hikes rates and hints increases may slow as recession looms
The European Central Bank (ECB) raised its key interest rates for a second consecutive time by 0.75 percentage point and said it may have to raise them further to curb inflation that is still “far too high.” The deposit rate now stands at 1.5%, its highest level since 2009.
However, markets reduced their bets on higher rates and the euro fell below parity against the U.S. dollar on hints in the policy statement that the ECB’s approach may have begun to shift and that the size of the next hike could be smaller. The central bank also noted that “substantial progress” had already been made in “withdrawing monetary policy accommodation,” while ECB President Christine Lagarde emphasized that a recession scenario was “looming much more on the horizon.”
Eurozone business activity contracts for fourth consecutive month
Business activity in the eurozone contracted for a fourth month running in October, indicating that the economy is likely entering a recession. An early reading of S&P Global’s composite purchasing managers’ index (PMI), a measure of activity in the private sector, dropped to a 23-month low of 47.1 from 48.1 in September. A PMI reading below 50 indicates a contraction.
Eurozone growth resilient, but inflation faster than predicted
Official early estimates showed Germany’s economy expanded unexpectedly in the third quarter, while growth slowed in France and Spain. German GDP increased by a seasonally adjusted 0.3% sequentially, compared with 0.1% in the previous quarter. In France, GDP grew 0.2%, compared with 0.5% in the second quarter. Spain's economy expanded 0.2% in the third quarter, a sharp slowdown from the 1.5% expansion registered in the preceding three-month period. Early estimates showed inflation in Germany, France, Spain, and Italy was higher than expected in October.
PMI shows UK falling into recession; Sunak elected PM
Business activity in the UK shrank for a third consecutive month in October. An early reading of S&P Global’s composite PMI dropped to a 21-month low of 47.2 from 49.1 in September.
Members of Parliament elected former UK finance minister Rishi Sunak as prime minister. Sunak replaces Liz Truss, who stepped down after a proposed change in fiscal policy resulted in financial market turmoil that eroded confidence in her administration.
Japan
Japanese equities finished higher for the week. The benchmark Nikkei 225 ended the week above the 27,000 mark—at 27,105—while the broader TOPIX index finished essentially flat at 1,899. Local markets rose early in the week, amid hopes that the U.S. central bank may adopt a less aggressive policy stance than previously anticipated. Late in the week, however, local markets lost some ground as investors digested domestic earnings reports and the announcement by Prime Minister Fumio Kishida of a JPY 71.6 trillion government economic stimulus package.
Yen recovers some ground
The yen started the week on a softer trend, despite signs that the government was ramping up its intervention strategy. Early Monday saw a sharp rally of almost 1.5%, coming on the back of a Friday surge that saw the yen soar the most against the U.S. dollar since March 2020. The currency meandered for most of the remaining week, finishing in the JPY146 range against the dollar.
Increase in bond purchases hits yields
On Wednesday, the Bank of Japan (BoJ) increased its purchases of Japanese government bonds (JGBs), adding a further JPY 100 billion in 10- to 25-year debt and JPY 50 billion in longer-dated purchases. This increase was not unexpected, but it nevertheless prompted sharp gains at the long end of the yield curve, where yields fell sharply to their lowest levels since mid-October. Meanwhile, benchmark 10-year JGBs also dipped sharply late in the week, finishing around 0.237%, having started the week at 0.251%.
Manufacturing continues to expand, while BoJ keeps rates unchanged
Japan’s manufacturing sector continued to expand in October, the latest PMI data released on Monday showed, registering a score of 50.7. While slightly down from September’s 50.8 reading, it remains above the 50 level that separates expansion from contraction. The services PMI also improved to 53.0 from 52.2, while the composite PMI rose to 51.7, up from 51.0 in September.
Notably, the Bank of Japan wrapped up its monetary policy meeting on Friday, announcing that it would hold interest rates at ultra-low levels (-0.1% for short-term rates, and 0% for 10-year government yields), as widely anticipated. However, it raised its target for core consumer inflation to 2.9% for the fiscal year ending March 2023 and 1.6% the following year.
In other reports, consumer prices in the Tokyo region, viewed as a key indicator of national trends, rose 3.5% year-over-year in October, exceeding expectations for an increase of 3.2%, and up from 2.8% in September. Core CPI, which excludes volatile food prices, climbed 3.4%, which also exceeded forecasts of 3.1%, and was up from 2.8% the previous month.
The Ministry of Internal Affairs and Communications also reported that the unemployment rate in Japan came in at a seasonally adjusted 2.6% in September, exceeding expectations for 2.5%. The workforce participation rate was 63.0%, again exceeding expectations of 62.9%.
China
China’s stock markets pulled back, as investor sentiment was dampened by new COVID-related lockdowns in several parts of China. Several Chinese cities doubled down on COVID-19 curbs after the country reported three straight days of more than 1,000 new cases nationwide. Data also showed that profits at China's industrial firms declined at a faster pace in September. The broad, capitalization-weighted Shanghai Composite Index fell 4.05%.
Reports emerged that major Chinese state-owned banks sold U.S. dollars in both onshore and offshore markets during the week after the yuan’s recent slide. The 10-year Chinese government bond yield fell to 2.691% from last week’s 2.75%, according to Dow Jones, amid growing expectations that global central banks may stall their aggressive rate-hike policies.
Growth Worries Rattle Investors
Growth worries rattled investors despite better-than-expected GDP data reported for the third quarter during. China’s economy expanded 3.9% in July-September from a year earlier, faster than the 0.4% growth in the second quarter.
Retail sales grew 2.5%, missing forecasts for a 3.3% increase and easing from August's 5.4% pace. Exports grew 5.7% from a year earlier in September, beating expectations but coming in at the slowest pace since April. Imports rose a feeble 0.3%, undershooting estimates for 1.0% growth.
After the closing of the Communist Party's 20th Congress, the People’s Bank of China and the State Administration of Foreign Exchange issued a joint statement that they would maintain the healthy development of stock and bond markets.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about -1.4%.
Reuters reported that leaders of Turkish banks have “raised concerns with authorities” that new rules requiring the banks to purchase Turkish government debt “could ultimately destabilize the sector.” According to T. Rowe Price sovereign analyst Peter Botoucharov, banking executives warned government representatives and banking regulators (central bank officials were not in attendance) in several closed meetings that banks face the potential for large losses on their balance sheets because bond yields have been artificially suppressed by their purchases. While this yield suppression has helped Turkey with public sector financing in the short run, the losses would materialize if or when the current or a future Turkish government decides to return to more orthodox policies and dispense with using deeply negative real (inflation-adjusted) interest rates as a policy tool. From the sovereign point of view, Botoucharov believes an exit from this situation could be painful and that any policy normalization would need to be done slowly and cautiously to reduce the risk of a systemic event. He also believes that it could ultimately require some banks to be recapitalized.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -4.8%. Investors were cautious ahead of Sunday’s runoff election between incumbent president Jair Bolsonaro and former president and Workers’ Party candidate Luiz Inácio Lula da Silva. With Lula leading in various polls, investors are concerned about a possible change in economic policies, as well as the potential for civil unrest from Bolsonaro supporters if the incumbent loses.
Early in the week, the government reported that month-over-month inflation as of mid-October was 0.16%, slightly higher than expected. According to T. Rowe Price analyst Richard Hall, volatile airline fares, which rose 28% month over month, were a major factor. Below the headline number, however, Hall believes that the details look encouraging.
For example, he notes that the improvement in industrial goods inflation is continuing. Also, consumer durables prices have especially decelerated, moving from disinflation (a slowing in the rate of rising prices) to outright deflation (falling prices). Hall believes that reflects reduced supply chain bottlenecks, and he thinks it could be a sign that demand reduction from higher rates is starting to bite more, despite a decent amount of fiscal support to households since mid-August, such as lower energy taxes and higher social welfare payments. In addition, services inflation—outside of airfares—showed some signs of deceleration, though it remains at uncomfortably high levels, almost 8% annualized over the past three months.
On Wednesday, the central bank decided to keep its primary interest rate, the Selic rate, at 13.75%. The decision among policymakers was unanimous. In their post-meeting statement, central bank officials affirmed that they will remain “vigilant, assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation.” They also said that they will “persist until the disinflationary process consolidates” and that they “will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.”
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
This material is provided for general informational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. All other trademarks shown are the property of their respective owners. Use does not imply endorsement, sponsorship, or affiliation of T. Rowe Price with any of the trademark owners.
T. Rowe Price Investment Services, Inc., Distributor.