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Global Markets Weekly Update: February 04, 2022
U.S.
Stocks remain volatile as focus turns to earnings
Equity markets remained volatile but recorded overall gains for the second consecutive week. Breaking with a pattern of value outperformance largely in place since November, growth and value shares performed similarly, while mid- and small-caps outpaced large-caps. It was one of the busiest weeks of the fourth-quarter earnings reporting season, with 112 companies in the S&P 500 Index scheduled to report results, according to T. Rowe Price traders.
These included several mega-cap names, which drove significant moves in the overall benchmarks. Meta Platforms’ report of a decline in Facebook’s average daily users and guidance for slower revenue growth resulted in a 26% decline in its stock price and wiped a record USD 232 billion off its market capitalization on Thursday. Conversely, Amazon.com’s report of better-than-expected earnings, driven in part by its Web services business, helped the indexes jump back Friday morning. Energy shares performed best, building on their significant lead for the year as U.S. oil prices rose above USD 90 per barrel and as major oil exporters agreed to stick to only a modest production increase in the face of high demand.
Conflicting jobs signals
Our traders reported that the prominent earnings releases took some—but not all—of the focus off rising bond yields and interest rates. The week’s heavy calendar of economic releases included data showing that manufacturing prices rose more than expected in January, reflecting modest upside surprises in gauges of factory activity. Measures of services sector activity fell back, probably reflecting the imprint of the omicron variant of the coronavirus, but not as much as expected.
Labor market data appeared to puzzle investors. On Wednesday, private payrolls firm ADP reported that its tally of private sector employment fell by 301,000 in January—the biggest drop since the start of the pandemic. Friday morning’s official Labor Department jobs report showed a surprising gain of 467,000 jobs in January—roughly three times consensus expectations—despite the impact of omicron. Previous months’ gains were revised significantly higher, and average hourly earnings jumped 0.7%, the biggest gain in 10 months.
The unemployment rate ticked higher to 4.0%, but this seemed to reflect an increase in the labor force participation rate, which rose to its highest level (62.2%) since the start of the pandemic. Observers pointed to the end of the increased federal Child Tax Credit and easing coronavirus concerns as encouraging a return to work. Many also cautioned that January’s preliminary payrolls number may also be revised significantly given the unique circumstances posed by the pandemic.
Payrolls jump pushes bond yields to new two-year highs
The jobs data pushed the yield on the benchmark 10-year U.S. Treasury note to 1.93% on Friday morning, its highest level since late 2019. (Bond prices and yields move in opposite directions.) Despite the higher Treasury rates, the broad municipal bond market rallied through most of the week. Our municipal traders observed stronger demand from institutional buyers and a positive reversal in cash flows as the week progressed.
According to our traders, investment-grade corporate bond spreads are on positive footing as expectations of a lighter primary calendar, generally encouraging corporate earnings reports, and relatively attractive valuations after some year-to-date weakness boosted demand. However, an uptick in new issuance weighed on the asset class later in the week, with more volatile bonds underperforming.
High yield bonds rebounded from recent weakness and traded higher along with equities. The high yield primary market was active with several new deals announced that were met with steady demand as buyers reemerged. The market gave back some gains, however, after weaker tech earnings were announced on Wednesday afternoon and due to renewed inflation fears following hawkish commentary from the European Central Bank (see below).
The bank loan market also performed well. Earnings beats boosted sentiment, and our traders noted that positive retail flows continued, and there was strong demand from collateralized loan obligations as more loans trading below par was supportive for the secondary market.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,089.74 |
364.27 |
-3.44% |
S&P 500 |
4,500.53 |
68.68 |
-5.57% |
Nasdaq Composite |
14,098.01 |
327.44 |
-9.89% |
S&P MidCap 400 |
2,623.18 |
44.86 |
-7.70% |
Russell 2000 |
2,002.36 |
33.85 |
-10.82% |
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
Equities in Europe weakened after European Central Bank (ECB) President Christine Lagarde made comments that appeared to leave the door open for a possible rate increase this year. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.73% lower. Major indexes slipped as well. Germany’s Xetra DAX Index fell 1.43%, while France’s CAC 40 Index slipped 0.21%. Italy’s FTSE MIB Index posted a modest gain, while the UK’s FTSE 100 Index advanced 0.67%.
Core eurozone bond yields rose on concerns about inflationary pressures and the possibility of a shift in the ECB’s accommodative policies. Peripheral eurozone bond yields moved in tandem. A Bank of England (BoE) interest rate increase—the second one since December—pushed gilt yields higher.
ECB’s Lagarde drops previous stance on possible rate increases in 2022
At a press conference following the ECB’s policy meeting, President Lagarde declined to reiterate that it was “very unlikely” that the central bank would raise interest rates this year after being asked about the market appearing to price in some tightening in monetary policy. “You know, I never make pledges without conditionalities, and it is even more important at the moment to be very attentive to that,” Lagarde replied. “We will assess very carefully, [and] we will be data dependent. We will do that work in March.”
Her comments came after the ECB decided to keep its deposit rate at a record low of -0.5% and stuck to plans to reduce asset purchases this year. Data released earlier in the week showed that eurozone inflation unexpectedly ticked up to a new record of 5.1% in January.
BoE raises rates for second month in a row
The BoE raised its key interest rate, with an eye toward curbing inflation that the central bank forecast could hit 7.25% in April. The Monetary Policy Committee (MPC) voted 5 to 4 to increase the bank rate by a quarter point to 0.5%. The minority wanted a half-point hike. The MPC also voted unanimously to stop reinvesting the proceeds from maturing government bonds bought as part of its quantitative easing programs
Eurozone GDP growth slows in Q4
A preliminary estimate indicated that gross domestic product (GDP) grew 0.3% in the final three months of 2021—a slowdown from the 2.3% expansion recorded in the third quarter. This weakness appeared to stem from the surge in coronavirus infections, which weighed on economic activity. For the full year, the eurozone economy overall grew 5.2%, after a 6.4% slump in 2020. Separately, Eurostat data showed that the jobless rate fell to 7.0% in the eurozone in the final month of 2021, an improvement of 100 basis point compared with the downwardly revised November tally.
Socialists win snap election in Portugal
Portugal’s ruling Socialist party, led by Antonio Costa, unexpectedly won an absolute majority in the snap general election held Sunday.
Japan
Stock markets in Japan generated a positive return for the week, with the Nikkei 225 Index rising 2.70% and the broader TOPIX Index up 2.86%. A rally late in the week in some stocks that would benefit from an economic reopening was sparked by a report from Japanese broadcaster TBS, which indicated that the government could present a policy as early as next week covering whether to ease the ban on the entry of nonresident foreigners into Japan. However, TBS did not elaborate on when and how the measures would be relaxed.
On the monetary policy front, reassurances from the Bank of Japan (BoJ) that it had no plans to modify its policy boosted broader sentiment. Although price momentum in Japan remains low, inflationary pressure is forcing other major central banks to tighten monetary policy, prompting some speculation that the BoJ could follow. The yield on the 10-year Japanese government bond rose to 0.20%, from 0.17% at the end of the previous week, the highest since the BoJ started its negative interest rate policy in January 2016. The yen strengthened to around JPY 114.91 against the U.S. dollar, from the prior week’s JPY 115.26.
BoJ reassures investors about monetary policy continuity
With the Japanese economy starting to pick up from the effects of the coronavirus pandemic, BoJ Deputy Governor Masazumi Wakatabe said that it is too early for the central bank to start tightening monetary policy when it has not achieved its 2% inflation target, as it could hinder the economic recovery. While consumer price inflation may accelerate to around 1% in the coming months, Wakatabe emphasized that reaching the target means that the year-on-year growth rate in the consumer price index (CPI) should be at 2% for a certain period, not merely for one month or a few months. Japan’s core CPI rose 0.5% year on year in December. Separately, BoJ Governor Haruhiko Kuroda said that it will be hard for inflation to hit 2% unless wages rise in tandem with prices. He asserted the importance of maintaining powerful monetary easing to support the economy and help generate steady wage and price growth.
Industrial production dips
Japan’s industrial production fell 1.0% month on month in December compared with the previous month’s 7.0% increase, according to data from the Ministry of Economy, Trade and Industry (METI). The main contributors to the decrease were general purpose, business-oriented, and production machinery, as well as transport equipment (excluding motor vehicles). According to METI, production is expected to to be shown to have increased in January and February.
China
China’s financial markets were closed during the week for the Lunar New Year. In economic news, government purchasing managers’ surveys for January showed a moderation in factory production and services. The official manufacturing Purchasing Managers’ Index (PMI) declined to 50.1 from December’s 50.3 reading, and the nonmanufacturing gauge—which measures activity in the construction and services sectors—fell to 51.1 from 52.7. The 50 mark separates expansion from contraction.
Meanwhile, the Caixin/Markit Manufacturing PMI fell to 49.1 in January, its lowest level since February 2020, from 50.9 in December, suggesting that smaller, private firms in China struggled last month. China’s official manufacturing PMI surveys mostly big and state-owned firms, while the private Caixin survey focuses on smaller, export-focused companies.
More evidence of falling sales reflected continued pressure on China’s cash-strapped property sector, which has been suffering a liquidity crisis since last year. Sales for the 100 biggest companies in the property industry slumped 39.6% in January from a year ago compared with December’s 35.2% decrease, according to preliminary data by China Real Estate Information Corp.
The sustained sales decline and tougher funding conditions may put further strain on the property sector’s ability to service its substantial debt. T. Rowe Price analysts believe that a significant worsening in economic data or an increase in defaults among suppliers, larger developers, or local government financing vehicles are among the things that could lead the government to take more decisive action. In the meantime, Beijing is likely using the current downturn as an opportunity to realize long-term goals, such as curbing property sector speculation, increasing housing affordability, and making China’s economy less dependent on real estate.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about -2.0%. Equities were under pressure this week amid weakness in global equity markets. Rising oil prices—which recently reached USD 90 per barrel—also weighed on the market, as Turkey is a major importer of energy commodities. However, lira weakness and its expected impact on already high inflation remain a major overhang.
Early in the week, as reported by Turkey’s Hurriyet Daily News, President Recep Tayyip Erdogan stated that the Turkish government is taking steps “to protect people from high inflation.” Erdogan cited the 50% increase in minimum wages for 2022 as well as increases in civil servants’ salaries and pensions as examples. He also offered to reduce electricity price tariffs to help reduce energy costs for consumers. While he claimed that Turkey has “entered a period where the outlook will improve in the month ahead,” he ultimately concluded that Turks “will have to carry the burden of the rise in inflation that is specific to a certain period for some time.” Indeed, T. Rowe Price sovereign analyst Peter Botoucharov agrees that higher inflation, as well as a weaker lira, is the price that Turks will have to pay as a result of Erdogan’s “new economic model.”
Later in the week, the Turkish Statistical Institute (TurkStat) reported a worsening of inflation trends. For example, the consumer price index increased 11.1% month over month in January. This lifted the year-over-year inflation rate through the end of January to 48.7% versus 36% for full-year 2021. Producer price increases were even more significant: The producer price index increased at a year-over-year rate of 93.5% through the end of January versus a 79.8% PPI inflation rate in 2021.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 0.3%. Central bank officials met on Tuesday and Wednesday, and, as expected, they decided to raise the key lending rate by 150 basis points from 9.25% to 10.75%.
In addition, as anticipated by T. Rowe Price sovereign analyst Richard Hall, policymakers signaled their intention to downshift the pace of rate hikes. According to the post-meeting statement, central bank officials foresee “…at this moment, a reduction in the pace of adjustment of the [policy] interest rate. This indication reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon.”
Hall notes that the language is ambiguous, as it does not clearly project the size of the next rate increase as previous post-meeting statements have. However, with year-over-over headline inflation likely to remain high when policymakers meet in March, this ambiguity gives the central bank flexibility for its next move.
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