Last Week in Review – December 2, 2022

Last Week In Review

Last week the major U.S. equity indexes ended higher, buoyed by the possibility that the Federal Reserve may slow the pace of its interest rate increases. Growth stocks outperformed their value counterparts in the S&P 500 Index, while the technology-heavy Nasdaq Composite Index posted solid gains. However, the “traditional economy” Dow Jones Industrial Average (DJIA) took a bit of a breather and ended modestly higher. Still, the DJIA did enter bull market territory on the final day of November; when it closed more than 20% above the low, it hit in September 2022.

Equities rallied sharply on the final day of November as the market reacted to a speech that Powell gave at the Brookings Institution. In his remarks, Powell highlighted the risk of relaxing monetary policy too soon and reiterated that the peak interest rate for this tightening cycle is likely to be “somewhat higher” than previously estimated. Rates could also remain higher for longer, according to the Fed chair, who also acknowledged that the central bank is mindful that the effects of monetary policy take time to filter through to the economy. Considering this lag, Powell indicated that the Fed could slow the pace of rate increases (down to 50 bps) as early as the Federal Open Market Committee’s mid-December 2022 meeting.

US – Markets & Economy

The jobs market was an area of focus, with Powell telling the audience at the Brookings Institution that labor demand would likely need to soften as the central bank seeks to bring inflation under control. Data from the Bureau of Labor Statistics showed that the number of job openings declined by about 353,000 to 10.3 million—a level that was slightly below a consensus estimate for 10.4 million available positions. Nonfarm payrolls data showed that the U.S. economy added 263,000 jobs in November, exceeding a consensus estimate that had called for the pace to slow to about 200,000. The report called out job gains in leisure and hospitality, health care, and government and employment declines in retail, transportation, and warehousing. The unemployment rate remained at 3.7%.

Consumer spending increased by 0.8%, or 0.5% on an inflation-adjusted basis, sequentially in October. The core personal consumption expenditure price index, which excludes volatile food and energy costs, increased 5.0% yearly, moderating from the 5.2% inflation rate recorded in September. However, the Conference Board’s gauge of consumer confidence slipped in November, with the survey registering an uptick in inflation expectations and increased reticence among households to buy big-ticket items over the next six months.

The Institute for Supply Management’s purchasing managers’ index (PMI) for manufacturing slipped to levels corresponding with a contraction in activity for the first time since May 2020, as the uncertain economic environment appeared to weigh on demand.

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

Comments from Fed Chair Jerome Powell signaling smaller interest rate hikes in the future drove U.S. Treasury yields lower this week. (Bond prices and yields move in opposite directions.) On Friday, however, yields partially retraced their earlier moves after U.S. employment data showed strong hiring and wage inflation in November. Municipal bonds extended their rally, aided by a pullback in interest rates. Traders reported strong demand for short- and intermediate-term municipals from more tax-sensitive, retail-oriented products.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose for the seventh week as lower inflation spurred hopes that central banks could slow the pace at which they are tightening monetary policy. Signs that China was relaxing some coronavirus restrictions also buoyed sentiment. The pan-European STOXX Europe 600 Index ended the week 0.58% higher in local currency terms. Major country stock indexes were mixed. France’s CAC 40 Index added 0.44%, Germany’s DAX Index was roughly flat, and Italy’s FTSE MIB Index slid 0.39%. The UK’s FTSE 100 Index gained 0.93%.

European government bond yields fell after data showed that euro area inflation slowed more than expected in November. Comments by U.S. Fed Chair Jerome Powell suggesting that the central bank might slow the pace of its rate increases fueled a broader rally in bond markets, with Italian, French, and Swiss yields also declining. In the UK, 10-year gilt yields ended little changed.

Inflation in the eurozone slowed in November for the first time in 17 months. Smaller increases in energy and services costs helped push consumer price growth down more than expected to 10% from a record high of 10.6% in October. Inflation decelerated in 14 of the 19 eurozone member states.

The European Commission’s economic sentiment survey showed that consumers and businesses are feeling less gloomy about the economic outlook. Eurozone economic confidence rebounded in November from a two-year low—the first increase since February when Russia invaded Ukraine. In addition, inflation expectations fell sharply.

Central bank policymakers continued to indicate that interest rates are likely to rise further. Before releasing the latest data on consumer prices, European Central Bank (ECB) President Christine Lagarde told the European Parliament that inflation in the euro area had not yet peaked and could even accelerate in the coming months.

In Japan, equity market returns were negative for the week, with the Nikkei 225 Index falling 1.79% and the broader TOPIX Index down 3.17%, as exporters suffered amid yen strength. Investors focused on COVID-related developments in China, where authorities indicated a slight easing of strict coronavirus containment measures could be in the cards. The sentiment was also shaped by growing expectations that the U.S. central bank would slow the pace at which it raises interest rates.

The 10-year Japanese government bond yield moved little on the prior week—broadly unchanged at 0.25%, trading around the Bank of Japan’s (BoJ’s) implicit policy cap. Meanwhile, the yen strengthened to its highest level in over three months to about JPY 134.5 against the U.S. dollar, from around JPY 139.1 at the end of the previous week, in anticipation of the Fed pivoting to a more dovish stance.

Chinese stocks rose amid signs that the Fed would slow the pace of interest rate hikes and that Beijing was moving closer to fully reopening the economy after months of pandemic controls. The blue-chip CSI 300 Index climbed 2.5% for the week, logging the best week in a month.

Chinese markets fell early last week following reports of civil unrest in major cities nationwide over the weekend. The unrest began after a fire in Urumqi, the capital of Xinjiang province, killed ten people, which protestors attributed to coronavirus restrictions.

Signs that China was edging away from its zero-tolerance approach to the coronavirus lifted sentiment. China’s National Health Commission announced that it would boost vaccination rates among the elderly, which is crucial for the economy to reopen fully. Days later, China’s most senior official in charge of the coronavirus response, Vice Premier Sun Chunlan, said that efforts to combat the virus were moving to a “new phase” as the omicron variant weakens and more people are vaccinated, state media reported. Bloomberg reported that Beijing also plans to allow low-risk infected individuals to isolate at home rather than in government quarantine sites, citing unnamed officials.

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