Last Week in Review – October 7, 2022

Last Week In Review

Last week stocks ended higher for the first time in four weeks. Still, they surrendered most of their gains, as some data suggested that the economy was not slowing enough to satisfy Federal Reserve policymakers. The energy sector was the standout performer in the S&P 500 Index as oil prices surged following a decision by major exporters to cut global production. Volumes were muted as investors awaited the start of the earnings season, and some observed the Yom Kippur holiday.

Stocks bounced off nearly two-year lows on Monday and Tuesday, with the S&P 500 rising 5.6%, its best two-day move since 2020 and the third-best start to an October since 1930.

US – Markets & Economy

Downside surprises in economic reports also boosted sentiment by raising hopes that the Fed might slow its rate hikes to tamp down on inflationary pressures. The Institute for Supply Management’s (ISM) gauge of manufacturing activity fell to 50.9 in September (levels under 50 indicate contraction), below consensus expectations and its lowest level since 2020.

Encouragingly, the ISM reported that price pressures facing manufacturers fell to their lowest level soon after the pandemic, while nonmanufacturing prices rose at the slowest pace since January 2021. Further calming inflation fears, job openings fell to their lowest level in over a year. A smaller-than-expected rate hike from the Australian central bank may have also boosted sentiment.

Inflation worries seemed to resurface after the so-called OPEC+ oil exporters announced a two million-barrel per day cut in target production on Wednesday. Although many observers expect the actual cutback will be smaller, the benchmark price for a barrel of domestic oil rose by roughly USD 10 over the week, crossing the USD 90 mark for the first time since late August.

Signs of labor market strength also seemed to deepen inflation fears. On Friday, the Labor Department reported that the economy had added 263,000 jobs in September, while the unemployment rate had fallen back to multiyear lows of 3.5%. More concerning may have been a surprise drop in the participation rate to 62.3%, indicating that competition for available workers would remain intense. Nevertheless, the wage increase appeared to be slowing, with average hourly earnings continuing to decline on a year-over-year basis to 5%, compared with March’s peak of 5.6%.

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

US Treasury yields increased Friday morning after the nonfarm payrolls data, reversing their decline earlier in the week on the decline in job openings and the Australian central bank’s decision to raise rates by 0.25% instead of 0.50%. (Bond prices and yields move in opposite directions.) The broad municipal bond market rallied through most of the week, meaningfully outperforming Treasuries. A light issuance calendar helped the tax-exempt market’s technical backdrop. Traders reported that primary market offerings—including New York City and California general obligation deals—were met with solid demand. Traders also observed a concentration of retail investors at the short end of the market, while institutional buyers were evident in longer-maturity segments.

Positive impacts of a rebound in risk sentiment on investment-grade corporate bonds as they tracked equities and other risk assets higher. While the rally moderated around midweek alongside the rise in Treasury yields, credit spreads of investment-grade corporates tightened week over week. Technical conditions provided additional support as new issuance was relatively subdued.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe gained ground, following global peers, on hopes that central banks might start scaling back interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.98% higher. Major indexes also climbed. France’s CAC 40 Index put on 1.82%, Germany’s DAX Index added 1.31%, and Italy’s FTSE MIB Index advanced 1.22%. The UK’s FTSE 100 Index added 1.41%.

Germany’s 10-year government bond yields headed back toward recent highs, as minutes of the European Central Bank’s (ECB) September meeting showed policymakers are increasingly worried about high inflation, potentially paving the way for another large rate hike in October. Yields rose broadly in the eurozone. French, Spanish, and Italian sovereign bond yields climbed from the week’s lows after data showed that eurozone inflation accelerated to 10% last month. In the UK, yields on 10-year gilts rose after Fitch Ratings cut the UK’s credit outlook to negative following a similar move by Standard & Poor’s last week.

The minutes from the ECB’s September monetary policy meeting showed clear-cut support for aggressive action due to rising concerns about high inflation becoming entrenched. Some policymakers initially backed increasing a key interest rate by 0.50%, but after discussion, a “very large” number favored taking it up by 0.75%. Some rate-setters backed a more modest move because the looming risk of recession might mitigate inflationary pressure and be sufficient to return inflation to target. However, others argued that policy would remain expansionary even after a 0.75% hike and that this more significant move would be a major step to frontload the transition from the general highly accommodative policy and ensure a timely return of inflation back to target.

Following a rough September for Asian markets, the first week in October saw a solid bounce, with Japanese equities finishing the week notably higher. The Nikkei average finished above the 27,000 level at 27,116 (+4.55%), while the broader TOPIX climbed above 1,900 to finish at 1,907 (+3.86%).

The yen remained in focus as it rallied midweek, briefly strengthening to high JPY 143 levels against the U.S. dollar. However, this proved to be short-lived, and by the end of the week, the yen was back trading in the high JPY 144 range and testing JPY 145 versus the U.S. dollar. This was on the back of a strengthening U.S. dollar after comments from Fed officials backing further rate rises.

Meanwhile, Japan’s Ministry of Finance announced that Japan’s foreign reserves fell by a record USD 54 billion to USD 1.238 trillion at the end of September, as reported by Kyodo News. This resulted from the government’s dollar-selling intervention, which aimed explicitly at arresting the yen’s steep decline.

Japan’s 10-year government bond yield dipped sharply midweek in the bond market, falling to 0.210% as U.S. Treasuries strengthened. However, yields rallied late in the week, briefly moving above the Bank of Japan’s 0.25% curve control tolerance level before settling around 0.245%.

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