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Global Markets Weekly Update: December 16, 2022
U.S.
Stocks take a round trip as investors focus on inflation and interest rates
Intensified fears over rising interest rates pushed the S&P 500 Index lower for a second consecutive week and to levels last seen in early November. Nearly every sector within the index recorded sharp losses with the exception of energy shares, which were supported by a partial rebound in oil prices. T. Rowe Price traders noted that a roughly USD 4 trillion expiration in options contracts on Friday sparked additional volatility. They also observed that trading in exchange-traded funds (ETFs) reached near record levels at midweek, indicative of investors moving in and out of stocks as a whole in response to broader economic signals.
Two highly anticipated announcements during the week appeared to send sentiment in opposite directions—much higher at the start of the week and sharply lower at its end. The first was the release of the consumer price index (CPI) before trading began on Tuesday. The data showed that headline inflation rose only 0.1% in November from October, bringing the year-over-year gain to 7.1%. That is still well above the Federal Reserve’s long-term 2% inflation target, but the lowest level since December 2021. Core (less food and energy) inflation rose 0.2%, a tick below consensus expectations and largely driven by housing costs, which are already showing signs of cooling.
Policymakers expect federal funds rate to move above 5% in 2023
Many investors assumed that the good news on inflation would have notable impact on Fed policy, but the release of the December policy meeting statement on Wednesday afternoon, followed by Fed Chair Jerome Powell’s press conference, sent stocks sharply lower. While, as widely expected, the Fed slowed its pace of rate increases by announcing a 50-basis-point (0.50 percentage point) increase in the federal funds target rate—the four previous meetings each brought rate increases of 75 basis points (0.75 percentage point)—the official statement reiterated that ongoing rate increases are likely.
Our traders noted that the major stock indexes tumbled over 1% within seconds of the release, perhaps as investors flipped to the quarterly summary of individual policymakers’ economic projections, which showed that the median projection for the federal funds rate in 2023 rose to 5.1%, well above the 4.6% officials had anticipated in September. Fed Chair Powell did little to calm fears at his press conference, stressing the need for further rate hikes and the inflationary dangers of a tight labor market, which has proved resilient despite the Fed’s aggressive rate hikes this year. Similar rate moves and commentary from European central banks on Thursday (see below) seemed to have further darkened investors’ moods.
The other notable surprise of the week may have been Thursday’s data on retail sales, which dropped 0.6% in November, defying expectations for a small increase and indicating a disappointing post-Thanksgiving “Black Friday” and “Cyber Monday” sales season. Sales in the previous two months were also revised lower.
Treasury yields fall
U.S. Treasury yields decreased, with a more pronounced move in shorter-maturity notes. The broad tax-exempt bond market traded modestly higher over most of the week but did not keep pace with the rally in Treasuries. (Bond prices and yields move in opposite directions.) According to our traders, the week’s light supply calendar helped to counter continued outflows from municipal bond funds industrywide.
Our traders noted that investment-grade (IG) corporate bonds performed well in the wake of the softer-than-expected CPI print. Yankee banks (banks with significant operations in the U.S. but domiciled elsewhere) and riskier bonds outpaced higher-quality securities. The IG market’s reaction to the Fed meeting was relatively quiet. New issuance was subdued, and our traders expect a muted primary calendar through year-end.
The lower-than-expected CPI print provided a brief boost to the high yield bond market, but the Fed meeting weighed on sentiment. Our traders noted that they expect liquidity in the below investment-grade market to become more challenged as we move toward year-end. In the bank loan market, our traders noted that retail sellers raised cash due to negative flows from the asset class.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,920.46 |
-556.00 |
-9.41% |
Nasdaq Composite |
10,705.41 |
-299.21 |
-31.57% |
S&P MidCap 400 |
2,416.49 |
-53.09 |
-14.97% |
Russell 2000 |
1,763.41 |
-33.25 |
-21.46% |
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 sharply after central banks indicated that interest rates would likely need to rise further and for longer than markets previously hoped. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.28% lower. Major stock indexes also weakened. Germany’s DAX Index dropped 3.32%, France’s CAC 40 Index lost 3.37%, and Italy’s FTSE MIB Index slid 2.43%. The UK’s FTSE 100 Index gave up 1.93%.
ECB reduces size of rate hikes but suggests higher peak; PMI slump eases
The European Central Bank (ECB) raised its key interest rate by 0.5 percentage point to 2%. Although the increase was less than the three-quarter-point hike implemented at the two previous meetings, ECB President Christine Lagarde said rates “will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive” to bring inflation back down to the central bank’s 2% target. The ECB also said it plans to shrink the portfolio accumulated as part of its Asset Purchase Programme by an average of EUR 15 billion per month, starting next March and running through the end of the second quarter.
The downturn in eurozone business activity continued for a sixth consecutive month in December, according to preliminary results from a survey of purchasing managers. S&P Global's flash composite purchasing managers' index (PMI) ticked up to 48.8—a reading that was still in contractionary territory (below 50) but exceeded a consensus forecast for 48.0 in a Reuters survey of economists.
BoE raises key rate for ninth time, more hikes likely
The Bank of England (BoE) hiked its key interest rate by 0.5 percentage point—the ninth consecutive increase—to a 14-year high of 3.5%. The Monetary Policy Committee, which voted 6–3 in favor of the move, said “further increases” may be required to quell inflation. Governor Andrew Bailey noted in a letter to finance minister Jeremy Hunt that UK inflation may have peaked. The BoE also forecast that the economy would shrink 0.1% in the final quarter of the year, less than its November estimate, which had called for 0.3% contraction.
UK inflation fell from a 41-year high to 10.7% in November as motor fuel prices weakened. Official data showed that the economy shrank 0.3% sequentially in the three months through October. A 0.5% expansion in October helped to partially offset a 0.6% contraction in September, when there was a public holiday to mark the funeral of Queen Elizabeth II. The jobless rate rose to 3.7% in October from 3.6% in September. Average wages rose 6.1% in the three months through October but fell by 2.7% when adjusted for inflation.
Swiss, Norwegian central banks raise rates
The Swiss National Bank raised its benchmark interest rate by 0.5 percentage point to 1.0%. “It cannot be ruled out that further increases will be necessary,” Chairman Thomas Jordan said. In Norway, Norges Bank increased its key rate by 0.25 percentage point to 2.75% and signaled that it would “most likely” raise it again in the first quarter of next year.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index declining 1.34% and the broader TOPIX Index down 0.58%. Risk appetite suffered as the U.S. Federal Reserve (Fed) presented a more hawkish than anticipated monetary policy outlook and concerns grew that continued tightening by the major central banks could push the global economy into recession. Japan’s government finalized its tax revision package, while the latest PMI data highlighted the divergence between an expanding services sector and a shrinking manufacturing sector.
The yield on the 10-year Japanese government bond (JGB) was broadly unchanged from the prior week at 0.25%, continuing to hover around the level at which the Bank of Japan (BoJ) implicitly caps JGB yields, amid ongoing speculation that the central bank could abandon its policy of yield curve control as early as next year. The BoJ is widely expected to leave its monetary policy settings unchanged at its December 19–20 meeting. The yen weakened to around JPY 137.1 against the U.S. dollar, from about 136.5 the previous week, coming under pressure from the Fed’s hawkish stance.
Government finalizes tax revision package
Having recently announced that it would gradually double spending on defense to about 2% of gross domestic product, Prime Minister Fumio Kishida’s government has now agreed to raise taxes—including corporate and tobacco taxes—to fund the increased expenditure.
The government will also make the terms of retirement accounts (NISAs, or Nippon Individual Savings Accounts) more attractive from January 2024. This will include making permanent certain tax exemptions that had previously been time-limited and increasing the maximum annual investment amount—as the government seeks to encourage individuals to shift from savings to investments.
Services sector expands while manufacturers continue to struggle
December PMI data showed that Japan’s services sector expanded while manufacturing contracted. Growing tourism volumes boosted demand for services, and firms saw their pricing power increase. This was against the backdrop of easing COVID concerns, which supported consumer confidence. Conversely, manufacturing firms suffered amid muted customer demand, with both output and new orders across the sector in decline. Manufacturers reported some signs of easing price pressures, however.
China
Chinese stocks fell as weaker-than-expected economic data dampened investor sentiment. The Shanghai Composite Index was down 1.22% and the blue chip CSI 300 Index declined 1.1%, reversing several weeks of gains. Remarks from Vice Premier Liu He indicating that Beijing is considering new measures to support the real estate industry lifted property sector stocks.
COVID lockdowns weigh on data
A trio of key economic indicators for November came in weaker than expected as pandemic-related disruptions weighed on activity. Industrial production rose by 2.2% in November from a year earlier, marking the softest growth since May, while retail sales declined by 5.9%. Fixed asset investment for the year through November also missed forecasts.
Although China recently lifted some of its more onerous coronavirus restrictions, the country’s economic reopening is expected to be bumpy. Recent reports have noted that economic activity remains depressed as concerns about the virus’s spread have discouraged people from resuming their normal activities, while rising infections have left many businesses facing labor shortages.
PBOC boosts monetary stimulus, but leaves rates unchanged
The People’s Bank of China (PBOC) injected a higher-than-expected CNY 650 billion into the banking system through its one-year medium-term lending facility (MLF) in its first cash injection since March. Analysts said the move was aimed at maintaining sufficient liquidity in China’s financial system as it prepares for a full reopening in January 2023. However, the central bank left the one-year MLF rate, a key benchmark lending rate, unchanged at 2.75%.
In other news, senior officials drafted the policy agenda for China’s economy in 2023 during the Central Economic Work Conference, an annual meeting that sets economic policy for the coming year. Officials reportedly set out guidelines aimed at boosting domestic consumption and investment to drive growth through 2035 as China continues to struggle with virus-related headwinds and weakening external demand. Sectors targeted for supportive measures include housing, tourism, electric vehicle manufacturing, health care, and education.
Other Key Markets
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -4.4%. Sentiment was hurt in part by news that the lower chamber of the legislature had passed a bill that, if passed by the upper chamber and signed into law, could enable political leaders to interfere in the operations of state-owned enterprises.
Late last week, President-Elect Lula da Silva confirmed amid growing expectations that he would select Fernando Haddad—a former mayor of Sao Paulo, minister of education, and presidential candidate—to be his administration’s finance minister. Haddad is not perceived as being market-friendly, so it could take some time for him to build credibility with investors. It is possible that market concerns could be assuaged somewhat if Haddad chooses people with business or corporate employment experience, rather than academic professors or public officials, to be economic advisors.
Haddad recently spoke about the need to simultaneously do a tax reform along with a reform of the various fiscal rules next year. As a result, some believe that Lula may be planning to raise the already-high effective tax rate in combination with a switch to a debt- or deficit-based fiscal rule, which would effectively allow more social and investment spending. Tax reform, however, has been difficult to achieve in Brazil, given different states and different industries with vested interests in the current system.
Mexico
Mexican stocks, as measured by the IPC Index, returned about -1.6%.
On Thursday, Mexico’s central bank (Banxico) raised its key interest rate by 50 basis points, from 10.00% to 10.50%, as was widely expected. The decision was not unanimous, however: Four policymakers agreed on a 50-basis-point rate hike, but one dissenter preferred a smaller, 25-basis-point increase.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the central bank’s post-meeting statement was measured, with policymakers lowering their headline inflation forecasts following November's better-than-expected inflation reading but increasing their core inflation forecasts given persistent underlying price pressures. Nevertheless, central bank officials see the same endpoint for inflation, namely Banxico’s 3% consumer price index target by the end of 2024.
On the growth side, the Governing Board highlights that economic activity is recovering but that it will come in at a slower pace in the fourth quarter. One significant change is related to forward guidance: Banxico now says that it believes one more rate hike will still be needed but that, going forward, the Board will be data-dependent. This contrasts to the previous meeting's statement, which focused on calibrating the size of rate increases over the coming meetings. Gifford believes that Banxico could be giving itself an offramp from policy tightening, perhaps even decoupling from the U.S. Federal Reserve—unless the Fed decides to take the same path.
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