September 2022 / WEEKLY GLOBAL MARKETS UPDATE
Global Markets Weekly Update
Our analysts recap activities across global markets in our weekly report.
S&P 500 returns to November 2020 levels
Turmoil in UK financial markets and signs that the Federal Reserve still has some way to go in its efforts to temper inflation sent stocks to their third consecutive weekly decline, while the yield on the benchmark 10-year U.S. Treasury note briefly breached 4% for the first time since 2008. (Bond prices and yields move in opposite directions.) The S&P 500 Index broke below its mid-June lows and fell back to November 2020 levels. The week closed out a third consecutive quarter of declines for the index for the first time since 2009.
The equity market’s biggest moves came Wednesday, following a surprise decision by the Bank of England (BoE) to purchase long-dated UK government bonds (see below). T. Rowe Price traders noted that the BoE’s move caused extreme volatility before trading began on Wall Street, but the end result was an easing of recent upward pressure on interest rates and the U.S. dollar and a rally for stocks. The market also received support from news of positive results in a large-scale trial of Biogen’s Alzheimer’s treatment, which sent the drugmaker’s shares surging nearly 40%.
Inflation runs hot, but expectations remain anchored
Markets reversed their gains on Thursday, however, with the selling seemingly caused by data showing continued resilience in the economy and inflationary pressures despite tightening monetary policy. Weekly jobless claims fell to 193,000, well below consensus expectations and their lowest level since late April.
Meanwhile, the core (less food and energy) personal consumption expenditures (PCE) price index, widely recognized as the Fed’s preferred inflation gauge, rose at an annualized pace of 4.7% in the second quarter—well above expectations of around 4.4% as well as the Fed’s long-term 2.0% inflation target. August’s monthly core PCE reading, released Friday, also surprised on the upside, rising 4.9% on a year-over-year basis, up from 4.7% in July. Long-term inflation expectations appeared to remain anchored, however, with consumers polled by the University of Michigan expecting inflation to fall to 2.7% over the next five years, the lowest reading in over a year.
The housing sector is feeling the immediate impact of the Fed’s rate hikes through rising mortgage rates—which breached an average of 7%—but even here the evidence was mixed. New home sales surprised investors by rising nearly 29% in August to hit a five-month high. Yet pending sales of both new and existing homes—where contracts have been signed but not closed—fell slightly. The Case-Shiller Home Price Index fell 0.24% in July, its first monthly decline since early 2012. On a year-over-year basis, prices decelerated from June to July at the fastest pace in the history of the index.
Yields decrease after Bank of England move
Prices of U.S. Treasuries rallied after the BoE intervened to stabilize the UK government bond market, leaving the 10-year U.S. Treasury note yield modestly higher for the week. According to our traders, selling pressures in the municipal bond market persisted through much of the week, leading to firmly negative returns at the broad market level and underperformance versus U.S. Treasuries. While outflows from municipal bond funds industrywide remained a strong headwind, our traders noted that buyers began to emerge late in the week after municipals repriced to more attractive yields and Treasury market volatility eased.
Our traders noted that the relatively weak macroeconomic backdrop created a difficult environment for investment-grade (IG) corporate bonds. Less liquid bonds and those issued by “Yankee” banks (those operating in the U.S. but registered elsewhere) underperformed more liquid areas of the market. In this less supportive environment, primary issuance fell short of weekly expectations.
The high yield bond market saw higher-than-average volumes during the week. Despite mostly negative flows from the asset class industrywide, market liquidity was somewhat healthy due to coupon payments and tenders. No new deals were announced, but our traders noted that the lack of issuance created demand for higher-quality names as well as some distressed bonds at lower prices in the secondary market.
Our traders reported that bank loans traded lower as market participants continued to assess the inflation and recession outlook. Hawkish messaging from multiple Fed speakers appeared to contribute to the weakness. Our traders noted that the loan primary market is expected to be limited over the near term as issuers will likely wait for a more opportune time to announce new deals.
|Index||Friday's Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,203.53||-35.74||-22.47%|
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 Associates’ presentation thereof.
Shares in Europe fell amid disappointing corporate earnings and fears of recession. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.65% lower. France’s CAC 40 Index slipped 0.36%, Germany’s DAX Index slid 1.38%, and Italy’s FTSE MIB Index dropped 1.98%. The UK’s FTSE 100 Index lost 1.78%.
UK government bond (gilt) yields ended higher after experiencing historic swings in the wake of the previous Friday’s announcement of a new UK fiscal plan proposing large tax cuts, energy subsidies, and sizable borrowing. Yields jumped at the start of the week amid worries about a severe deterioration in the public finances and then eased after the BoE said it would make temporary purchases of long-dated bonds “on whatever scale is necessary” in an effort to “restore orderly market conditions.”
The International Monetary Fund called on the UK to “reevaluate” the plan to ensure fiscal and monetary policy aren’t working at cross purposes. U.S. Treasury Secretary Janet Yellen said the U.S. was also “monitoring developments very closely.” Meanwhile, core eurozone bond yields fluctuated, ending broadly higher, mostly tracking moves in UK gilts. Higher-than-expected inflation in Germany also added some upward pressure on yields later in the week. Peripheral eurozone bond yields broadly tracked core markets.
BoE’s Pill signals “significant” rate hike possible; UK avoids recession
BoE Chief Economist Huw Pill said the new fiscal policy and the adverse market reaction “will require a significant monetary response.” However, he signaled the bank did not expect to act on rates before its next meeting in early November. T. Rowe Price International Economist Tomasz Wieladek says Pill’s comments indicate that he believes there could be a large rate increase in November that would be proportional to a rise in demand stemming from looser fiscal policy. However, the path for rates thereafter will be unclear until the details of promised reforms of the supply side of the economy are known, Wieladek observes.
Revised economic data unexpectedly showed the UK avoided a recession in the three months through June. Gross domestic product (GDP) increased by 0.2% instead of shrinking 0.1% as previously estimated.
ECB’s Lagarde says outlook “darkening,” more rate hikes ahead; inflation hits 10%
European Central Bank (ECB) President Christine Lagarde said at a hearing of the European Parliament that the economic outlook “is darkening” and that she expects business activity to “slow substantially” in the coming months as high energy and food prices curb spending power. She said output in the fourth quarter of 2022 and the first three months of 2023 would most likely be “negative.” The next day at an event in Frankfurt, she said the ECB would “continue hiking interest rates in the next several meetings” in a bid to return inflation to 2% in the medium term. Meanwhile, Slovak central bank governor Peter Kazimir, Finland’s Olli Rehn, Austria’s Robert Holzmann, Lithuania’s Gediminas Simkus, and Estonia’s Madis Muller, among others, contemplated another 0.75 percentage-point increase in borrowing costs in October. The ECB’s main refinancing rate is currently 1.25%.
Inflation in the eurozone accelerated to a record 10.1% in September from 9.1% the previous month, according to an official first estimate. The figure exceeded a consensus forecast of 9.7% and reinforced market expectations for another large increase in interest rates in October.
The week started on a negative trend for Japan equity markets and ultimately finished as it began, with Japanese shares ending at a three-month low, despite some encouraging economic readings. The Nikkei average fell 4.5% to 25,937, marking its lowest close since July 1. The broader TOPIX benchmark also finished down at 1,836, some 4.2% below where it began the week.
Concerns about the outlook for the global economy continued to weigh on the markets amid worries that the increases in interest rates around the world will lead to a global recession. The Fed and other central banks continue to tread a hawkish path, indicating that they plan to keep raising rates in an effort to combat stubbornly elevated inflation. Elsewhere, worries around the UK’s fiscal policy, the Ukraine/Russia conflict, and Europe's energy crisis did little to boost sentiment.
Currency worries remain central
The strengthening of the U.S. dollar against Asian currencies continued to weigh on market sentiment. The release of minutes from the Bank of Japan's (BoJ) monetary policy meeting on Wednesday showed policymakers voted 8–1 to maintain a negative benchmark interest rate of -0.1%. The BoJ also confirmed that it will continue to purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit, such that 10-year JGB yields will remain at around zero percent. This saw the yen weaken further mid-week, trading in the high 144 range against the U.S. dollar.
Some ground was recovered later in the week, however, as the U.S. dollar dipped following news of the bond market intervention by the Bank of England. Separately, Finance Minister Shunichi Suzuki said at a meeting of the Asian Development Bank that the government would "take necessary action" to respond to undesirable, rapid speculative currency movements. By the week’s end, the yen was trading in the mid-144 range against the dollar.
After a week of little movement, Japan's 10-year benchmark yield fell on Friday on indications that the Bank of Japan will increase bond buying from next quarter to curb elevated yields. The 10-year JGB yield ended the week at 0.247%.
Economic data beat expectations
On the economic front, the news was encouraging as Japan's industrial production and retail sales figures for August both beat expectations, while the jobless rate fell to 2.5% in the month.
China’s stock markets fell as currency weakness and signs of a flagging economy fueled concerns about the outlook. The broad, capitalization-weighted Shanghai Composite Index fell 2.1% and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, shed 1.4%, according to Reuters.
The yuan traded at 7.0898 per U.S. dollar late Friday versus 7.1066 a week earlier. The currency fell to a 28-month low last Monday and has lost more than 11% against the greenback this year. The yuan is on track for recording its biggest annual loss since 1994, when China unified its official and market rates, according to Reuters. Like many emerging markets currencies, the yuan has weakened against a surging U.S. dollar boosted by the Federal Reserve’s aggressive interest rate hikes.
Officials stepped up efforts to slow the currency’s slide. The People’s Bank of China (PBOC) imposed a 20% reserve requirement ratio for foreign exchange (forex) derivative sales and warned market participants against betting on the yuan currency, according to a statement on its website. Additionally, China’s foreign exchange regulator vowed to crack down on fake forex transactions, while the state-owned Securities Times predicted that the yuan is unlikely to continue depreciating rapidly, signaling the government’s growing unease about currency volatility.
The previous week, the PBOC asked state-owned banks to prepare themselves to defend the yuan by selling dollars from their foreign exchange reserves, Reuters reported, citing unnamed sources. Such a move would mark a significant escalation in Beijing’s efforts to stabilize the yuan compared with past efforts that were largely signaling and generally ineffective in the face of U.S. dollar strength, T. Rowe Price analysts note. While the proposed dollar selling may temporarily boost the yuan, it does not change the underlying dynamics weighing on the currency, in their opinion.
On the economic front, profits at industrial firms shrank 2.1% in the first eight months of the year from the prior year period, versus a 1.1% decline in the first seven months of the year, China’s statistics bureau reported. The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to a worse-than-expected 48.1 in September from 49.5 in August, below the 50-point reading that separates growth from contraction. Meanwhile, China’s official manufacturing PMI slightly improved in September, but services sector activity contracted as ongoing coronavirus lockdowns continued to hurt consumer spending.
Mainland China’s financial markets were scheduled to be closed for the Golden Week holiday, a seven-day holiday starting October 1 that typically marks a peak period for travel and consumption. However, ongoing coronavirus restrictions in major cities are expected to weigh on domestic tourism and retail spending this year.
On Tuesday, the National Bank of Hungary held its regularly scheduled policy meeting and decided to raise its key interest rate by 125 basis points, from 11.75% to 13.00%. This was slightly larger than expected.
According to the post-meeting statement, policymakers have observed a “clear economic slowdown since the beginning of June.” They note that inflation remained elevated—it was 15.6% over the 12 months ended August 2022—but that the “easing of external inflationary pressures and the downward pressure on prices, resulting from slowing demand, is expected to start feeding through to domestic inflation from early 2023.”
Central bank officials characterized their 125-basis-point rate increase as a “decisive” step and concluded that, because monetary policy has become “sufficiently strict,” they would “stop the cycle of base rate hikes.” They intend to maintain a tight monetary policy “over a prolonged period.” Also, starting October 1, the central bank plans to take additional steps to “tighten monetary conditions even further,” such as raising the required reserve ratio for banks and by holding central bank discount bond auctions regularly.
Stocks in Brazil, as measured by the Bovespa Index, returned about -1.3%.
During the week, the government reported that month-over-month inflation as of mid-September was -0.37%, which was weaker than expected. According to T. Rowe Price Analyst Richard Hall, the biggest part of the surprise is from non-core prices, as the cost of food at home was much lower than expected and gasoline costs were lower, too. However, he notes that there are other interesting details in the underlying data. For example, costs for services remained high, but they seem to have stopped accelerating. Also, there was a decline in cellphone prices—mostly an impact from a state tax cut that had a larger impact on electricity and gasoline costs. In addition, manufactured goods prices have continued to decline.
Taking a wider view, Hall sees an interesting distinction in the inflation trends affecting consumer durables and consumables. Prices for durable goods like cars and electronic equipment are either flat or dropping; in contrast, prices for consumables still are increasing at a decent clip. Hall believes it is possible that the pullback in durable goods prices could be an early sign of softening demand, along with some normalization of supply chains. However, that could be difficult to confirm given the stimulative effect of tax cuts and increased social welfare payments on the economy.
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