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Global Stocks Fall on Hawkish Central Banks, U.S. Inflation May Slide
Global equities declined 1.5% last week. After the Federal Reserve meeting last Wednesday, U.S. equities rose by over 4%. A sharp sell-off ensued during the following days as we believe investors came to terms with central banks eager to raise rates in order to restore price stability. Equites finished lower last week across the U.S. (-0.5%), non-U.S. developed markets (-2.7%) and emerging markets (-4.0%). The two-year Treasury yield rose 0.02% to 2.73% and the 10-year Treasury yield rose 0.19% to 3.13%.
Fed Boosts Rate
The Federal Reserve raised its policy rate 0.50% to 0.75%–1.00%. Quantitative tightening will start in June and the details of the phased run-off were roughly in line with expectations. Chairman Jerome Powell stated the Fed is not actively considering a 0.75% hike and expressed confidence in a “softish” landing. This sparked a short-lived rally across stocks and bonds. However, those gains reversed sharply later. The Fed noted it is highly attentive to inflation risk, committed to restoring price stability and willing to take policy into restrictive territory if economic data over the next few months warrants it. The Bank of England hiked its rate 0.25% to 1.00%. Whereas the Fed highlighted a strong economy, the Bank of England warned of recession. As financial conditions have tightened, investor concerns on stagflation have risen.
U.S. Jobs Momentum Continues
U.S. nonfarm payrolls rose more than expected to 428,000 and the unemployment rate was unchanged (3.6%). Wage gains ticked down to 5.5% year-over-year. There was some concern on the participation rate edging lower as it contradicts the Fed’s goal to increase labor supply.
Europe and U.S. Purchasing Data Strong, China Lags
Purchasing Managers’ Index data for the U.S. and Europe showed continued strong economic activity, increasingly supported by services rather than manufacturing. Low China purchasing data confirmed its COVID-19 lockdowns are slowing economic activity there.
U.S. Earnings and Sales Rising
Aggregate earnings and revenue of companies in the S&P 500 Index are expected to rise 9% and 13% year-over-year, respectively. The rate of companies beating earnings estimates is trending slightly below recent averages, but those averages are elevated by abnormal growth rates during the COVID-19 recovery period. U.S. earnings forecasts for 2022 have increased so far this year.
Europe Proposes Ban on Russian Oil
The European Union proposed a phased ban on Russia oil imports for member nations. Russia has prepared countersanctions and continues to attack areas of Ukraine. Supply disruptions related to the conflict continue to support higher inflation.
This Week Preview
Putin May Declare War on Ukraine
On Monday, we expect investors to react to Russian President Vladimir Putin’s Victory Day speech. Ukrainian officials have warned that he will declare war and announce a general mobilization. If not, the conflict may still worsen if he ramps up escalatory rhetoric against NATO. Overall, the war remains highly volatile.
U.S., Germany and China to Release Inflation
U.S. Consumer Price Index will be a key data release on Wednesday. The core reading is expected to fall to 6.0% year-over-year in April from 6.5% in March. The Fed has said that one datapoint is unlikely to change its policies, but incremental data may strongly influence the market. Other key economic data releases scheduled for this week include inflation in China and Germany.
China’s COVID-19 Challenges Continue
We expect investors to continue to focus on China’s struggle with COVID-19. Last week, the government reaffirmed its commitment to its strict COVID-19 policy. As evidenced by the Fed’s reference to China’s lockdowns last week, we think the spread of the virus in China has important implications for inflation and financial markets.
Source: Bloomberg for data, news developments and earnings schedule. Data as of May 8, 2022.
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