Last Week in Review – April 22, 2022

Last Week In Review

The major U.S. equity indexes ended last week lower. The Russell 1000 Growth Index stocks gave up more ground than its value counterpart, while the large-cap S&P 500 Index posted steeper losses than the S&P SmallCap 600 Index and the S&P MidCap 400 Index. Within the S&P 500, the communication services sector pulled back the most. Shares of Netflix tumbled more than 35% during the week as the company reported disappointing quarterly results that were headlined by a sequential decline in its global subscriber rolls. Only the consumer staples sector gained ground.

US – Markets & Economy

Preliminary data for the S&P Global U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, suggested that growth in business activity slowed in April but remained strong. The widely watched economic indicator came in at 55.1 compared with 57.7 in March. (PMI readings greater than 50 indicate an expansion in business activity.)

The S&P Global U.S. Services PMI hit 54.7 in April, down from 58.0 in March. The survey, however, showed that manufacturing activity expanded. New orders for manufacturing and services businesses suggested that demand remained strong as restrictions related to the coronavirus pandemic loosened. However, both economy segments appeared to contend with rising labor and input costs by signaling the steepest uptick in output charges on record.

James Bullard, president of the Federal Reserve Bank of St. Louis, reiterated his view that to curb elevated inflation, the central bank should move “expeditiously” to bring interest rates to be neutral or to a level that neither stimulates nor impedes economic growth. Bullard indicated that a rate increase of 75 basis points (0.75 percentage points) could be up for discussion. However, he also said that a move of this magnitude would not be his base case and suggested that the economy should expand this year and in 2023.

At an event hosted by the International Monetary Fund (IMF), Fed Chair Jerome Powell said a 50-basis-point rate increase could be “on the table” for the May 3‒4 policy meeting and stated that “it is appropriate…to be moving a little more quickly.” While acknowledging the challenges of engineering a soft landing, Powell disputed fears that the Fed’s rate-hiking cycle would risk pushing the economy into recession, citing the historically strong labor market.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

Meaningful increases in short- and intermediate-term U.S. Treasury rates resulted in a flatter yield curve. (Bond prices and yields move in opposite directions.) According to traders, these moves partly reflected investors’ growing expectations for the Fed to hike its benchmark interest rate by 50 basis points at its next three policy meetings.

Investment-grade corporate bonds weakened against a less supportive technical backdrop. New issuance exceeded weekly expectations, and this uptick in new deals, which generally offered attractive concessions, appeared to weigh on demand for bonds in the secondary market. In the high yield bond market, traders noted a bias toward quality, with BB-rated bonds outperforming the CCC tier.

The broad municipal bond market delivered negative returns through most of the week and underperformed U.S. Treasuries by a wide margin. Traders reported additional outflows forced municipal bond portfolios to sell bonds—particularly those with short maturities—to meet redemptions.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Shares in Europe fell amid ongoing concerns about the war in Ukraine and increased hawkishness among central bank policymakers. The pan-European STOXX Europe 600 Index ended 1.42% lower in local currency terms. The main market indexes were mixed. Germany’s DAX Index and France’s CAC 40 Index were little changed, but Italy’s FTSE MIB Index lost 2.34%. The UK’s FTSE 100 Index pulled back 1.24%.

Core eurozone bond yields increased as hawkish comments from policymakers at key central banks drove a broad sell-off in high-quality government bonds. Peripheral eurozone and UK government bond yields largely tracked core markets.

Speaking at the annual IMF/World Bank meeting, European Central Bank (ECB) President Christine Lagarde reiterated that its asset purchase program will conclude in the third quarter and that incoming data will determine interest rate moves. Earlier, hawks on the central bank’s governing council—Bundesbank Governor Joachim Nagel and Latvia’s central bank Governor Martins Kazaks—appeared to strengthen their stance, pressing for an early end to stimulus in July by interest rate increases. Previously seen as a dove, ECB Vice President Luis de Guindos suggested that a rate increase could occur as early as July.

Japan’s stock markets rose modestly over the week, with the Nikkei 225 Index returning 0.04% and the broader TOPIX Index gaining 0.47%. Consumer price inflation continued to lag other major developed economies—the core consumer price index was up 0.8% year on year in March—and remained a key factor behind the Bank of Japan’s (BoJ’s) continued pursuit of its ultra-loose monetary policy.

With the yen hovering around a two-decade low against the U.S. dollar, BoJ Governor Haruhiko Kuroda said that the adverse effects of a weak currency, including the increased difficulty in companies’ business planning, need to be taken into account. The yen finished the week at around JPY 128.49 against the U.S. dollar compared with the previous week’s JPY 126.44. The BoJ bought Japanese government bonds (JGBs) to defend the upper limit of its interest rate target range and announced new bond-buying plans. The yield on the 10-year JGB finished the period broadly unchanged at 0.24%.

BoJ Governor Kuroda offered his latest assessment of the recent moves in the yen, describing them as “quite sharp” and suggesting that they could hurt companies’ business plans. However, he reiterated that, overall, a weak yen benefits the economy by boosting the value of companies’ overseas earnings. Kuroda also reaffirmed the central bank’s commitment to its massive stimulus program to support the still-fragile economic recovery.

During the week, Finance Minister Shunichi Suzuki discussed recent currency developments with U.S. Treasury Secretary Janet Yellen, with the two asserting that the current Group of Seven (G-7) foreign exchange agreements should be upheld.

Lastly, the Chinese markets slid as investors worried about the economic fallout from coronavirus lockdowns after officials said harsh restrictions would remain in place. The CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 4.2% this week in its worst five-day performance since mid-March, according to Bloomberg.

Fed Chair Powell’s comments that a half-point U.S. rate hike was “on the table” when the central bank meets in May pressured China’s bonds and currency. The 10-year Chinese government bond yield rose to 2.88% from 2.818% a week ago, while the yuan struck a seven-month low of 6.47 against the U.S. dollar, down 1.8% for the week.

Reuters reported that foreign investors sold a net USD 1.01 billion worth of Chinese stocks so far in April via the Hong Kong Stock Connect program. The latest outflow comes after foreigners sold roughly USD 7.1 billion in March, the largest outflow in nearly two years. Bloomberg reported that the outflows had stoked official concern. The China Securities Regulatory Commission reportedly called upon its National Social Security Fund, banks, and insurers to boost their equity investments.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com