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Global Markets Monthly Update

July 2022

Highlighted Regions

Key Insights

  • Stock indexes in major developed markets reached new record highs, with Japan’s Nikkei Average finally surpassing a level set 34 years ago.
  • Inflation in Europe and the U.S. generally surprised on the upside, and central bankers tried to dispel hopes of imminent rate cuts.
  • China led the gains in major markets as investors welcomed new policy support measures but remained well behind over longer time periods.


Large-cap stocks recorded a fourth consecutive month of gains, helping the S&P 500 Index mark its strongest start to a year since 2019 and bringing it and other large-cap indexes to record highs. The advance also broadened to include value stocks and small-cap shares, although large-caps remained well ahead of other categories for the year through February. Enthusiasm over the potential of generative artificial intelligence (AI) seemed to provide a particular overall tailwind to the group of mega-cap tech-oriented companies known colloquially as the “Magnificent Seven.”

In contrast, bond returns were negative over the month, leaving the broad index of investment-grade bond performance in negative territory for the year-to-date period. An increase in U.S. Treasury yields weighed on returns, but most classes of credit-sensitive bonds fared somewhat better. (Bond prices and yields move in opposite directions.)

Economy and stock prices defy higher rates

The market’s advance was relatively steady over the month, helped by signs that the economy was continuing to defy skeptics and grow despite the highest interest rates in nearly two decades. Early in the month, the Labor Department reported that employers added 353,000 nonfarm jobs in January, nearly double consensus estimates, while November and December’s gains were also revised higher, due in part to an annual benchmark revision. Soon after, S&P Global and the Institute for Supply Management reported solid growth in their respective gauges of services sector activity, although manufacturing readings remained more subdued.

The better growth brought some unwelcome inflation surprises, however. Stocks wavered after the Labor Department reported that consumer prices had risen 0.3% in January, a tick above consensus expectations of around 0.2%. More concerning may have been the 0.4% rise in core (less food and energy) consumer prices, keeping the year-over‑year increase at 3.9%, nearly double the Federal Reserve’s 2.0% target. The Labor Department later reported that producer prices, which are typically more volatile, increased 0.3% in January—the most in five months.

However, inflation data later in the month appeared to calm inflation fears to some degree. The Commerce Department’s core personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, came in at 2.8% for the 12 months ended in January, in line with expectations. 

Economic data releases later in the month also arguably had a more negative tone. Most prominently, retail sales plummeted 0.8% in January. While many economists pointed to seasonal factors and harsh weather early in the year as a reason for the weakness, typically weather-sensitive sales at restaurants and bars rose 0.7%.

Expectations diminish for rate cuts

Throughout the month, Fed officials appeared to take pains to dispel hopes that recent progress on inflation would lead them to soon reverse course and begin cutting interest rates. In response, futures markets, as measured by the CME FedWatch Tool, began pricing in only a minimal chance of a rate cut until June, with the odds of several more cuts to follow also falling substantially.

The upside surprises in economic growth indicators were not matched by equivalent surprises in corporate earnings, but investors appeared to take the data in stride. As of the end of the month, analysts polled by FactSet were anticipating overall fourth-quarter earnings for the S&P 500 to have grown by 4.0% versus the same quarter a year before. While this would mark the second quarter of gains, FactSet noted that the magnitude of upward earnings surprises was significantly smaller than in recent years.


In local currency terms, the pan-European STOXX Europe 600 Index advanced to an all-time high on February 23. The market rallied on expectations that the European Central Bank (ECB) could soon lower borrowing costs but lost some of its momentum late in the month as sticky inflation data prompted the market to reassess the magnitude and timing of rate cuts. Germany’s DAX and France’s CAC 40 Index also hit new peaks. The UK’s FTSE 100 Index lagged on concerns that the Bank of England (BoE) may keep interest rates higher for longer.

ECB curbs rate expectations

The minutes of the ECB’s January meeting and policymakers’ public comments dampened market expectations for imminent rate cuts. Although the Governing Council agreed that inflation appeared to be coming under control, members argued that talk of lowering rates was premature, citing wage growth and concerns about the potential persistence of pricing pressures. Later, when the ECB published data showing relatively benign wage growth in the fourth quarter, ECB President Christine Lagarde said progress was not yet sufficient to give the central bank confidence that inflation had been tamed. 

Eurozone inflation stronger than forecast, economy dodges recession

Both headline and core inflation in the eurozone slowed less than forecast in February. Annual consumer price growth declined marginally to 2.6%, while core inflation slipped to 3.1% from 3.3% in January. In another positive surprise for investors, the eurozone unexpectedly avoided a recession in the final three months of 2023. Gross domestic product (GDP) was unchanged after shrinking 0.1% from July to September.

The manufacturing-heavy German economy was an outlier, with final data confirming that Germany’s economy contracted 0.3% in the fourth quarter. Government consumption fell sharply due to budget constraints, and gross fixed capital formation shrank as companies cut investment. The government slashed its forecast for economic growth this year to 0.2% from 1.3%, citing weaker global demand, geopolitical uncertainty, and higher inflation.

BoE ditches tightening bias, data signal economic upturn

The BoE held its key interest rate steady at an almost 16-year high of 5.25% but dropped its warning that borrowing costs could rise again, saying they would now be “kept under review.” Governor Andrew Bailey cautioned that “we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.” Headline inflation held steady at 4.0% in January.

Official data showed that the UK ended 2023 in recession, after the economy contracted 0.3% in the fourth quarter. However, recent indicators have been encouraging:

  • Retail sales rebounded strongly in January, reversing a fall in December; 
  • Business and consumer confidence improved; and 
  • Purchasing managers’ surveys indicated that private sector business activity expanded for a fourth consecutive month in February amid strong growth in customer demand.


Japan’s stock markets had another strong month, with the MSCI Japan Index rising 5.5% in yen terms, bringing gains in the year-to-date period to 14.4%. Late in the month, the Nikkei Stock Average finally surpassed 38,915, the record high established 34 years ago. Japan’s return to steady growth and corporate profitability both continued to underpin confidence. Historic weakness in the yen provided a favorable backdrop for share price gains, particularly in the case of Japan’s exporters. The weak yen weighed on returns for U.S. investors, however.

Investors remained laser focused on when the Bank of Japan (BoJ) might end its negative interest rate policy and break free from years of ultra-loose monetary policy. The BoJ’s Governor Kazuo Ueda stressed that it was too early to conclude that the central bank had met its 2% inflation target in a sustained manner and continued to signal that prices rising in tandem with wages was a precondition for any shift in its stance. Consumer inflation, as measured by the core consumer price index (CPI), slowed in January to 2.0% year on year from the previous month’s 2.3%.

Bond yields fall slightly, yen remains at historic lows

Against this backdrop, the yield on the 10‑year Japanese government bond fell slightly to 0.71% from 0.73% at the end of January. The yen weakened to about JPY 150 against the U.S. dollar, from around JPY 147 at the end of the prior month. The currency’s persistent weakness prompted fresh verbal intervention by Japan’s finance minister, but he refrained from commenting on the prospect of actual intervention in the foreign exchange market. Japan’s Ministry of Finance last stepped into the market to prop up the yen in September 2022.

Japan’s economy slips into fourth place, behind Germany

On the economic data front, Japan’s GDP contracted at an annualized rate of 0.4% over the final three months of last year, a worse‑than‑expected slump and marking an entry into a technical recession (defined as two consecutive quarters of negative growth). The main cause was sluggish domestic demand, while export growth was helped by a revival of inbound tourism. The country’s economy is now the world’s fourth largest, slipping behind Germany in GDP terms. Japan faces structural headwinds in the form of weak growth and capital outflows as locals increase overseas investments.

The latest purchasing managers’ index (PMI) data showed that the deterioration in manufacturing conditions worsened over the month of February amid weakness in both domestic and foreign (notably Chinese) demand. This was in contrast with a stronger services sector, which is a bigger driver of Japan’s economy.


Stocks in China rose as recovery hopes grew following increased policy support from the government. The MSCI China Index gained 8.39%, while the China A Onshore Index added 10.79%, both in U.S. dollar terms.  

Deflation persisted in January, weighing on China’s growth outlook. The CPI fell 0.8% in January from the prior-year period, accelerating from December’s 0.3% drop and marking its fastest decline since 2009; however, core inflation rose 0.4%. Separately, the producer price index declined 2.5% from a year ago, marking the 16th consecutive month of deflation for factory gate costs.  

Other data provided a mixed snapshot of the economy. The official manufacturing PMI rose to 49.2 in January from 49.0 in December amid improved production growth but still missed the 50-mark threshold separating growth from contraction. On the other hand, the private Caixin/S&P Global survey of manufacturing activity remained steady at 50.8 in January, beating expectations and marking its third straight month of expansion. The official nonmanufacturing PMI ticked up to an above-consensus 50.7 from 50.4 in December.

Stock market trading was curtailed in February due to the weeklong Lunar New Year holiday, which began February 10. Tourism revenue during the break surged 47% over the 2023 holiday and surpassed pre-pandemic levels, according to government data. Domestic trips rose 34% from last year, and international trips also increased. However, average spending per trip fell 9.5% from 2019 even though this year’s holiday lasted eight days, a day longer than the 2019 break.

Central bank slashes key mortgage rate 

The People’s Bank of China cut the five-year loan prime rate by a bigger‑than‑expected 25 basis points to 3.95%, marking the largest cut since the reference rate was introduced in 2019. Lowering the five-year rate, a key gauge for mortgages, aims to shore up demand in the troubled property sector. Policymakers left the one-year lending rate unchanged.

New home prices register seventh monthly decline

New home prices in 70 cities fell 0.3% sequentially in January, marking the seventh monthly contraction, according to the country’s statistics bureau. The report showed no sign of a turnaround in China’s property crisis as falling home prices and construction delays have kept buyers on the sidelines, which, in turn, has increased pressure on indebted property developers.

Other Key Markets

Türkiye (Turkey): Central bank leadership changes; policymakers may use currency as inflation-fighting tool

Turkish stocks, as measured by MSCI, returned 3.16% versus 4.77% for the MSCI Emerging Markets Index. 

In early February, central bank Governor Hafize Gaye Erkan resigned unexpectedly following accusations of family involvement in management of the central bank, and Deputy Governor Fatih Karahan was appointed as her replacement. According to T. Rowe Price sovereign analyst Peter Botoucharov, Karahan’s initial public comments regarding the central bank’s latest inflation report were somewhat more hawkish than he expected, with Karahan stressing that monetary policy will be kept tight for “longer than previously envisaged.” He also left open the possibility that policy may be tightened further in case of “marked deterioration” in the inflation outlook. However, there were no changes to the central bank’s year-over-year inflation projections for year-end 2024 (36%), 2025 (14%), and 2026 (9%).

Likewise, Botoucharov considered the statement after the most recent policy meeting to be hawkish, with policymakers pledging to tighten monetary policy further if they anticipate “a significant and persistent deterioration” in the inflation outlook. However, he believes the main news was that policymakers explicitly stated that a “tight monetary stance will continue to contribute to the Turkish lira’s real appreciation process.” This could be a sign that the central bank is shifting some attention from rebuilding its foreign exchange reserves to supporting the currency as an inflation-fighting tool. All other things being equal, a stronger currency typically results in lower import prices.

Hungary: Central bank lowers interest rates “at a temporarily faster pace”

Stocks in Hungary, as measured by MSCI, returned 0.66% in February and underperformed the MSCI Emerging Markets Index.

Near the end of the month, the National Bank of Hungary (NBH) held its regularly scheduled meeting and reduced its main policy rate, the base rate, from 10.00% to 9.00%. The NBH also reduced the overnight collateralized lending rate—the upper limit of an interest rate “corridor” for the base rate—from 11.00% to 10.00%. In addition, the central bank lowered the overnight deposit rate, which is the lower limit of that corridor, from 9.00% to 8.00%. These 100-basis-point rate cuts are larger than the central bank’s 75-basis-point rate reductions at the end of January. (A basis point is 0.01 percentage point.)

According to the central bank’s post‑meeting statement, policymakers characterized disinflation as being “strong and general in the Hungarian economy.” In fact, they noted that the domestic inflation rate in January was among the lowest in the central Eastern European region. However, they expect “two opposing factors” to affect inflation in the months ahead: “The impact of the increase in excise duties on fuel will raise headline inflation, while underlying inflation will continue to moderate.”


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