![](/sites/default/files/styles/1086x410/public/architecture-buildings-city-316137.jpg?itok=nuzfiWyS)
Global Markets Weekly Update: March 18, 2022
U.S.
Stocks rally as Fed hikes interest rates
Stocks moved higher for the week, ending a two-week losing streak and reclaiming much of the ground lost over the past month. According to T. Rowe Price traders, markets were supported by multiple factors, including falling oil prices, news that Russia had avoided defaulting on its sovereign debt, and the outcome of the Federal Reserve’s monetary policy meeting. While fighting continued in Ukraine, investor sentiment was also buoyed during the week by continued negotiations to end the conflict. Gains were widespread across the major indexes, with the tech-heavy Nasdaq Composite staging the biggest rally.
Central bank begins tightening policy to address inflation risks
As expected, the Fed raised its short-term lending rate by 25 basis points (a quarter percentage point) at its March meeting, moving the fed funds target rate from near zero to a range of 0.25% to 0.50%. It was the first rate hike by the Fed since 2018 and marked a key step away from the ultra-accommodative monetary policy the central bank instituted in the early days of the pandemic. Policymakers also released an updated economic forecast, which showed they are expecting to raise rates seven times in 2022, according to the median projection. In addition, they downgraded their forecast for economic growth, while upwardly revising inflation projections.
According to Blerina Uruci, T. Rowe Price’s chief U.S. economist, the inflation forecast shows that policymakers see a broadening in price pressures beyond the pandemic-related disruptions that had caused the initial spike in prices. Uruci also noted that the Fed intends to shift the stance of monetary policy from accommodative to neutral and then to slightly restrictive before the end of next year, another sign that it intends to move at a fast pace to address inflation. Equity markets seemed satisfied with the Fed’s approach and rallied following the meeting.
Retail sales disappoint, but job market stays strong
Besides the Fed’s announcement, economic data seemed to have a limited impact on markets. February retail sales were disappointing, although the January numbers were revised upward. Continuing claims for unemployment insurance fell to a 52-year low, showing continued strength in the labor market. In a possible sign of peaking inflation, the headline producer price index decelerated during the month of February and the gain in core prices held steady with January’s pace. Meanwhile, mortgage rates in the U.S. soared, surpassing 4% for the first time in almost three years.
Treasury yields rise in response to Fed’s hawkish signals
U.S. Treasury yields shifted higher in response to hawkish signals from the Federal Reserve. (Bond prices and yields move in opposite directions.) Yield increases were most notable in shorter-maturity Treasuries, which are generally more sensitive to changes in monetary policy. Amid a further flattening of the Treasury curve, the five-year yield briefly eclipsed the yield of the 10-year Treasury note during intraday trade Wednesday and did so again early Friday morning.
According to our traders, outflows from municipal bond funds continued to drag on technical conditions in the municipal bond market, although modest levels of new issuance and more attractive valuations relative to Treasuries helped stabilize the market later in the week. In the corporate bond market, both investment-grade and high yield securities performed well following the Fed rate hike.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,754.93 |
1,810.74 |
-4.36% |
S&P 500 |
4,463.12 |
258.81 |
-6.36% |
Nasdaq Composite |
13,893.84 |
1,050.03 |
-11.19% |
S&P MidCap 400 |
2,705.47 |
134.71 |
-4.80% |
Russell 2000 |
2,084.53 |
104.86 |
-7.16% |
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 gained ground for a second consecutive week amid cautious optimism that negotiations between Russia and Ukraine could yield a peace plan. China’s announcement that it would take measures to support the economy and financial markets also appeared to boost sentiment. In local-currency terms, the pan-European STOXX Europe 600 Index advanced 5.43%. Germany’s Xetra DAX Index added 5.76%, France’s CAC 40 Index tacked on 5.75%, and Italy’s FTSE MIB Index climbed 5.13%. The UK’s FTSE 100 Index gained 5.13%.
Core eurozone bond yields climbed modestly. The benchmark German 10-year bund yield at first rose on hoped of progress in Ukraine-Russia peace talks and growing expectations that central banks would pursue more-hawkish policies to quell surging inflation. Yields moderated after ceasefire negotiations appeared to stall. Peripheral eurozone bond prices found support during the week. Reports that the European Union (EU) was mulling fresh joint debt issuances to fund energy and defense spending buoyed the price of Italian government debt and other sovereign issues. UK gilt yields fell. Although the Bank of England (BoE) raised interest rates, markets discerned a more dovish tone in policymakers’ comments and scaled back expectations for more hikes.
BoE raises interest rates for a third time
The BoE raised interest rates to 0.75% from 0.50%, aiming to curb inflation that it now expects to reach 8% by the end of June, in part due to the Russia’s invasion of Ukraine. “Some further modest tightening in monetary policy” might be needed over the coming months, the BoE asserted, while also acknowledging “there were risks on both sides of that judgment depending on how medium-term prospects evolved.” Markets interpreted the language to be more dovish in tone, a view reinforced by Deputy Governor for Financial Stability Sir Jon Cunliffe’s vote against a third back-to-back hike. Cunliffe argued that the hit to business confidence and household incomes from the Ukraine-Russia conflict would slow the economy and bring down inflation.
The BoE’s message appears to have become more dovish because of the potential real economy effects of the Ukraine conflict, according to T. Rowe Price European Economist Tomasz Wieladek. However, he still sees the potential for three more rate increases this year because of evidence of decoupling inflation expectations, emergence of a price-wage spiral, a tight labor market, and a resilient services sector.
ECB’s Lagarde warns Ukraine crisis may trigger ‘new inflationary trends’
In a speech to the annual “The ECB and Its Watchers” conference, European Central Bank President Christine Lagarde appeared to strike a more bearish tone since last week’s policy meeting. She warned that the Ukraine conflict could trigger “new inflationary trends,” as inflation expectations become embedded, companies onshore supply chains, and countries switch to different sources for energy supplies. She also said that the invasion “posed significant risks to growth,” which could depress medium-term inflation “if it means the economy returns to full capacity more slowly.”
Separately, Germany’s ZEW research institute said its economic sentiment index plunged to a record low of -39.3 in March from 54.3 in February. The institute’s president, Achim Wambach, said: “A recession is becoming more and more likely. The war in Ukraine and the sanctions against Russia are significantly dampening the economic outlook for Germany.”
Japan
Japan’s stock markets registered five consecutive days of gains, with the Nikkei 225 Index finishing the week 6.62% higher and the broader TOPIX Index rising 6.10%. Sentiment was supported by the Bank of Japan’s (BoJ’s) continued commitment to its dovish stance amid a global shift toward tighter monetary policy, as well as the government’s announcement that it was set to lift all remaining quasi-states of emergency given the downward trend in daily coronavirus infections. Export volumes recovered, growing in the double digits in February after briefly softening in January. Against this backdrop, the yield on the 10-year Japanese government bond (JGB) rose to 0.21%, from 0.18% at the end of the previous week. The yen weakened to around JPY 118.90 against the U.S. dollar, compared with JPY 117.29 the prior week.
BoJ retains dovish stance, as widely expected
The BoJ’s March monetary policy meeting reaffirmed the central bank’s stance as among the most dovish in the world. The BoJ maintained its short-term policy interest rate at -0.1% and its target for the 10-year JGB yield at around 0%. It will continue with quantitative and qualitative monetary easing with yield curve control as long as it is necessary to achieve and maintain its price stability target of 2%. Japan’s core consumer prices rose 0.6% year-on-year in February, as energy costs soared due to higher oil prices.
The BoJ said that Japan’s economy has picked up as a trend, although some weakness—notably a pause in the pickup in private consumption—has stemmed from the impact of the coronavirus pandemic. It pointed to market volatility due to Russia’s invasion of Ukraine and significant commodity price rises, and cautioned that future developments warrant attention. Inflation expectations have risen moderately. However, BoJ Governor Haruhiko Kuroda stated that there is no need to tighten monetary policy in response to a transitory trend, as opposed to a sustained one. He also asserted that a gradually depreciating yen has a more beneficial impact on the economy than a negative one.
Japan to be free of domestic coronavirus restrictions
The government is set to lift all remaining quasi-states of emergency on March 21, leaving the country free of domestic coronavirus restrictions for the first time since January. Prime Minister Fumio Kishida said that there will be a transition period during which people should exercise maximum caution to prevent the spread of the virus. Daily coronavirus infections have been on a downward trend, and the strain on hospitals has eased. Nevertheless, Japan’s borders remain closed to many foreigners including tourists. The country’s largest business federation, Keidanren, has called on the government to reclassify the coronavirus as endemic and fully remove the border restrictions, which it says are hampering economic activity.
China
Chinese markets weakened during the week with the broad, capitalization-weighted Shanghai Composite index retreating 1.8% and the blue chip CSI 300 index down 0.8%, but the tone at the end of the week was positive after policymakers pledged economic support.
Chinese officials said they would introduce market-friendly policies and keep the capital market running smoothly at a meeting attended by President Xi Jinping’s economic czar, Vice Premier Liu He. In a statement carried by state media, China’s top financial policy body vowed to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on Big Tech “as soon as possible.”
Yi Gang, governor of the People’s Bank of China (PBOC), said in a statement the central bank would help implement the policies after the PBOC unexpectedly held its key interest rate for one-year policy loans unchanged earlier in the week, confounding the expectations of the majority of economists who had predicted a cut in the medium-term lending facility rate.
The 10-year bond yield ended the week at 2.82%, down from the previous week’s 2.836%, according to the Wall Street Journal. The yuan weakened ahead of a meeting between U.S. President Joe Biden and Chinese President Xi Jinping. President Biden was expected to warn Beijing that it will pay a price if it supports Russia.
There was some optimism around resolving the U.S.-China audit dispute following a report that Beijing plans to make concessions. The U.S. Securities and Exchange Commission’s demand for detailed audit documents from U.S.-listed Chinese firms recently had partly contributed to the wave of selling in their American Depositary Receipts (ADRs) amid delisting worries. The property sector saw some relief as state media reported the property tax pilot scheme would not be expanded.
Industrial output highlights positive economic data
In economic news, China reported better-than-expected activity in the January-February period with help from policy easing measures and the easing of power and chip shortages. The year-on-year growth of industrial production, fixed asset investment, and retail sales were all significantly above December 2021 levels and well above market expectations.
Industrial output rose 7.5% in January-February from a year earlier, the fastest pace since June 2021 and up from a 4.3% increase seen in December. Fixed-asset investment rose 12.2% in January-February from a year earlier, the highest since July last year, and retail sales, a gauge of consumption that has been lagging since COVID-19 hit, expanded 6.7% year-on-year amid rising demand during the Lunar New Year holidays and Winter Olympic Games. It also marked the quickest clip since June last year and beat expectations of a 3.0% increase in the poll.
China's new home prices stalled in February after eking out a small gain a month earlier. A surge in domestic omicron cases in recent weeks has also cooled somewhat, helping demand in big cities.
Other Key Markets
Russia
The Moscow stock exchange remained closed during the week of March 18. Despite reports that negotiations between Ukraine and Russia had made some progress toward a framework for ending the conflict, subsequent developments and comments from the leadership of both nations appeared to raise doubts about a near-term diplomatic solution.
Russia’s President Vladimir Putin reportedly told German Chancellor Olaf Scholz that Ukraine was delaying ceasefire talks with counterproductive proposals, and the Russian army stepped up its shelling of Ukrainian cities. Meanwhile, Ukraine President Volodymyr Zelensky continued to seek arms and other assistance from the West. Russian bonds rallied on Friday, buoyed by reports that the correspondent bank had processed interest payments on two of the country’s sovereign bonds and transferred the funds to the payment agent to disburse to investors. Earlier in the week, Russia had indicated that it might need to remit the payment in rubles if sanctions prevented the transaction from taking place in U.S. dollars, raising concerns about a possible default.
Brazil
Equities in Brazil, as represented by the Bovespa Index, gained ground, rallying with stocks in other emerging markets. The country’s central bank on Wednesday raised interest rates by 100 basis points, to 11.75%. This rate increase marked a slowdown from the 150-basis point hike implemented in February, although the central bank indicated that it would adjust the pace of its monetary tightening depending on the persistence and magnitude of inflation. In February, the official measure of consumer prices in Brazil increased 1.01% month over month and hit an annual inflation rate of 10.54%. The country’s Ministry of Economy later increased its 2022 outlook for consumer price inflation to 6.55%, from the 4.70% estimated in November 2021 and lowered its forecast for growth in gross domestic product by 600 basis points, to 1.5%. However, the government reiterated its outlook for the Brazilian economy to grow 2.5% annually from 2023 to 2026.
Argentina
Headline consumer price inflation in Argentina accelerated 4.7% month over month in February, hitting an annual rate of 52.3%. On Thursday, Argentina’s congress voted to approve the restructuring of USD 45 billion in debt remaining from the International Monetary Fund’s (IMF) USD 57 billion loan to the country in 2018. The IMF board must still sign off on the agreement. Meanwhile, the government halted new registrations for overseas sales of soy oil and soy meal from the 2021-to-2022 crop, sparking speculation that a tariff increase could be forthcoming.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. All other trademarks shown are the property of their respective owners. Use does not imply endorsement, sponsorship, or affiliation of T. Rowe Price with any of the trademark owners.
T. Rowe Price Investment Services, Inc., Distributor.