Last Week in Review – August 26, 2022

Last Week In Review

Last week stocks moved sharply lower—if in a week of primarily light summer trading—as investors became less optimistic that the Federal Reserve would be able to tame inflation without causing a significant economic slowdown. Technology and other high-growth stocks fared worst in this environment, and the tech-heavy Nasdaq Composite Index fell to its lowest level in a month. Rising oil prices fed into inflation worries but also boosted energy stocks. Wednesday was the slowest session of the year based on traded shares (volume).

US – Markets & Economy

Most of the market’s moves came at the end of the week as central bankers gathered at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming—and most of the investors’ focus appeared to center around Fed Chair Jerome Powell’s speech on Friday morning. Chairman Powell’s comments were viewed as “resolutely hawkish,” as he perceives taming inflation as the bedrock of the recovery. Nevertheless, the Fed is unlikely to move official short-term rates above 4% by the end of the year as the U.S. economy feels the lagged impact of monetary policy and anticipation of a recession in Europe and a sharp slowdown in China.

Much of the week’s economic data surprised to the downside and arguably offered evidence that growth had slowed considerably in recent weeks in response to tightening financial conditions. On Tuesday, S&P Global announced that its composite gauge of service and manufacturing activity had fallen further into contraction territory and hit its lowest level since early 2020. Sales of new homes in July fell for the sixth month so far this year to the slowest pace since early 2016, and both personal income and spending rose much less than consensus expectations (0.2% versus roughly 0.6% and 0.1% versus 0.4%). On the positive side, new orders for nondefense capital goods excluding aircraft, a proxy for business investment, rose 0.4% in July, and weekly jobless claims fell back to their lowest level in a month. The University of Michigan’s consumer sentiment index rose more than expected, hitting 58.2 in August after bottoming at a record low of 50 in June.

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

Despite the mixed economic signals, U.S. Treasury yields moved higher for much of the week, which traders attributed partly to hawkish comments from several Fed officials and a Wall Street Journal article highlighting structural inflationary forces that could keep interest rates higher for longer. (Bond prices and yields move in opposite directions.) Industrywide outflows and higher Treasury yields weighed on the broad tax-exempt municipal bond market, which extended its month-to-date losses.

Weak equities and market expectations for a hawkish stance from Powell at the Jackson Hole symposium led investment-grade corporate bonds lower early in the week. Higher-risk issuers and those with larger, more liquid capital structures underperformed. However, a relatively quiet primary calendar and healthy overnight demand from Asia provided technical support.

The high-yield bond market experienced low trading volumes throughout the week. Still, traders noted some weakness in the retail segment due to disappointing results and guidance from department store operator Nordstrom. No new issues were announced, and the primary market was expected to be dormant until after Labor Day when financing deals from several issuers are anticipated. Similarly, the bank loan primary market was effectively closed for the summer, with no deals left on the docket and no more issuance until after Labor Day.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe fell as fears intensified that the efforts of key central banks to subdue inflation could deepen an economic downturn. The pan-European STOXX Europe 600 Index ended the week 2.58% lower in local currency terms. Major stock indexes also declined. Germany’s DAX Index tumbled 4.23%, France’s CAC 40 Index fell 3.41%, and Italy’s FTSE MIB Index slid 2.84%. The UK’s FTSE 100 Index lost 1.63%.

Core eurozone government bond yields moved higher amid rising expectations of sharp increases in interest rates and data indicating economic activity is stalling. Peripheral eurozone and UK government bond yields broadly tracked core markets.

Also weighing on investor sentiment, natural gas prices surged to record levels after Russia’s state-owned natural gas producer Gazprom announced further maintenance-related closures of the Nord Stream 1 pipeline to Europe at the end of August. Pipeline flows are currently at 20% of the agreed volume. The euro traded close to parity with the dollar as the economic outlook soured.

The minutes from the European Central Bank’s (ECB) July policy meeting suggested that more interest rate hikes could be forthcoming to subdue persistently high inflation that “posed an increasing risk of longer-term inflation expectations becoming unanchored.” At that meeting, policymakers sanctioned a larger-than-expected 0.5 percentage point increase in critical rates and “cautioned that a continued anchoring of inflation expectations was dependent on the Governing Council acting decisively on the worsening inflation outlook.” However, rate-setters also stressed that the rate increase’s size did not “constitute an upward shift in the interest rate path but, rather, a frontloading of the policy normalization.” They said signs of an economic downturn had increased, but “there were no indications of a major recession in the euro area so far.”

Despite rallying late in the week, Japanese equities finished the period lower than they began, as investors braced for a hawkish message from U.S. Federal Reserve Chair Jerome Powell at the annual Jackson Hole economic symposium on Friday. The Nikkei 225 Index finished the week down 1.0%, closing at 28,641.4. The broader TOPIX also finished lower, booking a 0.75% loss on the way to closing at 1,979.6 for the week.

Economic data released early in the week did little to boost sentiment, with flash survey numbers showing Japan’s factory activity growth slowed to a 19-month low in August, impacted by persistent rises in raw materials/energy costs and weakening global demand. Elsewhere, Japan’s manufacturing sector continued to expand in August, but the 51.0 PMI score ultimately

disappointed, given it was down from 52.1 in July. The weaker data only added to persistent concerns about an economic slowdown, causing Japanese equities to close at a two-week low on Wednesday.

Lastly, China’s stock markets declined as extreme temperatures, and power shortages in some provinces raised concerns about the growth outlook. The broad, capitalization-weighted Shanghai Composite Index eased 0.67%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.05%, Reuters reported.

Beijing announced several measures to prop up the economy last week. The State Council, China’s cabinet, outlined a 19-point policy package adding CNY 300 billion to state policy banks’ investment in infrastructure projects, on top of the CNY 300 billion announced in June. The cabinet also allocated CNY 500 billion in special bonds from previously unused quotas to local governments. China’s policymakers have signaled they wouldn’t flood the economy with excessive stimulus.

The People’s Bank of China (PBOC) cut two key interest rates as the central bank stepped up efforts to revive the economy. The central bank cut the five-year loan prime rate (LPR), a reference for mortgages, by 15 basis points to 4.30% and trimmed the one-year LPR by a smaller-than-expected five basis points to 3.65%. Last month, China reported that its economy narrowly avoided contracting in the second quarter amid repeated coronavirus lockdowns and a nationwide property crisis.

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