Last Week in Review – December 9, 2022

Last Week In Review

Last week, stocks gave back much of the previous two weeks’ gains as some surprisingly strong economic data dampened hopes that the Federal Reserve might soon be able to curb its program of raising interest rates to cool inflation. The S&P 500 Index recorded its worst return in five weeks, while the small-cap Russell 2000 Index endured its worst week since late September. Technical factors may have played a role in the declines, with the S&P 500 unable to stay above its 200-day moving average following the recent rally.

Within the S&P 500, the typically defensive healthcare, consumer staples, and utility sectors fared best. Energy shares fell sharply as international oil prices tumbled to their lowest level since January, while weakness in Google parent Alphabet weighed heavily on communication services stocks. Financials also performed poorly as several bank executives offered negative outlooks. Goldman Sachs’ CEO David Solomon warned about pay and job cuts and “some bumpy times ahead,” while JPMorgan Chase CEO Jamie Dimon told CNBC that a “mild to hard recession” may hit next year.

US – Markets & Economy

The week started on a down note following a significant upside surprise in the Institute for Supply Management’s (ISM’s) index of services sector activity, which defied expectations for a slight decrease and rose to 56.5, near its highs over the past several months (readings over 50 indicate expansion). The ISM noted a particular pickup in business activity, especially in real estate, food services, and accommodation.

Investors seemed focused on the Friday morning release of producer price inflation (PPI) data throughout much of the week. The PPI figures surprised moderately to the upside, rising 7.4% on a year-over-year basis versus consensus expectations of around 7.2%, sending stock futures sharply lower. Markets recovered losses as trading progressed but sold off again into the close.

Friday also brought the release of the University of Michigan’s preliminary survey of consumer sentiment for December, which added to evidence from hard data that the near-term outlook for the U.S. consumer is broadly stable. While long-term inflation expectations were unchanged at 3%, which is on the higher end of the historical range for the series, short-term inflation expectations fell further.

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 yield on the benchmark 10-year U.S. Treasury note touched a nearly three-month intraday low on Wednesday. Still, it edged higher to the end of the week, driven mainly by the PPI data and headlines that China is easing some of its COVID-related restrictions. Traders noted that the upward pressure on yields was mitigated by softer-than-expected unit labor cost data and by Russian President Vladimir Putin’s comments about the rising risks of a nuclear war. With municipal bond investors eager to access new deals before an anticipated drop in issuance through year-end, offerings from the city of Chicago and other borrowers were met with robust demand.

Despite the weakness across risk markets, investment-grade corporate bonds proved resilient, thanks to a constructive technical backdrop. Secondary trading volumes were in line with daily averages, and primary issuance came in well below expectations for much of the week. Conversely, high-yield bonds and broader risk markets were weaker amid renewed fears around the Fed’s agenda for rate hikes. Several new high-yield deals could price over the next few weeks, but no meaningful issuance is expected until 2023. The bank loan market was relatively quiet, but our traders noted that some buyers looked to rotate to higher-quality loans.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe fell on renewed fears of a recession as central banks tighten monetary policy to quell inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.94% lower. Major indexes also declined. Italy’s FTSE MIB Index lost 1.40%, Germany’s DAX Index dropped 1.09%, France’s CAC 40 Index slid 0.96%, and the UK’s FTSE 100 Index moved 1.05% lower.

Revised data showed that the eurozone economy expanded 0.3% sequentially in the third quarter—up from the first estimate of 0.2%—boosted by increases in household spending and business investment.

However, S&P Global’s composite Purchasing Managers’ Index (PMI), which measures business activity in the services and manufacturing sectors, ticked up to 47.8 in November from the 47.3 reading in October. Despite the improvement, the composite PMI remained below 50, marking the fifth consecutive month in which the forward-looking indicator has been in contractionary territory.

Eurozone retail sales in October posted their most significant monthly drop this year, while German industrial production weakened that month, albeit less than expected.

Japan’s stock markets generated modest positive returns over the week, with the Nikkei 225 Index rising 0.44% and the broader TOPIX Index up 0.39%. While investor sentiment was somewhat supported by data showing that Japan’s economy contracted less than initially estimated in the third quarter of 2022, uncertainty about the trajectory of U.S. monetary policy capped market gains.

The yield on the 10-year Japanese government bond (JGB) finished the week broadly unchanged at 0.25%, although it briefly touched 0.26% amid some speculation that the Bank of Japan (BoJ) may abandon its JGB yield cap as early as next year. The yen weakened to around JPY 136.2 against the U.S. dollar, from about 134.3 at the end of the prior week, on the continued divergence in the monetary policies of the U.S. Federal Reserve and the BoJ, with the former widely expected to hike interest rates again and the latter consistently asserting its commitment to an ultra-loose policy stance.

Data from the Cabinet Office confirmed that gross domestic product (GDP0 shrank an annualized 0.8% in the third quarter of the year, less than the 1.2% contraction indicated by initial estimates. While the historic yen weakness has adversely affected trade, stronger-than-anticipated exports mitigated the impact. Firms’ capital expenditures remained solid, but consumption was weaker than initially thought due to the resurgence of COVID and accelerating inflation. Japan’s government has enacted measures to support growth and protect households and businesses from the buildup of price pressures. Reopening the country’s borders to tourism is also likely to support economic expansion.

Lastly, Chinese stock markets rose as Beijing’s rapid easing of coronavirus pandemic restrictions bolstered investor sentiment despite an expected infection surge in the coming months. According to Bloomberg, the Shanghai Composite Index added 1.6%, and the blue-chip CSI 300 Index gained 3.3% in its biggest weekly gain since early November.

Chinese officials announced a 10-point guideline for their new COVID prevention and control measures. The new measures outlined by the State Council include home quarantine for people with mild symptoms, a vaccination program for the elderly, and reducing mass testing requirements in many cities. Lockdowns in high-risk areas would be lifted if no new cases appeared for five consecutive days.

Although China’s zero-tolerance approach to the virus significantly disrupted economic activity this year, concerns persisted over the impact of reopening on the country’s near-term growth outlook. Many analysts have noted that China’s rapid shift from zero COVID could be a headwind for the economy and increase business uncertainty if infections and deaths rise.

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