Global Markets Weekly Update: September 02, 2022
U.S.
Hawkish Fed continues to weigh on stocks
Stocks finished lower for the week as investors continued to digest the implications of hawkish messages from Federal Reserve officials. The S&P 500 Index extended the daily losing streak that began with Fed Chair Jerome Powell’s August 26 speech at the central bank’s Jackson Hole conference, widely perceived as hawkish, through Wednesday before rising marginally on Thursday. Value stocks continued to outperform high-valuation growth stocks, and large-caps held up significantly better than small-cap shares. Energy shares suffered as oil prices declined below USD 90 per barrel for West Texas Intermediate crude, the U.S. benchmark.
T. Rowe Price equity traders noted that stocks that fell short of earnings estimates or that issued disappointing earnings guidance were punished much more than those that beat estimates were rewarded. This resulted in significantly higher volatility among certain individual stocks than the broad indexes reflected, particularly for software companies with earnings that missed estimates later in the week.
Monthly job gains lower but still strong
Friday’s August jobs report from the Department of Labor showed that the economy added 315,000 jobs last month, a number seen as solid though down from a revised 526,000 in July. The unemployment rate rose to 3.7% from 3.5% in July as the labor force participation rate increased. Earlier in the week, the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) for July indicated that job postings unexpectedly increased, reaching nearly two per unemployed worker.
Public statements by Fed officials continued to reinforce the message that the central bank is determined to raise rates enough to get inflation under control. Cleveland Fed President Loretta Mester said that she anticipates that interest rates will still need to rise significantly for the Fed to effectively fight inflation. Atlanta Fed President Raphael Bostic echoed that sentiment, saying that “we have some work to do” before the central bank’s drive to temper inflation is complete.
U.S. Treasury yields increase
The evidence of continued tightness in the labor market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007. T. Rowe Price traders noted that stronger-than-expected Institute for Supply Management (ISM) manufacturing data, which showed steady expansion in the sector last month, aided the upward yield moves.
According to our traders, investment-grade corporate bonds suffered from the weaker macro backdrop. Secondary trading volumes were below daily averages, and no new issuance occurred. The sell-off in Treasuries pressured high yield bonds and bank loans as the market continued to assess the Fed’s hiking trajectory and its impact on growth. As expected, no new high yield bond issues were announced this week, but several financing deals are anticipated after Labor Day.
Rising interest rates continued to hamper the municipal debt market, although munis fared better than Treasuries at the broad market level. While our municipal traders observed somewhat thin liquidity in the secondary market, they reported strong demand for this week’s approximately USD 1.8 billion primary market offering from Chicago O’Hare International Airport.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
31,318.44 |
-964.96 |
-13.81% |
S&P 500 |
3,924.26 |
-133.40 |
-17.66% |
Nasdaq Composite |
11,630.86 |
-510.85 |
-25.66% |
S&P MidCap 400 |
2,393.10 |
-107.14 |
-15.80% |
Russell 2000 |
1,809.75 |
-90.09 |
-19.40% |
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 fell sharply on fears that central banks could tighten monetary policy aggressively for an extended period. Worries that Russia might stop natural gas supplies to Europe also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.37% lower. Major indexes were mixed. France’s CAC 40 Index dropped 1.70%, and the UK’s FTSE 100 Index lost 1.97%. Germany’s DAX Index gained 0.61%. Italy’s FTSE MIB Index was little changed.
Core eurozone government bond yields rose on hawkish central bank comments and record high inflation. Peripheral eurozone bond yields and UK gilt yields broadly tracked core markets.
The UK pound posted its steepest monthly drop versus the U.S. dollar since October 2016, three months after the Brexit referendum, as economic and political uncertainty in the country intensified during the ruling Conservative party’s election campaign to replace outgoing Prime Minister Boris Johnson. The pound fell more than 4% in August to USD 1.16. The pound also declined almost 3% relative to the euro.
ECB policymakers call for big rate hike
Eurozone money markets were pricing in a roughly 80% chance of an exceptionally large 0.75 percentage point rate hike by the European Central Bank (ECB) at its next meeting, after a chorus of hawkish comments by policymakers and data showing record inflation. Executive Board member Isabel Schnabel said at the Jackson Hole conference that central banks should act "forcefully" to reduce high inflation, even at the risk of lower growth and higher unemployment to minimize the risk of bad economic outcomes. Banque de France Governor François Villeroy de Galhau said policy would need to remain tight for an extended period and that he favored “another significant step in September.” Policymakers quoted by Reuters, including German Bundesbank President Joachim Nagel, said the bank should again act decisively to subdue inflation, indicating that they favored another large increase as well. However, ECB Chief Economist Philip Lane argued at a conference in Barcelona that borrowing costs should increase at a "steady pace" to allow for any downward adjustment in inflation forecasts.
Eurozone inflation hits records; unemployment falls to record low
Inflation in the euro area accelerated more than expected to a record 9.1% in August, up from 8.9% in July. Surging energy and food prices were the primary drivers.
The number of jobless people in the 19-country bloc dropped by 77,000 in July, leaving the unemployment rate at a record-low 6.6%, Eurostat said.
Gazprom extends Nord Stream 1 pipeline closure
Sources quoted by Reuters said Russia’s state-owned energy company Gazprom was ready to reopen the Nord Stream 1 pipeline to Germany as scheduled after a three-day outage for maintenance. However, after the market closed on Friday, Gazprom announced that a technical fault would extend the pipeline’s closure. Meanwhile, Gazprom said it would further reduce deliveries to French utility Engie due to a disagreement over contracts. Storage levels of natural gas for the coming winter have reached 90% of their capacity in France and more than 80% in Germany, officials said.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index down 3.46% while the broader TOPIX Index declined 2.50%. A hawkish outlook on U.S. interest rates dampened investor sentiment. Against this backdrop, the yield on the 10-year Japanese government bond rose to 0.24%, from 0.22% at the end of the previous week, amid a sell-off in global bonds. The yen plunged on expectations of continued monetary policy divergence between the U.S. Federal Reserve and the Bank of Japan (BoJ), which remains committed to maintaining ultralow rates.
Yen falls to lowest level since 1998
The Japanese currency breached the JPY 140 level against the U.S. dollar for the first time since 1998. Japan’s Finance Minister Shunichi Suzuki acknowledged the somewhat high recent currency market volatility and its potential negative impact on the economy and financial conditions. Furthermore, he said that the government was prepared to take appropriate action as needed to bring stability, working closely with monetary authorities in other nations.
While the weak yen has been very supportive of Japan’s competitiveness and a boon for the country’s exporters, it has also pushed up the cost of importing energy and food, increasing the burden on businesses and households. As a net energy importer, Japan is impacted by surging energy prices. With core inflation having exceeded the BoJ’s 2% target for four consecutive months, the government has promised to take new measures to cushion the impact of rising food and energy prices.
Government to ease COVID-19 border controls
Prime Minister Fumio Kishida announced a further easing of Japan’s strict COVID-19 border controls, raising the cap on daily entrants to 50,000 from the current 20,000 starting September 7, as well as removing the requirement for foreign tourists to travel on tours with a guide. The testing requirements for those vaccinated at least three times will also be relaxed. Without providing a time frame, Kishida said that the government will ease border controls even further, to make the entry of people as smooth as the other Group of Seven developed nations. Coronavirus cases in Japan remain elevated, but the government has refrained from imposing restrictions on movement, with vaccination rates among the highest in the world.
China
China’s stock markets fell as coronavirus outbreaks in major cities triggered renewed lockdowns and dampened the economic outlook. The broad, capitalization-weighted Shanghai Composite Index retreated 1.54% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, slipped 2.01%, Reuters reported.
In the southern tech hub of Shenzhen, most of the city’s nearly 18 million residents were under virus-related controls amid the most serious outbreak since the spring. In southwestern China, Chengdu, the capital of Sichuan province, went into lockdown Thursday with mass testing planned through the weekend. The southern port city of Guangzhou also imposed restrictions. As estimated by research firm Capital Economics, 41 Chinese cities, responsible for 32% of the country’s gross domestic product, are grappling with coronavirus outbreaks, the highest number since April.
In geopolitical news, China said it would implement a landmark audit agreement it struck with the U.S. last month. Both countries signed a preliminary deal on August 26 that would allow U.S. accounting officials to review the audit papers of U.S.-listed Chinese companies, resolving a yearslong dispute that threatened to kick off about 200 Chinese companies from U.S. exchanges. The agreement marked a retreat from Beijing, which had refused to give U.S. regulators access to the audit papers of Chinese companies citing national security. The U.S. will monitor developments in the coming months to make sure China complies with the terms, said Securities and Exchange Commission Chair Gary Gensler.
In economic news, the official manufacturing Purchasing Managers’ Index (PMI) rose to 49.4 in August from July’s 49.0, above expectations but still below the 50-point mark that separates contraction from growth. The official nonmanufacturing PMI declined to 52.6 from 53.8. Meanwhile, the private Caixin manufacturing PMI declined to 49.5 in August from 50.4 in July, reflecting the impact of nationwide power shortages and virus lockdowns.
China has room to adjust monetary policy as stimulus measures to support the economy have been restrained and consumer inflation is under control, a People’s Bank of China spokeswoman said. Last month, China cut two key interest rates as Beijing stepped up efforts to revive an economy that has been slowing under a nationwide property crisis and continued lockdowns.
Other Key Markets
Hungary
Hungarian stocks and bonds have been under pressure amid growing expectations that central banks in Europe and the U.S. will raise interest rates aggressively in September, and possibly beyond, in order to tame inflation. The forint, however, was lifted by the National Bank of Hungary’s decision to raise its base rate by 100 basis points, from 10.75% to 11.75%, on Tuesday. The central bank also raised other key interest rates by the same amount on Tuesday, as well as the one-week deposit rate on Thursday.
In their post-meeting statement, central bank officials noted that year-over-year headline inflation in July was 13.7%, while year-over-year core inflation was 16.7%. They confirmed that inflation expectations were high and that inflation is expected to rise further; hence their decision “to tighten the base rate further in a decisive manner in order to anchor inflation expectations and mitigate second-round inflation risks.” Policymakers also announced three measures intended to enhance the transmission of monetary policy so that central bank rate increases have a greater impact on inflation and the economy: a higher required reserve ratio for the banking system, regularly held central bank discount bill auctions, and the creation of a long-term deposit instrument to help the central bank sterilize liquidity in the banking system at longer maturities.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -1.4%.
The U.S. dollar has been strengthening against various emerging markets currencies amid expectations that the U.S. Federal Reserve will continue to pursue aggressive interest rate increases to fight inflation. However, the Brazilian real has recently held up well versus the dollar, helped by signs that the economy is continuing to recover from the coronavirus pandemic despite a significant increase in the benchmark Selic rate—currently 13.75%—since March 2021. Reuters, for example, recently reported that Brazil created almost 219,000 formal jobs in July, which was the seventh consecutive month of employment growth.
Another sign of underlying economic strength in Brazil is that there is currently a very strong credit impulse in the economy despite nearly 18 months of rising interest rates. In contrast, at this point in Brazil’s previous rising interest rate cycle, there was a clear drop in credit growth. While there is usually a lag between central bank rate hikes and lending activity, there may be some idiosyncratic factors at work during the current cycle, such as a structural increase in credit card use or greater competition among banks.
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