Global Markets Weekly Update: August 26, 2022
U.S.
Rate worries drive stocks sharply lower
Stocks moved sharply lower—if in a week of mostly light summer trading—as investors became less optimistic that the Federal Reserve will be able to tame inflation without causing a significant economic slowdown. Technology and other high-growth stocks fared worst in this environment, and the tech-heavy Nasdaq Composite Index fell to its lowest level in a month. Rising oil prices fed into inflation worries but also boosted energy stocks. T. Rowe Price traders noted that Wednesday was the slowest session of the year so far based on shares traded.
Uruçi: Powell is resolutely hawkish
Most of the market’s moves came at the end of the week as central bankers gathered at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming—and most of investors’ focus appeared to center around Fed Chair Jerome Powell’s speech on Friday morning. According to T. Rowe Price U.S. Economist Blerina Uruçi, Powell’s comments were “resolutely hawkish,” and she confirmed that he perceives taming inflation as the bedrock of the recovery. Nevertheless, Uruçi believes that the Fed is unlikely to move official short-term rates above 4% by the end of the year as the U.S. economy feels the lagged impact of monetary policy and in anticipation of a recession in Europe and a sharp slowdown in China.
Much of the week’s economic data surprised on the downside and arguably offered evidence that growth had slowed considerably in recent weeks in response to tightening financial conditions. On Tuesday, S&P Global announced that its composite gauge of service and manufacturing activity had fallen further into contraction territory and hit its lowest level since early 2020. Sales of new homes in July fell for the sixth month so far this year to the slowest pace since early 2016, and both personal income and spending rose much less than consensus expectations (0.2% versus roughly 0.6% and 0.1% versus 0.4%). On the positive side, new orders for nondefense capital goods excluding aircraft, a proxy for business investment, rose 0.4% in July, and weekly jobless claims fell back to their lowest level in a month. The University of Michigan’s index of consumer sentiment also rose more than expected, hitting 58.2 in August after bottoming at a record low of 50 in June.
Yields move higher on structural inflation worries
Despite the mixed economic signals, U.S. Treasury yields moved higher for much of the week, which T. Rowe Price traders attributed in part to hawkish comments from several Fed officials and a Wall Street Journal article highlighting structural inflationary forces that could keep interest rates higher for longer. (Bond prices and yields move in opposite directions.) Industrywide outflows and higher Treasury yields weighed on the broad tax-exempt municipal bond market, which extended its month-to-date losses.
According to our traders, weakness in equities and market expectations for a hawkish stance from Powell at the Jackson Hole symposium led investment-grade corporate bonds lower early in the week. Higher-risk issuers and those with larger, more liquid capital structures underperformed. However, a relatively quiet primary calendar and healthy overnight demand from Asia provided technical support.
The high yield bond market experienced low trading volumes throughout the week, but our traders noted some weakness in the retail segment due to disappointing results and guidance from department store operator Nordstrom. No new issues were announced, and the primary market was expected to be dormant until after Labor Day, when financing deals from several issuers are anticipated. Similarly, our traders noted that the bank loan primary market was effectively closed for the summer, with no deals left on the docket and no more issuance until after Labor Day.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,283.40 |
-1423.34 |
-11.16% |
S&P 500 |
4,057.66 |
-170.82 |
-14.87% |
Nasdaq Composite |
12,141.71 |
-563.51 |
-22.39% |
S&P MidCap 400 |
2,500.24 |
-77.80 |
-12.03% |
Russell 2000 |
1,899.84 |
-57.50 |
-15.39% |
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 as fears intensified that the efforts of key central banks to subdue inflation could deepen an economic downturn. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.58% lower. Major stock indexes also declined. Germany’s DAX Index tumbled 4.23%, France’s CAC 40 Index declined 3.41%, and Italy’s FTSE MIB Index slid 2.84%. The UK’s FTSE 100 Index lost 1.63%.
Core eurozone government bond yields moved higher amid rising expectations of more sharp increases in interest rates and data indicating economic activity is stalling. Peripheral eurozone and UK government bond yields broadly tracked core markets.
Also weighing on investor sentiment, natural gas prices surged to record levels after Russia’s state-owned natural gas producer Gazprom announced further maintenance-related closures of the Nord Stream 1 pipeline to Europe at the end of August. Pipeline flows are currently at 20% of the agreed volume. The euro traded close to parity with the dollar as the economic outlook soured.
ECB officials worried by increasing inflation risk
The minutes from the European Central Bank’s (ECB) July policy meeting suggested that more interest rate hikes could be forthcoming to subdue persistently high inflation that “posed an increasing risk of longer-term inflation expectations becoming unanchored.” At that meeting, policymakers sanctioned a larger-than-expected 0.5 percentage point increase in key rates and “cautioned that a continued anchoring of inflation expectations was dependent on the Governing Council acting decisively on the worsening inflation outlook.” Rate-setters also stressed, however, that the size of the rate increase did not “constitute an upward shift in the interest rate path but, rather, a frontloading of the policy normalisation.” They said that signs of an economic downturn had increased, but “there were no indications of a major recession in the euro area so far.”
Eurozone PMI falls for second month; German confidence at record lows
Eurozone business activity shrank for a second consecutive month in August, another sign of a possible recession in the third quarter, according to purchasing managers’ surveys. An early reading showed that S&P Global's Composite Purchasing Managers' Index (PMI) fell to an 18-month low of 49.2 in August from 49.9 in July. (PMI readings below 50 signal a contraction.) Activity in the services industry almost stalled as consumers cut spending, while manufacturing activity contracted due to supply constraints.
In Germany, surveys of consumer and business confidence hit new lows. The GfK Institute said its survey of 2,000 consumers indicated that confidence would fall to a fresh record low in September as households saved to pay for higher energy costs. The ifo Institute said that business morale fell in August to its lowest level since June 2020, sapped by uncertainty caused by the war in Ukraine and signs of a looming recession.
UK business activity almost stalls; household energy bills to jump 80%
In the UK, business activity almost stagnated in August, with a sharp fall in the manufacturing sector. The S&P Global/CIPS composite PMI fell to an 18-month low of 50.9 in August from 52.1 in July. The services sector expanded at the slowest pace in 18 months.
The UK regulator announced an 80% increase in household energy bills to GBP 3,549 per year, effective from the end of September, as natural gas imports have become more expensive.
Japan
Despite rallying late in the week, Japanese equities finished the period lower than they began, as investors braced for a hawkish message from U.S. Federal Reserve Chair Jerome Powell at the annual Jackson Hole economic symposium on Friday. The Nikkei 225 Index finished the week down 1.0%, closing at 28,641.4. The broader TOPIX also finished lower, booking a 0.75% loss on the way to closing at 1,979.6 for the week.
Disappointing data impact sentiment
Economic data released early in the week did little to boost sentiment, with flash survey numbers showing Japan's factory activity growth slowed to a 19-month low in August, impacted by persistent rises in raw materials/energy costs and weakening global demand. Elsewhere, Japan’s manufacturing sector continued to expand in August, but the 51.0 PMI score ultimately disappointed given it was down from 52.1 in July. The weaker data only added to persistent concerns about an economic slowdown, causing Japanese equities to close at a two-week low on Wednesday.
Japan equities finish on a positive trend
However, the week ended on a positive trend. Japanese equities finished higher on Thursday—snapping a five-session losing streak for the Nikkei 225—thanks to generally positive cues from Wall Street and support from bargain hunters. The gains were extended on Friday, with exporters and technology stocks notably leading Japanese equity markets higher. Positive cues were again taken from the U.S., including data showing the U.S. economy contracted by only 0.6% in the second quarter—less than the 1.6% initially anticipated—thereby providing “glass half full” encouragement for investors.
JGB yields jump to six-week high
In the bond markets, 10-year Japanese government bond (JGB) yields spiked to a more than one-month high on Thursday (0.230%), tracking a similar rise in their U.S. peers. JGB yields ended the week at around 0.224%, higher than the previous week’s close.
Little sign of turnaround for softening yen
The dollar traded firmly against the yen at times during the week, but the Japanese currency ultimately finished the period broadly unchanged from where it began, at JPY 136.8 versus the U.S. dollar. Meanwhile, comments from Bank of Japan (BOJ) board member Toyoaki Nakamura during the week, suggesting there is little the BoJ can do to address the currency’s decline, did little to inspire hopes of rally any time soon. Since the start of August, the yen has weakened by around 5% versus the U.S. dollar.
China
China’s stock markets declined as extreme temperatures and power shortages in some provinces raised concerns about the growth outlook. The broad, capitalization-weighted Shanghai Composite Index eased 0.67%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.05%, Reuters reported.
Beijing announced several measures to prop up the economy last week. The State Council, China’s cabinet, outlined a 19-point policy package adding CNY 300 billion to state policy banks’ investment in infrastructure projects, on top of CNY 300 billion announced in June. The cabinet also allocated CNY 500 billion of special bonds from previously unused quotas to local governments. T. Rowe Price analysts believe that China’s policymakers have signaled that they wouldn’t flood the economy with excessive stimulus.
The People’s Bank of China (PBOC) cut two key interest rates as the central bank stepped up efforts to revive the economy. The central bank cut the five-year loan prime rate (LPR), a reference for mortgages, by 15 basis points to 4.30% and trimmed the one-year LPR by a smaller-than-expected five basis points to 3.65%. Last month, China reported its economy narrowly avoided contracting in the second quarter amid repeated coronavirus lockdowns and a nationwide property crisis.
In property sector news, developer Longfor Group raised CNY 1.5 billion (USD 219 million) through selling onshore bonds fully guaranteed by the government. The guarantee from China Bond Insurance was the first under a scheme that Beijing unveiled earlier this month to support the stricken real estate sector. CIFI Holdings, another developer, also plans to sell an onshore bond with a state guarantee, Bloomberg reported. Despite the recent show of official support, some state-backed financial institutions have resisted Beijing’s calls to support the country’s debt-laden developers over concerns about the impact of such exposure on their balance sheets, Reuters reported.
The 10-year Chinese government bond yield rose to 2.68% from 2.639% a week earlier, according to Dow Jones. The yuan weakened to 6.8624 per U.S. dollar versus last week’s 6.80, according to Reuters. Investor appetite for emerging markets assets was muted ahead of Friday’s speech by Federal Reserve Chair Jerome Powell in Jackson Hole, Wyoming.
Other Key Markets
Hungary
Hungarian assets continued to fare poorly after credit rating agency S&P Global Ratings lowered its credit outlook for Hungary from “stable” to “negative” due to the country’s high dependence on Russian energy exports as well as tensions with the European Union (EU). However, S&P maintained its BBB rating on Hungarian sovereign debt.
Since the revised outlook was announced on August 12, Hungarian assets have continued to weaken for three main reasons, according to T. Rowe Price credit analyst Ivan Morozov. The first is a global bond market sell-off stemming from concerns that elevated inflation will force major central banks in the U.S. and Europe to raise interest rates aggressively. The second reason is reduced market participation, which is not unusual in August due to investors taking late-summer vacations.
The third reason is uncertainty about whether Hungary will receive much-needed funds from the EU. In April, the EU initiated a rule of law procedure against Hungary—with which it has yet to comply—that has jeopardized a disbursement of funds. However, earlier this week, the Hungarian government submitted a letter to the EU promising to legislate a number of changes to comply with the rule of law. According to Morozov, the ball now is in the EU court, and the EU is expected to reply to the letter within a month. He is optimistic that Hungary and the EU will reach an agreement before mid-September.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 0.8%.
During the week, the government reported that inflation was recently measured at a month-over-month rate of -0.73%, a deflationary reading that T. Rowe Price sovereign analyst Richard Hall attributes almost entirely to cuts in energy price taxes. While the headline number was a little stronger than expected, Hall believes that some of the underlying details are encouraging. For example, currency appreciation this month has more than offset some increases in global food prices, and Hall believes that a good winter corn crop could reduce pressure on local grain prices.
Another positive is a continuation of a trend in which manufactured goods have become a disinflationary force with outright price drops, though Hall notes that some of this is related to a tax cut on many manufactured items. In addition, services inflation seems to have stopped increasing, though it remains high. The net effect is that measures of core inflation have decreased on a sequential basis, though they continue to increase year over year due to base effects.
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