markets & economy  |  september 23, 2022

Global Markets Weekly Update


Hawkish Fed sends stocks lower; bond yields sharply higher

Stocks recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows since late 2020, while the S&P 500 Index, small-cap Russell 2000 Index, and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022. The Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge, stayed more firmly below its spring highs but rose sharply at the end of the week. The technology-heavy Nasdaq Composite Index fared worst for the second consecutive week and briefly fell to a level more than one-third below its January record high.

T. Rowe Price traders reported that trading was relatively subdued at the start of the week, as all eyes were on the Fed policy meeting that concluded Wednesday. Stocks fell sharply at 2 p.m. on Wednesday after policymakers announced a 75-basis-point (0.75 percentage point) hike in the federal funds rate, bringing it to a target range of 3.00% to 3.25%, its highest since March 2008—when the Fed was in the process of cutting rates.

Uruçi: Rate volatility taking a toll on economy

As T. Rowe Price U.S. Economist Blerina Uruçi told The Wall Street Journal, however, what really seemed to concern investors more was the survey of Fed policymakers’ individual expectations for future rate increases, which showed that many expect rates to reach 4.50% by the end of the year and stay near there for much of 2023. While the full impact of the Fed rate increases has yet to be felt, “all of this volatility and uncertainty makes it hard for businesses to make plans,” she told the Journal. “There are some benefits to having this hiking of interest rates over and done with sooner.”

Federal Reserve Chair Jerome Powell’s post-meeting press conference initially seemed to reassure investors, sending stocks back higher. The Fed Chair acknowledged that Americans’ longer-term inflation expectations “appear to remain well anchored” and noted that policymakers expected their preferred measure of inflation, the year-over-year change in the personal consumption expenditures index, to ease significantly in 2023, from a median of 5.4% to 2.8%. But stocks then headed back lower after Powell acknowledged that “no one knows whether this process [of raising rates] will lead to a recession or, if so, how significant that recession would be.”

Economy slowing, but perhaps not at pace expected

The selling accelerated Friday, seemingly fed by troubling developments in Europe (see below) and despite some modestly encouraging economic data. S&P Global reported measures of current manufacturing and services activity that both surprised on the upside. Manufacturing activity continued to expand and even accelerated a bit (51.8 versus 51.5, with levels above 50 indicating expansion) from August’s reading, while services sector activity continued to contract but at a much more modest pace (49.2 versus 43.7). Weekly jobless claims, reported Thursday, rose a bit to 213,000 but would have been flat if the previous week’s number had not been revised down; the four-week moving claims average fell to its lowest point in three months.

Longer-term U.S. Treasury yields at highest level since late 2008

According to our Treasury traders, short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred on Thursday amid elevated futures market activity. These moves pushed the two-year U.S. Treasury note yield above 4.10%—its highest level since October 2007—and the benchmark 10-year U.S. Treasury note yield briefly to 3.77%—its highest mark since November 2008. (Bond prices and yields move in opposite directions.)

Tax-exempt municipal bonds slumped, as the continued climb in Treasury rates and persistent outflows from muni bond portfolios industrywide weighed heavily on the market. Very light issuance levels may have mitigated this week’s selling pressures, although our traders noted that new supply is projected to ramp up next week, adding another prospective headwind to performance.

Our traders noted that investment-grade corporate bonds held up relatively well ahead of the Fed meeting as higher-than-average trading volumes and muted primary issuance formed a supportive technical backdrop. However, after the meeting, the asset class weakened alongside moves lower in the equity market and rising U.S. Treasury yields. There was also an uptick in new issuance post-Fed, although the level of new deals fell short of weekly expectations.

According to our traders, the high yield bond market saw lower-than-average volumes during the first part of the week as investors seemed to focus on positioning ahead of the Fed meeting. Below investment-grade bonds experienced weakness following the Fed’s rate decision. New issuance remained light, but several new deals are expected over the next few weeks. Our traders noted that the bank loan market traded lower along with broader risk markets following the Fed’s rate announcement and Powell’s press conference.

Index Friday's Close Week's Change % Change YTD
DJIA 29,590.41 -1232.01 -18.57%
S&P 500 3,693.23 -180.10 -22.51%
Nasdaq Composite 10,867.93 -580.47 -30.53%
S&P MidCap 400 2,239.27 -141.01 -21.21%
Russell 2000 1,679.59 -118.60 -25.20%

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.


European shares fell sharply for a second week, as central banks raised interest rates sharply, intensifying fears of a prolonged economic slowdown. The pan-European STOXX Europe 600 Index ended the week down 4.37%, dropping to the lowest levels in more than a year. Major indexes also tumbled. France’s CAC 40 lost 4.84%, Germany’s DAX slid 3.59%, and Italy’s FTSE MIB 4.72%. The UK’s FTSE 100 Index lost 3.01%.

Yields on German 10-year government bonds rose to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. That was echoed across European markets with Italian, Spanish, and French yields also rising across the board. UK gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The UK pound fell to USD 1.09—a 37-year low.

European central banks jack up interest rates

Sweden’s central bank kicked off a spate of large interest rate increases in Europe and indicated policy may have to be tightened further to bring inflation under control, a judgment echoed by other central banks. The Riksbank raised its benchmark rate by one percentage point to 1.75%, which was more than expected. Switzerland’s central bank lifted borrowing costs by 0.75 percentage point, taking its benchmark rate to 0.5% and shifting into positive territory for the first time since 2015. In Norway, policymakers hiked rates by 50 basis points for the third time in a row to 2.25%. The Bank of England (BoE) lifted its key rate to 2.25% as well, hiking by 0.5 percentage point for the second month running. Markets had been pricing in the probability of a three-quarter-point increase in line with the U.S. Federal Reserve.

Eurozone slowdown deepens in third quarter, PMI surveys show

Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened, according to purchasing managers’ surveys. Preliminary data showed the S&P Global Eurozone purchasing managers index composite Index fell to 48.2 in September—the lowest level since June 2020—from 48.9 in August (a level below 50 signals a contraction.)

UK chancellor unveils sweeping tax cuts

UK Chancellor of the Exchequer Kwasi Kwarteng unveiled a tax-cutting budget that also included supply-side reforms and a GBP 60 billion energy support package for households and businesses aimed at achieving 2.5% annual growth. The package includes reductions in the top and basic rates of income tax and the cancellation of increases in national insurance contributions (a payroll tax) and corporation tax.


Japan’s stock markets closed at their lowest levels in more than two months in a holiday-shortened week. The Nikkei 225 Index fell 2.6%—dipping at one point below the 27,000-mark for the first time since July 19. The Nikkei tracked losses on Wall Street as a large interest rate hike by the Fed further widened the U.S.-Japan rate differential. The government intervened in the foreign exchange market to support the yen after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy.

Japan intervenes in FX market for first time since 1998

Japan intervened in the currency market to support the yen for the first time since 1998 after it fell below JPY 145 to the U.S. dollar. Finance Minister Shunichi Suzuki said at a press conference afterward: “In principle, exchange rates should be decided in the markets, but we cannot tolerate repeated rapid fluctuations by speculative moves.” He said that the government will closely monitor the situation and will take necessary actions against excessive rate swings. He did not reveal the size of the intervention, nor whether the move was coordinated with other countries.

BoJ maintains dovish monetary policy

As expected, the BoJ maintained its ultra-easy monetary policy that includes setting a short-term interest rate at -0.1% and purchasing Japanese government bonds (JGB) to defend the 0.25% cap for 10-year JGB yields. Governor Haruhiko Kuroda said after the meeting: “I believe we won’t be introducing a rate hike anytime soon.” The central bank also said in a statement that the coronavirus pandemic funding program would be extended for another six months. The statement reiterated the need to monitor the impact of the coronavirus on the economy and maintain stability in financial markets.

Inflation accelerates to eight-year high in August

Japan’s core consumer price inflation, which excludes volatile food prices, accelerated to an annual 2.8% in August, the fastest increase since October 2014, the Ministry of Internal Affairs and Communications said. The reading exceeded forecasts for an increase of 2.7% and was up from 2.4% in July. Higher utility bills and prices for food and groceries, along with the waning effect from cuts to mobile phone tariffs drove the increase.

Daily limit on foreign arrivals removed

Prime Minister Fumio Kishida said during a U.S. tour that Japan will remove the 50,000 daily cap on foreign arrivals from October 11, further relaxing border controls. Foreign visitors will no longer need a visa or to be part of a tour group to enter the country.


China’s stock markets fell as global growth slowdown fears gripped investors. The broad, capitalization-weighted Shanghai Composite Index slipped 1.2%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, dropped 1.9%, Reuters reported.

On Friday, the yuan currency fell to a near 28-month low and traded at 7.1066 per U.S. dollar versus 7.0185 a week earlier, according to Reuters. The People’s Bank of China (PBOC), which sets a reference rate each trading day for the onshore yuan versus the U.S. dollar, set the so-called fixing at its lowest level since early August 2020, according to Reuters. The onshore yuan can trade up to 2% on either side of the fixing. However, the central bank has set the fixing stronger than market expectations in every single session for almost a month, indicating China’s efforts to slow the pace of depreciation.

Analysts regard any significant discrepancy between the market’s expectations of the fixing and where the PBOC sets the midpoint as a signal of how Beijing wants to influence the currency. The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. China’s surprise decision to lower key interest rates in August has also fueled the yuan’s slide.

An increasing number of economists have dialed back their growth forecasts for China, where the economy faces persistent headwinds from a property market downturn and continued coronavirus outbreaks. The Asian Development Bank was the latest to downgrade its growth estimate for China to 3.3% this year from a prior 4.0% estimate. It also forecast that China’s economic growth would lag that of developing Asia for the first time in more than three decades. Beijing’s official growth target this year is about 5.5%, a level that many economists believe is unattainable.

On the monetary policy front, the PBOC kept its benchmark lending rates unchanged at a monthly meeting. The central bank left the one-year and five-year loan prime rates unchanged after unexpectedly cutting both rates in August. The 10-year Chinese government bond yield rose to 2.713% from 2.692% the prior week as U.S. Treasury yields hit 11-year highs. The yield gap between the benchmark 10-year U.S. Treasury bond and its Chinese counterpart widened to the highest since 2007, Reuters reported.

Other Key Markets


On Sunday, September 18, the European Commission (EC) recommended that the European Union (EU) withhold approximately EUR 7.5 billion that Hungary anticipated receiving for the 2020–2027 time frame due to Hungary’s rule of law violations. However, T. Rowe Price credit analyst Ivan Morozov believes that there are some positive signs that Hungary and the EU can reach a compromise to prevent a cutoff of much-needed funds.

The EC specifically mentioned that it wants Hungary to pass certain pieces of legislation that the government already promised that it would and, in fact, has already started doing. Morozov believes Hungary has approximately two months to pass the necessary laws. Given that Hungarian officials know how important EU funds are for the country, Morozov expects legislators to do what is needed.


Stocks in Brazil, as measured by the Bovespa Index, returned about 2.3%.

Brazil’s central bank held its policy meeting this week and decided, as was generally expected, to leave the Selic benchmark interest rate at 13.75%. The decision among policymakers was not unanimous: Seven central bank officials voted to keep the Selic rate unchanged, but two voted in favor of an additional 25-basis-point (0.25 percentage point) rate increase.

According to the post-meeting statement, the rate hiking cycle is over. Policymakers asserted 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.” At the same time, they also claimed that they “will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.” However, with the central bank pausing its rate hikes, and with year-over-year inflation trending lower in recent months, investors may increasingly focus on when the central bank may decide to begin reducing rates.


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