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Global Markets Weekly Update: December 10, 2021
U.S.
Easing omicron worries help stocks rebound
The S&P 500 Index recorded its best weekly gain since February, as fears seemed to abate about the new omicron variant of the coronavirus. Most of the benchmarks moved near their record highs, and the S&P MidCap 400 Index reached a new peak on Friday. Information technology stocks drove much of the rally, as solid gains in Apple pushed the market capitalization of the world’s most highly valued public company near USD 3 trillion. Shares of financial firms and utilities lagged but still recorded gains.
Trading started out on a strong note after Dr. Anthony Fauci, the president’s chief medical advisor, said in an interview over the previous weekend that there did not appear to be “a great deal of severity” in the new omicron variant, while cautioning that it was too early to be certain. Later in the week, Rochelle Walensky, the head of the Centers for Disease Control and Prevention (CDC), said that U.S. cases of the disease appeared to be “mild,” although she repeated the need to wait for further evidence. Investors also seemed reassured by news on Wednesday that early studies by Pfizer and its European partner BioNTech showed that a booster shot of their vaccine was effective against the new variant. T. Rowe Price traders noted that new coronavirus restrictions in the UK seemed to weigh on sentiment on Thursday, however (see below).
Labor and inflation data reach levels not seen in decades
Markets also seemed to react favorably to the week’s economic news. On Thursday, the Labor Department reported that 184,000 Americans applied for unemployment benefits the previous week—the lowest number since 1969. The number of open jobs in the U.S. also rose much more than expected to a record 11 million, with most of the gains coming in accommodation and food services.
The multi-decade strength in the labor market was reflected in multi-decade high levels of inflation, with the November consumer price index, reported Friday, rising 6.8% on a year-over-year basis, the biggest jump since 1982. While rising energy costs deserved part of the blame, price increases were broad-based—the core rate, excluding food and energy, rose 4.9%—suggesting wage pressures alongside supply chain issues. Both increases were roughly in line with expectations, however.
While polling suggested that consumers remained more concerned about inflation than they were encouraged by their job prospects, some evidence suggested that the balance might be shifting. The December IBD/TIPP Economic Optimism Index, reported Tuesday, bounced off a six-year low in November and rose the most in a year. The index remained slightly in negative territory, however.
Fixed income markets take inflation data in stride
For their part, bond traders appeared to take the inflation news in stride, perhaps because they had girded themselves for an upside surprise. The yield on the benchmark 10-year U.S. Treasury note fell in the wake of Friday’s report, reversing a part of its increases earlier in the week. (Bond prices and yields move in opposite directions.) According to our traders, receding omicron fears and weak demand for the Treasury Department’s 30-year bond auction drove increases in long-maturity rates and a steepening of the yield curve through much of the week.
High-grade municipal bond yields were little changed through most of the week despite a sell-off in Treasuries and a relatively large new issue calendar. T. Rowe Price municipal traders observed solid demand for new offerings early in the week but some softening in the primary market as the week progressed, evidenced by a lack of meaningful deal repricing.
According to our traders, credit spreads in the investment-grade corporate bond market tightened at the start of the week, as a strong macroeconomic backdrop and light forward supply expectations provided support. (Credit spreads measure the amount of additional yield over a similar-maturity Treasury security that investors demand to hold a bond with credit risk.) Spreads widened later in the week as market participants digested developments around the omicron variant of the coronavirus and factored in expectations for reduced year-end liquidity. The primary calendar was active, but the new deals were met with generally strong demand.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,970.99 |
1390.91 |
17.53% |
S&P 500 |
4,712.02 |
173.59 |
25.45% |
Nasdaq Composite |
15,630.60 |
545.13 |
21.28% |
S&P MidCap 400 |
2,779.85 |
77.72 |
20.52% |
Russell 2000 |
2,211.81 |
52.50 |
12.00% |
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.
Europe
Shares in Europe rebounded as fears about the omicron variant of the coronavirus and its potential economic implications subsided. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.76% higher. France’s CAC 40 Index climbed 3.34%, Italy’s FTSE MIB Index advanced 3.02%, and Germany’s Xetra DAX Index gained 2.99%. The UK’s FTSE 100 Index advanced 2.38%.
Core eurozone bond yields ended higher. Pfizer and BioNTech shared laboratory results indicating that their booster vaccine could be effective against the omicron strain, helping to allay concerns about the possible economic ramifications and bumping up yields. Yields subsequently pulled back a bit on speculation that the European Central Bank could increase asset purchases via its standard Asset Purchase Program once its emergency purchases end in March 2022. On the periphery, an upgrade to Italy’s credit rating kept yields low before they shot up with core markets. UK gilt yields also ended higher. The UK government announced new coronavirus restrictions, a move that appeared to prompt the market to moderate its expectations for potential interest rate increases. This shift in sentiment pressured gilt yields around midweek; however, yields later ticked up on positive vaccine news.
Denmark, Norway, UK impose stricter coronavirus controls
Some countries implemented stricter rules to contain the spread of the coronavirus but stopped short of announcing lockdowns. The UK imposed its so-called Plan B, which includes guidance to work from home, mandatory mask wearing for most indoor venues, and certification of vaccination status. Denmark and Norway also tightened their measures, following similar moves in Germany, Italy, France, and Ireland. Poland made vaccines mandatory for public sector workers. In Austria, Chancellor Karl Nehammer said the national lockdown would be lifted on Sunday but that restrictions would still apply to unvaccinated citizens. Large protests in Brussels and Austria ended in clashes and arrests.
Germany industry output, exports rebound, but orders tumble
German industrial production rose much more than expected in October, but orders plummeted, Federal Statistics Office data showed. Output climbed a seasonally adjusted 2.8% month over month, based on revised data for September. Orders, however, tumbled 6.9% sequentially, after the increase for the preceding month was revised higher to 1.8%. Exports grew for the first time since July, rising 4.1% on the month, the strongest pace in more than a year. Imports surged 5%.
UK economy slows to a crawl
Gross domestic product (GDP) in the UK expanded 0.1% in October, slowing from 0.6% in September, as the construction industry shrank due to rising costs and supply disruptions, according to official figures.
Japan
Japanese equities made gains over the week, with the Nikkei 225 Index returning 1.46% and the broader TOPIX index rising 0.90%. Markets appeared to take ongoing concerns about the omicron variant of the coronavirus and a downgrade to Japan’s third-quarter economic growth in stride. Prime Minister Fumio Kishida set out how his administration plans to carve out a new era for Japan in a policy speech to parliament, with areas of focus including digitalization opportunities, climate change mitigation, and strengthening the start-up ecosystem. Against this backdrop, the yield on the 10-year Japanese government bond was broadly unchanged at 0.05%. The yen weakened to around 113.6 from about 112.8 at the end of the previous week, as it remained vulnerable to negative omicron-related developments and expectations of further policy tightening by the U.S. Federal Reserve.
Kishida set on carving out a new era for Japan; digitalization in focus
In a policy speech to Japan’s parliament, Kishida gave an assessment of the country’s current state of COVID-19 infections, which is holding steady at a low level. Regarding vaccinations, Kishida said the country had begun administering the third dose, beginning with health care workers, and the schedule would be accelerated as much as possible such that the vaccination can be given without waiting eight months after the second dose. Kishida also said he was prepared to bear the criticism for his decision to exercise extreme caution and suspend the entry of foreign nationals into Japan in response to the risk of the omicron strain.
The prime minister also made reference to the previously announced large-scale economic measures, amounting to JPY 55.7 trillion (USD 490 billion), to overcome the coronavirus and carve out a new era; these include assistance to individuals and business operators, as well as an injection of funds to address the challenges of digitalization and climate change. To stimulate consumption, the government is preparing measures, including new “Go To” campaigns—these subsidy programs have, in the past, promoted both domestic tourism and dining out. On innovation, Kishida’s administration intends to dramatically strengthen the ecosystem surrounding start-ups, such as by reviewing the rules for becoming listed on an exchange, so that start-ups that have achieved listing are able to grow further.
Japan’s economy contracts by more than initially estimated in third quarter
Revised figures for economic growth released by Japan’s Cabinet Office showed that gross domestic product contracted by an annualized 3.6% in the third quarter, more than the preliminary estimate of 3.0%. Private consumption fell by more than expected, due primarily to a surge in coronavirus cases over the summer. Meanwhile, Bank of Japan data on the Corporate Goods Price Index showed a record 9.0% year-on-year rise in producer prices, due to supply chain disruptions and the rising cost of raw materials. Until companies start passing on higher costs to their customers, the impact on consumer price inflation—which continues to hover around 0%—is likely to be muted. According to the Reuters Tankan Survey, sentiment among Japan’s manufacturers rose to a four-month high in December. The main reason cited for the rise in sentiment was an easing in supply constraints.
China
Chinese stock markets rose for the week after the central bank cut the reserve requirement ratio (RRR) for banks and November factory gate inflation cooled, easing inflation concerns. The CSI 300 Index jumped 3.1%, and the Shanghai Composite Index added 1.6%. However, worries about property sector defaults and the withdrawal of more U.S.-listed Chinese companies dampened sentiment after ride-hailing app Didi Global said it would delist from the New York Stock Exchange earlier this month.
Yields on China’s 10-year government bonds fell to 2.861% from the prior week’s 2.926%. The renminbi struck a 3.5-year high of 6.3649 against the dollar on Friday after the People’s Bank of China (PBOC) set a weaker-than-expected midpoint. The central bank allows the value of the renminbi to rise or fall 2% against the U.S. dollar from an official midpoint rate it sets each morning.
Property developer worries persist
Property sector turmoil kept investors on edge amid reports of offshore debt restructurings for cash-strapped developers China Evergrande and Kaisa Group. Evergrande announced that it plans to engage with offshore creditors to formulate a restructuring plan. Meanwhile, Kaisa’s recent failure to secure sufficient support from creditors for a bond exchange indicated that a debt recast could be in the offing.
On Monday, the PBOC announced it would cut the RRR for banks by 50 basis points effective December 15, its second such move this year as China seeks to bolster slowing growth. The rate cut will release CNY 1.2 trillion in long-term liquidity into the economy. The central bank also cut the rates on its relending facility by 25 basis points to support the rural sector and small firms.
Producer prices rise much faster than consumer prices
In economic readings, China’s export growth slowed in November due to currency strength and weaker external demand. However, imports jumped amid the scramble to restock depleted commodities, such as coal. Exports rose 22% year on year in November, decelerating from last month’s 27.1% increase, while imports surged 31.7%, outpacing October’s 19.8% rise. As a result, China’s trade surplus in November reached USD 71.72 billion, down from October’s USD 84.54 billion surplus. On the inflation front, China’s consumer price index rose 2.3% in November from a year ago compared with October’s 1.5% gain, reflecting higher food prices and a low base in the prior-year period. But the producer price index rose 12.9% in November from a year earlier, easing from October’s 13.5% increase.
The Chinese Academy of Social Sciences, a leading government think tank, forecast that China’s economy would expand 5.3% in 2022 compared with estimated growth of 8% this year.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 2.5%. Despite some recent weaker-than-expected economic data, the central bank decided on Wednesday to raise the Selic rate by 150 basis points (1.5 percentage points), from 7.75% to 9.25%. This rate increase was generally expected, as it is consistent with what policymakers projected they would do when they met in late October.
In their post-meeting statement, policymakers predicted another 150-basis-point increase at their February 2022 meeting. According to T. Rowe Price sovereign analyst Richard Hall, the statement also included some new hawkish language. For example, “…given the increase in its inflation projections and in the risk of a de-anchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory.” Policymakers also asserted their intention to pursue a restrictive policy “until the disinflation process and the expectation anchoring around its targets consolidate.”
Hall believes that the implications for economic activity are substantial. The economy is already in a technical recession—as indicated by two consecutive quarters of negative GDP growth—so with the central bank solely focused on inflation, Hall believes that the recession is likely to get deeper in the months ahead, as the lagged impacts of this year’s interest rate increases are felt throughout the economy. The Selic rate had been as low as 2.00% in mid-March.
On Friday, the government reported that inflation rose 0.95% month over month in November. This was weaker than expected. Hall is hopeful that this is a sign that inflation is about to begin decelerating and that the 10.7% year-over-year reading for November will be the cyclical high for inflation.
Mexico
Mexican stocks, as measured by the IPC Index, returned about 1.2%.
The Mexican economy continues to struggle with high inflation despite having a sluggish economic recovery. Earlier this week, the government reported that headline inflation rose 1.14% month over month in November and 7.37% year over year. This is the highest inflation on an annual basis in 20 years.
The biweekly figures also show that inflation deteriorated in the second half of the month relative to the first half of November. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, supply shocks continue to be the main culprit, with non-core prices rising 3.45% month over month, or 12.61% year over year, driven by another surge in food and energy costs. Still, core prices (which exclude food and energy) have been very sticky around 0.4% to 0.6% month over month for the last seven months, translating into a 5.0% to 7.5% annualized core inflation rate. Gifford believes that inflation remains too high for monetary policymakers’ comfort, but he does note that core inflation does not seem to be getting worse on a sequential basis.
While it’s hard to know how long supply shocks will last, Gifford believes that the recent drop in oil prices as well as increasingly tougher year-over-year inflation comparisons heading into next year suggest that there could be an inflation turnaround soon, even if the cyclical inflation peak has been pushed out again. Nevertheless, this most recent inflation reading, coupled with news that Mexico’s minimum wage will increase another 22% in 2022, leads Gifford to believe that the central bank may accelerate the pace of interest rate increases when policymakers meet on December 16. The central bank has increased the overnight interbank interest rate from 4.00% to 5.00% in four quarter-point (0.25%) increments since late June.
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