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Global Markets Weekly Update: December 09, 2022
U.S.
Good news for the economy is bad news for stocks
Stocks gave back much of the previous two weeks’ gains, as some surprisingly strong economic data dampened hopes that the Federal Reserve might soon be able to curb its program of raising interest rates to cool inflation. The S&P 500 Index recorded its worst return in five weeks, while the small-cap Russell 2000 Index endured its worst week since late September. T. Rowe Price traders noted that technical factors may have played a role in the declines, with the S&P 500 unable to stay above its 200-day moving average following the recent rally.
Within the S&P 500, the typically defensive health care, consumer staples, and utilities sectors fared best. Energy shares fell sharply as international oil prices tumbled to their lowest level since January, while weakness in Google parent Alphabet weighed heavily on communication services stocks. Financials also performed poorly as several bank executives offered negative outlooks. Goldman Sachs’ CEO David Solomon warned about pay and job cuts as well as “some bumpy times ahead,” while JPMorgan Chase CEO Jamie Dimon told CNBC that a “mild to hard recession” may hit next year.
Services sector regains footing
The week started on a down note following a significant upside surprise in the Institute for Supply Management’s (ISM’s) index of services sector activity, which defied expectations for a small decrease and rose to 56.5, near its highs over the past several months (readings over 50 indicate expansion). The ISM noted a particular pickup in business activity, especially in real estate and food services and accommodation.
Uruçi: Inflation continues to decelerate
Our traders noted that investors seemed focused on the Friday morning release of producer price inflation (PPI) data throughout much of the week. The PPI figures surprised moderately to the upside, rising 7.4% on a year-over-year basis versus consensus expectations of around 7.2%, sending stock futures sharply lower. Markets recovered some of their losses as trading progressed but then sold off again into the close. T. Rowe Price Chief U.S. Economist Blerina Uruçi believes that the details of the report are broadly supportive of a continued deceleration in trend inflation, especially for consumer goods.
Friday also brought the release of the University of Michigan’s preliminary survey of consumer sentiment for December, which Uruçi believes added to evidence from hard data that the near-term outlook for the U.S. consumer is broadly stable. While long-term inflation expectations were unchanged at 3%, which is on the higher end of the historical range for the series, she notes that short-term inflation expectations fell further.
Yields touch three-month lows but end the week roughly unchanged
The yield on the benchmark 10-year U.S. Treasury note touched a nearly three-month intraday low on Wednesday but edged higher to end the week, driven in large part by the PPI data and headlines that China is easing some of its COVID-related restrictions. Our traders noted that the upward pressure on yields was mitigated by softer-than-expected unit labor cost data and by Russian President Vladimir Putin’s comments about the rising risks of a nuclear war. With municipal bond investors eager to access new deals before an anticipated drop in issuance through year-end, offerings from the city of Chicago and other borrowers were met with robust demand.
Despite the weakness across risk markets, our traders noted that investment-grade corporate bonds proved resilient, thanks to a constructive technical backdrop. Secondary trading volumes were in line with daily averages, and primary issuance came in well below expectations for much of the week. Conversely, high yield bonds and broader risk markets were weaker amid renewed fears around the Fed’s agenda for rate hikes. Our traders noted that several new high yield deals could price over the next few weeks, but no meaningful issuance is expected until 2023. The bank loan market was relatively quiet, but our traders noted that some buyers looked to rotate to higher-quality loans.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,476.46 |
-953.42 |
-7.88% |
S&P 500 |
3,934.38 |
-137.32 |
-17.45% |
Nasdaq Composite |
11,004.62 |
-456.88 |
-29.66% |
S&P MidCap 400 |
2,469.58 |
-101.95 |
-13.10% |
Russell 2000 |
1,796.66 |
-96.18 |
-19.98% |
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 on renewed fears of a recession as central banks tighten monetary policy in an effort to quell inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.94% lower. Major indexes also declined. Italy’s FTSE MIB Index lost 1.40%, Germany’s DAX Index dropped 1.09%, France’s CAC 40 Index slid 0.96%, and the UK’s FTSE 100 Index moved 1.05% lower.
Eurozone GDP revised higher, but recent PMI surveys point to recession
Revised data showed that the eurozone economy expanded 0.3% sequentially in the third quarter—up from a first estimate of 0.2%—boosted by increases in household spending and business investment.
However, S&P Global’s composite Purchasing Managers’ Index (PMI), which measures business activity in the services and manufacturing sectors, ticked up to 47.8 in November from the 47.3 reading registered in October. Despite the improvement, the composite PMI remained below 50, marking the fifth consecutive month in which the forward-looking indicator has been in contractionary territory.
Eurozone retail sales in October posted their biggest monthly drop this year, while German industrial production weakened that month, albeit less than expected.
ECB moderates call for smaller rate hikes
The central bank governor of Ireland, Gabriel Makhlouf, and the governor of the Bank of France, François Villeroy de Galhau, added their voices to growing support among European Central Bank (ECB) policymakers for a half-percentage-point rate increase this month, which would take the deposit rate to 2%.
UK services activity shrinks again; house prices decline
Business activity in the UK services sector contracted again in November as new orders fell, a survey of purchasing managers showed. The S&P Global/CIPS UK Services PMI Business Activity Index held steady at 48.8 in November, remaining at levels that correspond with a contraction.
House prices dropped for a third consecutive month in November and at the fastest pace since the financial crash in 2008, mortgage lender Halifax said. Average house prices declined 2.3% sequentially, after dropping 0.4% in September as mortgage rates surged. Meanwhile, the Royal Institution of Chartered Surveyors said that its house price net balance—measuring the difference between the percentage of surveyors seeing rises and falls in house prices—fell to -25 in November, the lowest level since May 2020.
Japan
Japan’s stock markets generated modest positive returns over the week, with the Nikkei 225 Index rising 0.44% and the broader TOPIX Index up 0.39%. While investor sentiment was to some degree supported by data showing that Japan’s economy contracted less than initially estimated in the third quarter of 2022, uncertainty about the trajectory of U.S. monetary policy capped market gains.
The yield on the 10-year Japanese government bond (JGB) finished the week broadly unchanged at 0.25%, although it briefly touched 0.26% amid some speculation that the Bank of Japan (BoJ) may abandon its JGB yield cap as early as next year. The yen weakened to around JPY 136.2 against the U.S. dollar, from about 134.3 at the end of the prior week, on the continued divergence in the monetary policies of the U.S. Federal Reserve and the BoJ, with the former widely expected to hike interest rates again and the latter consistently asserting its commitment to an ultra-loose policy stance.
Japan’s economy contracted less than initially expected in the third quarter
Data from the Cabinet Office confirmed that gross domestic product (GDP0 shrank an annualized 0.8% in the third quarter of the year, less than the 1.2% contraction indicated by initial estimates. While historic yen weakness has adversely affected trade, stronger-than-anticipated exports mitigated the impact. Firms’ capital expenditures remained solid, but consumption was weaker than initially thought due to the resurgence of COVID and accelerating inflation. Japan’s government has enacted measures to support growth and protect households and businesses from the buildup of price pressures. The reopening of the country’s borders to tourism is also likely to support economic expansion.
Household spending increased in October, but falling real wages posed a headwind
Separate data showed that household spending, a key indicator of private consumption, increased 1.2% year-on-year in October, due to increased spending on trips after the lifting of coronavirus restrictions, with the benefits of government subsidies to encourage domestic tourism being felt. However, falling real wages posed a headwind to increased spending. The BoJ has repeatedly stressed the importance of seeing wage growth come through to help reach its 2% inflation target in a stable and sustainable manner.
Japan’s impressive performance at soccer World Cup estimated to have economic effects
Dai-ichi Life Research Institute, a think tank, estimated that Japan’s impressive performance at the soccer World Cup—the team made it into the final 16, although it failed to reach the quarter-final stage—could generate up to ¥16.3 billion (USD120 million) in economic effects. These derive from the sale of team apparel, food, and beverages, as well as subscription fees paid to watch the games. COVID has meant that fewer people have travelled to watch the games, however.
China
Chinese stock markets rose as Beijing’s rapid easing of coronavirus pandemic restrictions bolstered investor sentiment despite an expected surge in infections in the coming months. The Shanghai Composite Index added 1.6% and the blue chip CSI 300 Index gained 3.3% in its biggest weekly gain since early November, according to Bloomberg.
China shifts from zero-COVID to reopening
Chinese officials announced a 10-point guideline to their new COVID prevention and control measures. The new measures outlined by the State Council include home quarantine for people with mild symptoms, a vaccination program for the elderly, and reducing mass testing requirements in many cities. Lockdowns in high-risk areas would be lifted if no new cases appeared for five consecutive days.
Although China’s zero-tolerance approach to the virus significantly disrupted economic activity this year, concerns persisted over the impact of reopening on the country’s near-term growth outlook. Many analysts have noted that China’s rapid shift from zero-COVID could be a headwind for the economy and increase business uncertainty if infections and deaths start to rise.
Global demand slows, inflation eases
Weak trade data tempered optimism about reopening. China’s exports fell a bigger-than-forecast 8.7% in November from a year earlier, marking the steepest monthly drop in exports since February 2020. Weaker global demand resulting from rising prices and interest rates worldwide and pandemic-related disruptions in China weighed on exports. Although China has relaxed its COVID restrictions, economists believe that persistent virus outbreaks will weigh on manufacturing activity in the coming months.
In other economic developments, China’s producer price index contracted in November and inflation fell to 1.6%, in line with expectations. Core inflation, which excludes food and energy prices, was unchanged at 0.6%. The tame inflation data raised expectations that China’s central bank would loosen monetary policy, including a possible interest rate cut, even as other major central banks are expected to keep hiking rates into next year.
Other Key Markets
Argentina
Early in the week, former Argentine President Cristina Fernandez de Kirchner was sentenced to six years in prison by a judge in one of several ongoing corruption charges she faces. The judge also prohibited her from holding office in the future. However, as the current Vice President, Kirchner has immunity, so she won't go to jail unless she were impeached by Congress—which T. Rowe Price sovereign analyst Richard Hall believes is unlikely. Hall also notes that the suspension of her political rights is only effective once she has exhausted her appeals, which would likely take at least two to three years for a final ruling by Argentina’s Supreme Court. Although she claimed that she does not plan to seek public office in next year’s elections, Hall believes that she could seek a Senate seat, as she needs to maintain legal immunity by being a lawmaker, or risk being imprisoned once she leaves office.
Peru
On Wednesday, President Pedro Castillo called for the immediate dissolution of the unicameral legislature—a move that T. Rowe Price emerging markets sovereign analyst Aaron Gifford considered a desperate attempt by the president to avoid another impeachment effort by Congress, the third since he took office in July 2021. Castillo’s plan was to impose a temporary curfew, call for early elections, and rule by decree in the interim. After new elections, the new Congress would have been given the powers to create a new constitution within nine months.
In response to this coup attempt, most of Castillo’s cabinet resigned, and Congress impeached Castillo after accelerating the timing of the lawmakers’ impeachment debate. In addition, the Peruvian constitutional court ruled that Castillo was no longer the country’s president, and police forces detained him. Vice President Dina Boluarte was quickly sworn in as president and, in an attempt to provide reassurance to the public, spoke about her intent to create a national unity government, fight “shameful” corruption, and respect the independence of both the police and the military. Gifford is hopeful that, after months of chaos and uncertainty, Peru’s political situation will settle down.
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