Last Week in Review – October 14, 2022

Last Week In Review

Last week, most major indexes were lower as third-quarter earnings reporting season began in earnest, and investors weighed inflation data and their implications for Federal Reserve policy. By the end of the week, the S&P 500 Index had surrendered nearly half of its gains since its March 2020 bottom. Within the index, the typically defensive healthcare and consumer staples sectors outperformed. In contrast, consumer discretionary and communication services shares lagged, dragged lower by heavily weighted Amazon.com, Tesla, and Meta Platforms (parent of Facebook). Likewise, slower-growing value stocks handily outperformed their growth counterparts.

Stocks saw their most significant move on Thursday, with a sharp early drop followed by a 5.5% surge to the upside in the S&P 500 Index, marking its largest intraday move since March 25, 2020. The bond market was closed Monday in observance of Columbus Day.

US – Markets & Economy

Even as the beginning of last week brought the release of the first major third-quarter corporate earnings reports, all eyes seemed to remain on the macroeconomic environment, particularly inflation. Futures fell before trading on Wednesday after the Labor Department reported that producer prices rose 0.4% in September, double consensus expectations for around a 0.2% increase. On a year-over-year basis, prices rose 8.5%, a tick above expectations but still the third straight monthly decline and well below March’s peak of 11.7%.

However, the market was relatively benign, which may have been due partly to core (less food and energy) prices coming in roughly in line with expectations. Core prices rose 0.3% in September, and the year-over-year gain stayed at a one-year low of 7.2%, slightly below consensus expectations.

Unfortunately, Thursday’s CPI inflation data showed that lower wholesale prices were not yet filtering down significantly to consumers—the trend was, in fact, in the wrong direction. Core consumer prices rose 6.6% on a year-over-year basis in September. This was more than expected, above the previous March peak, and the fastest pace in four decades. Stocks fell sharply on the news but quickly rebounded, which traders attributed mainly to a general sense that negative sentiment had reached extreme levels as well as to technical factors, such as the recent build-up in put options, which give the holder the right to sell at a specific price.

If there was a silver lining to the report, the price increases were primarily concentrated in medical services, transportation, and housing. Shelter prices climbed 0.7% in September, accounting for 40% of the rise in the core index. Still, many observers expect the rapidly cooling housing market to eventually spill over into the Labor Department’s calculation of owner-equivalent rents and the rental market itself.

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

The Treasury yields rose over the week, with the 10-year U.S. Treasury note yield moving above 4.0%, while the two-year yield hit 4.5%, its highest level since 2007. (Bond prices and yields move in opposite directions.) Yields broadly surged Thursday morning following the consumer inflation data release. According to traders, industrywide outflows continued to impede the municipal bond market, but they observed strong demand for primary deals, including a bond issue for the New Jersey Turnpike.

In the investment-grade corporate bond market, banking sector bonds were notable detractors. Investment-grade corporates initially weakened on the consumer inflation data before rallying alongside strength in the equity market. Primary issuance was muted as no new deals were brought to market. Likewise, the high-yield bond market was weaker following the CPI print but recovered along with broader risk markets. Technical factors contributed to the high-yield market’s recovery, and investors’ focus will likely shift to corporate earnings. The bank loan market’s performance was bifurcated, with higher-quality loans holding up reasonably well while lower-quality issues received limited support.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe were little changed after suffering a sharp pullback in the week prior. The pan-European STOXX Europe 600 Index ended slightly lower in local currency terms. Major indexes on the Continent rose. Germany’s DAX Index advanced 1.34%, France’s CAC 40 Index gained 1.11%, and Italy’s FTSE MIB Index tacked on 0.14%. However, the UK’s FTSE 100 Index lost 1.89%.

European government bonds capped a volatile week of trading, with the yield on Germany’s 10-year government debt falling from more than 11-year highs hit earlier this week. However, higher-than-expected U.S. CPI data kept yields in a range, with French and Italian sovereign bond yields enduring a roller-coaster ride. In the UK, yields on 10-year gilts retreated from near 14-year highs after the government reversed some controversial fiscal policy changes it announced in late September.

European Central Bank (ECB) Governing Council member Pablo Hernandez de Cos, governor of the Bank of Spain, said some shocks in the ECB’s downside scenario appear to have materialized, indicating that the economy could soon contract. ECB Vice President Luis de Guindos reportedly said that the central bank is prepared for a possible technical recession (two consecutive quarters of negative growth) accompanied by high inflation. Meanwhile, Austria’s central bank governor, Robert Holzmann, appeared to strike a less hawkish stance. He said that the bank needs to hike interest rates by only 1.25 percentage points by year-end to get close to neutral, or the rate at which monetary policy neither stimulates nor impedes growth. Some policymakers, including ECB President Christine Lagarde, have indicated that rates might have to keep rising into next year.

Japanese equity markets started the shortened week trending sharply lower as traders returned from the long weekend on Tuesday. Fears around hawkish signals from the U.S. Federal Reserve and a weak currency that has, so far, failed to respond to government intervention measures undermined sentiment for much of the week.

Only on Friday did Japanese stocks snap a four-day losing streak, soaring in response to a remarkable Thursday turnaround in the U.S., where equity markets closed sharply higher despite higher-than-expected U.S. inflation numbers. The Nikkei average jumped 3.3% on Friday to finish the week essentially flat at 27,091, while the broader TOPIX index rose 2.4% to end the week at even 1,898.

While U.S. news was a key driver, Japanese markets also digested local data releases. A survey released midweek showed business confidence among big manufacturers fell for a second straight month to its lowest level in five months. However, according to the Bank of Japan, this disappointment was followed by data showing that Japanese corporate goods prices grew the most in five months in September.

China’s stock markets rose after the weeklong National Day Holiday, lifted by supportive central bank comments and anticipation of policy signals during the Communist Party Congress, a twice-a-decade gathering of the country’s political elite that began on Sunday. The broad, capitalization-weighted Shanghai Composite Index added 2.07%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, gained 1.32% from the pre-holiday closing levels, Reuters reported.

The People’s Bank of China (PBOC) will focus on supporting infrastructure construction and enabling quicker delivery of home projects, according to PBOC Governor Yi Gang. He added that the central bank would also step up the implementation of prudent monetary policy and provide stronger support for the real economy.

The yuan, which fell to a 28-month low in September, traded at 7.191 per U.S. dollar late on Friday after hitting a two-week low on Thursday, when U.S. inflation data stoked concerns of more outsized rate hikes. According to Reuters, the yuan had lost more than 10% against the dollar this year and is on track for its biggest annual loss since 1994, when China unified its official and market rates.

The yield on the 10-year Chinese government bond fell to 2.719% from September’s close of 2.776%, according to Dow Jones, after September inflation data came in slightly lower than forecast. The benign readings spurred hopes of supportive monetary policy from the PBOC to bolster the economy.

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