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Global Markets Weekly Update: January 28, 2022
U.S.
Stocks move into correction territory
Late gains helped the large-cap benchmarks move higher for the week, but not before most major indexes moved temporarily into correction territory or down more than 10% from recent highs. The small-cap Russell 2000 Index lagged and ended the week down nearly 20% from its November peak, leaving it just outside of a bear market. Volatility as measured by the Cboe Volatility Index (VIX) reached its highest level since the early months of the pandemic. Energy stocks rallied as international oil prices pushed above USD 90 per barrel, driven in part by the continued massing of Russian troops along the border with Ukraine.
Investors expect more rate increases
Fears that the Federal Reserve might be “behind the curve” and forced to raise short-term interest rates quickly to tame inflation weighed heavily on sentiment. The Fed’s monetary policy committee met during the week and kept interest rates steady, as expected. In his post-meeting press conference on Wednesday, however, Fed Chair Jerome Powell left open the possibility that policymakers would raise rates in 2022 more than the three quarter-point hikes they had signaled after their December meeting, with the first increase coming in March. According to CME Group data, futures markets at the end of the week were pricing in a significant potential for at least 125 basis points (1.25%) of rate increases in 2022.
T. Rowe Price traders observed that Wall Street seemed primarily focused, however, on the Fed’s plans to reduce its balance sheet by selling its holdings of Treasuries and agency mortgage-backed securities. Powell said that policymakers were only now discussing how a balance sheet reduction would work but that he expected to announce more details following the March meeting of the Federal Open Market Committee. The chair also acknowledged that the Fed’s roughly USD 8.9 trillion balance sheet is substantially larger than it needs to be, making substantial shrinkage necessary.
Economy grows at fastest pace in nearly four decades
Powell also stressed that economic conditions now are much stronger than in prior cycles, particularly given the record number of open jobs. Indeed, the Commerce Department’s first estimate of economic growth in the fourth quarter showed gross domestic product rising at an annualized rate of 6.9%, well above consensus estimates of roughly 5.5%; for 2021 as a whole, the economy grew by 5.7%, its fastest pace since 1984.
Higher-frequency economic indicators indicated some slowing in January, however. IHS Markit’s composite gauge of service and manufacturing activity fell to 50.8—barely in expansion territory, and its lowest level in 18 months—indicating that the economy had largely stalled as the rapidly spreading omicron variant of the coronavirus restrained consumers and exacerbated supply challenges. (Readings of 50 mark the dividing line between expansion and contraction.) The University of Michigan’s gauge of consumer sentiment was revised lower to 67.2, its lowest level since November 2011, as Americans worried about inflation and falling real wages.
Bond markets suffer setback
U.S. Treasury yields increased in response to the hawkish Fed signals, but our traders noted that the IHS Markit data may have helped temper the rise, along with the tensions between the U.S. and Russia. (Bond prices and yields move in opposite directions.) The broad tax-exempt bond market registered firmly negative returns and underperformed Treasuries, hampered in part by notable outflows from municipal bond funds industrywide. However, following a sell-off across the municipal yield curve, our traders observed improved demand late in the week—particularly among long maturities—from bond buyers who typically invest in taxable fixed income sectors.
The Fed's policy meeting also seemed to weigh on investment-grade corporate bonds, although higher-volatility energy-sector bonds outperformed the broader market in the wake of the meeting. Primary issuance was subdued and fell short of weekly expectations. According to our traders, the high yield bond market traded lower as the prospect of tighter Fed policy and decelerating economic growth weighed on risk assets. Investors also closely monitored the Ukraine situation, partly due to concerns about the potential impact on the energy sector, which carries a heavy weight in high yield bond indexes.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,725.47 |
460.10 |
-4.44% |
S&P 500 |
4,431.85 |
33.91 |
-7.01% |
Nasdaq Composite |
13,770.57 |
1.65 |
-11.98% |
S&P MidCap 400 |
2,578.32 |
-16.16 |
-9.28% |
Russell 2000 |
1,968.51 |
-19.44 |
-12.33% |
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 fell for a fourth consecutive week, extending declines on rising concerns about interest rate increases and escalating tensions between Russia and the West. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.87% lower. The major indexes in Germany and Italy suffered similar pullbacks, while France’s CAC 40 Index slid 1.45%. The UK’s FTSE 100 Index slipped 0.37%.
Yields on core eurozone, peripheral eurozone, and UK bonds increased on concerns over inflation and monetary policy tightening.
Some countries ease coronavirus restrictions
Denmark said it would remove almost all coronavirus restrictions on February 1, except for testing travelers from abroad. Denmark follows the UK, Ireland, and the Netherlands in scrapping measures aimed at reducing the spread of the coronavirus, even though infections remain at or near record highs across the Continent. Sweden, Norway, and Finland announced that they were likely to ease their restrictions in the coming days and weeks.
Coronavirus weighs on activity in services sector
Preliminary data for IHS Markit’s eurozone Purchasing Managers’ Index (PMI) came in at 52.4—an 11-month low but still a level that indicates an expansion in business activity. Much of this weakness stemmed from the services sector, which appeared to come under pressure from coronavirus restrictions. Manufacturing PMI, on the other hand, hit a five-month high as supply bottlenecks eased. Average prices charged for goods and services rose at the fastest rate since the survey started in 2002.
German economy contracts in Q4; Spain and France post GDP growth
Germany’s gross domestic product (GDP) contracted 0.7% sequentially in the fourth quarter, as supply bottlenecks restricted manufacturing and consumer spending fell. In contrast, official data showed that France’s economy grew 0.7% in the last three months of 2021—above expectations but slower than the 3.1% registered in the third quarter. Spain’s economy grew 2.0% over the same period, also topping the consensus estimate. All three economies rebounded in 2021 from sharp, coronavirus-driven contractions suffered in 2020.
Japan
Japan’s stock markets generated a negative return for the week, with the Nikkei 225 Index down 2.92% and the broader TOPIX Index falling 2.61%. The markets slumped after the U.S. Federal Reserve signaled that it plans to steadily tighten monetary policy, with high-growth technology companies leading the declines. Sentiment was also dampened by Japanese authorities’ decision to extend quasi-states of emergency to more prefectures as the country’s daily COVID-19 cases reached a record high and the omicron variant continued to spread rapidly in Tokyo and elsewhere. Against this backdrop, the yield on the 10-year Japanese government bond rose to 0.17%, from 0.13% at the end of the previous week, tracking U.S. Treasury yields higher on the Fed’s hawkish outlook for interest rates. The yen weakened to around JPY 115.55 against the U.S. dollar, from the prior week’s JPY 113.68.
BoJ Governor Kuroda reiterates commitment to ultra-loose monetary policy
Speaking before parliament, Bank of Japan (BoJ) Governor Haruhiko Kuroda reiterated the central bank’s commitment to ultra-loose monetary policy, which he expects to lead to an improvement in corporate profits and economic growth, in turn propping up wages and gradually accelerating consumer inflation. On risks, Kuroda said that prices may shoot up before wages begin to pick up, which could make it difficult for households to meet rising living costs. Wage growth remains sluggish in Japan—Prime Minister Fumio Kishida has called for pay hikes by companies whose earnings have recovered to pre-pandemic levels.
Services activity falls sharply; manufacturers signal strong improvement in operating conditions
Flash purchasing managers’ indices showed a divergence in the performance of the services and manufacturing sectors in January. Services activity fell sharply, with the contraction attributed largely to the reintroduction of restrictions across various prefectures, including Tokyo, due to the spread of the omicron variant. Conversely, manufacturers signaled strong improvement in operating conditions, as both output and new order growth quickened. Across the private sector, firms remained confident about the outlook for activity in the year ahead, although the degree of optimism was the weakest since January 2021.
In the January 2022 update to its World Economic Outlook, the International Monetary Fund (IMF) revised upward its outlook for Japan’s economic growth in 2023 by 0.4 percentage points to 1.8% year over year, reflecting anticipated improvements in external demand and continued fiscal support. The IMF also said that extraordinary support is likely to continue in Japan to allow the recovery to take firmer hold.
China
Chinese stocks slumped ahead of a weeklong Lunar New Year holiday as Jerome Powell’s hawkish tone following the U.S. Fed’s policy meeting raised expectations for faster monetary tightening. For the week, the Shanghai Composite Index lost 4.6% and the CSI 300 Index slid 4.5% as traders factored in as many as five rate hikes in the U.S. this year, a development that would impact the offshore borrowing plans for many Chinese companies. The CSI 300, which struck a 16-month low during the week, is now in a bear market, having fallen more than 20% from its February 2021 peak.
Selling intensified as investors pared positions ahead of the holiday. A spate of profit warnings, mostly in the beleaguered property sector, further dampened sentiment as most China-listed companies prepare to start reporting annual results next month. In economic readings, profits at China’s industrial firms grew at their slowest pace in more than a year and a half as demand cooled.
Evergrande promises restructuring plan
In property sector news, debt-laden developer China Evergrande Group said it would come up with a preliminary restructuring proposal in the next six months. Creditors, however, were disappointed by a lack of detail at a bondholders’ call. Moody’s Investors Service said that the covenant packages in Evergrande’s offshore issuance had become increasingly lax, placing recovery prospects for offshore creditors in peril. Evergrande’s restructuring process was dealt a setback last week after Oaktree Capital, a Los Angeles-based alternative investments manager that issued secured loans to two major projects, seized one of the developer’s prime residential developments near Shanghai, the Financial Times reported.
Local governments become leading land buyers
The debt crisis in China’s property sector has drawn attention to the role of local government financing vehicles (LGFVs), a tool used by local governments to borrow money without it appearing on their balance sheets. According to several reports, LGFVs have eclipsed private developers as the leading buyers of land parcels in China. The increase in off-balance sheet debt amid the pandemic is a key concern for policymakers as they try to manage growing risks to the economy. China’s LGFV debt totals roughly CNY 53 trillion, or roughly one-half of gross domestic product, Goldman Sachs estimates.
Last year, China’s fiscal revenue rose 10.7% from 2020, driven by the economic recovery. The revenue surge has raised the prospect that the central government would boost transfer payments to local governments to help ease their fiscal strains.
The yield on Chinese 10-year government bonds edged down to 2.728% from the prior week’s 2.736%. The yuan currency declined for the week to around 6.36 per U.S. dollar from last week’s 6.34 as the greenback rallied after the Fed’s hawkish comments.
Other Key Markets
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned about -2.3%. On Wednesday, central bank officials held their regularly scheduled monetary policy meeting and decided to raise the country’s key lending rate by 150 basis points, from 4.00% to 5.50%. The decision was unanimous, and the rate increase was larger than the 125-basis-point increase that was widely expected.
According to T. Rowe Price emerging markets sovereign Aaron Gifford, the central bank’s official statement published after the meeting was once again hawkish. Policymakers noted that growth and inflation have been stronger than what was laid out in the central bank’s quarterly monetary policy report published in December. They also noted the increased risks of inflation persisting both domestically and abroad—hence their decision to increase the magnitude of rate hikes.
Gifford believes that the Chilean central bank is ahead of the curve in the fight against inflation and that there is the potential for a significant deceleration in both growth and inflation in the second half of 2022. If that proves to be true, Gifford believes that the central bank could begin reducing rates sometime in 2023.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 2.7%. During the week, the government issued its mid-month inflation report for January, and the month-over-month reading was higher than expected. According to T. Rowe Price sovereign analyst Richard Hall, the upward surprise appeared to stem from a couple of sources, one of which was higher-than-expected prices of volatile food items, like fruits. There was also a continuation of general pressure on manufactured goods prices, which Hall observes is partly related to a longer-term trend of supply chain issues, as well as a delayed removal of holiday shopping discounts.
Brazil’s central bank is scheduled to meet on February 1–2, and investors generally believe that policymakers will raise the key lending rate by 150 basis points, as they signaled following their December policy meeting. However, there is uncertainty about how the latest inflation reading could impact the central bank’s forward guidance for its mid-March meeting. Hall believes that the central bank could signal that it will downshift the pace of its rate increases, as 150-basis-point rate hikes are sizable if the central bank is approaching the end of this cycle of rate increases.
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