Last Week in Review July 15, 2022

Last Week In Review

Stocks remained volatile last week in light summer trading as investors absorbed inflation data and the first major second-quarter corporate earnings reports. Last Thursday morning, the S&P 500 Index touched its lowest intraday level since June 22 but rallied sharply to end the week. Technology stocks were among the best performers in the index, helped by solid gains in Apple. Energy stocks underperformed as international oil prices fell to levels not seen before Russia invaded Ukraine. Traders I spoke with noted that Monday saw the lowest trading volumes in 2022.

US – Markets & Economy

Anticipation over last week’s important inflation data dominated sentiment even before the reports’ releases beginning Wednesday, according to traders. Wednesday morning’s data uniformly came in hotter than expected, sending markets sharply lower. The Labor Department reported that the consumer price index (CPI) rose by 9.1% over the 12 months ended in June, the highest increase since 1981, with prices jumping 1.3% in June alone. While an 11.2% jump in gas prices in June was partly to blame, core (less food and energy) inflation also surprised to the upside (0.6% versus 0.5%) and picked up from May’s pace.

Thursday’s producer price index (PPI) signals were more mixed. Headline producer price inflation rose 1.1% in June, more than expected and at its highest pace since March. The increase was heavily concentrated in energy prices, however, and some prices fell sharply—for example, softwood lumber prices fell 22.6%, and prices for chicken eggs tumbled 30.2%.

Friday’s inflation data seemed to be interpreted as unambiguously good news, helping to spark a solid rally to end the week. Both import and export prices rose significantly less than forecast in June. A gauge of manufacturing activity in the New York region indicated healthy expansion alongside a deceleration in both prices paid, and prices received. According to the University of Michigan’s preliminary consumer sentiment survey, Americans’ five-year inflation expectations had declined sharply in early July to 2.8%, their lowest level in over a year. The decline seemed to feed expectations that the Fed would move less aggressively than feared at its next policy meeting, raising rates by 75 basis points (0.75%) rather than the 100 basis points futures markets had begun to indicate.

The Michigan survey indicated that Americans felt marginally better about their financial situation than in June. The index defied consensus expectations for another decline and rose to 51.1 off a record low of 50.0. Consumers also appeared more resilient in the face of higher prices than expected—retail sales grew 1.0% in June, above expectations if still not on pace with inflation. Core retail sales (excluding cars, gasoline, building materials, and food services) rose 0.8% after declining in May.

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

Last week the yield on the benchmark 10-year U.S. Treasury note fell as an inversion in the closely watched 2-year/10-year segment of the Treasury yield curve, considered by some to be a recession signal, reached its widest level since 2000. (Bond prices and yields move in opposite directions.) Tax-exempt bonds traded higher through most of the week but lagged U.S. Treasuries. Demand remained strongest at the front end of the municipal yield curve, aided by incoming cash from summer coupon payments and maturing bonds. According to Refinitiv Lipper’s latest weekly measure, municipal mutual funds received net positive flows, a welcome change for municipal bondholders following a protracted period of elevated redemption activity.

The investment-grade corporate bond market opened last week with a cautious macro tone ahead of inflation data releases. Higher-than-expected CPI and PPI prints weighed on macroeconomic sentiment; however, investment-grade corporates remained resilient. Technical conditions were constructive amid healthy levels of overnight inquiry from Asia, with a focus on longer-maturity credits and relatively subdued primary issuance.

High-yield bonds fared relatively well despite equity weakness amid renewed recession fears. No new deals were announced over the week. Traders generally reported positive sentiment in the bank loan market despite broader macro volatility, the equity sell-off, and the flight to safety ahead of the June CPI report. Collateralized loan obligations continued to be an essential source of demand, and most buyers were primarily focused on higher-quality and defensive sectors.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Shares in Europe were flat to lower as central banks increased interest rates, raising fears of a global recession. Over the five days ended July 15, the pan-European STOXX Europe 600 Index ended 0.80% lower, Germany’s DAX Index pulled back 1.16%, France’s CAC 40 gained 0.05%%, and Italy’s FTSE MIB dropped 3.86%. The UK’s FTSE 100 Index declined 0.52%.

Core eurozone bond yields fell as worries grew that a cutoff of Russian gas might push European economies into a recession. Markets pared expectations for policy tightening. As a result, it was causing core bonds to rally. UK government bond yields broadly tracked core markets. Peripheral eurozone bond yields ended largely level. Italian 10-year bond yields fell in tandem with core bonds earlier in the week but sold off after Italy’s ruling coalition collapsed.

The euro broke below parity with the U.S. dollar for the first time in two decades as fears of a global recession intensified. Bank of France Governor François Villeroy de Galhau said on broadcaster franceinfo that the European Central Bank is monitoring the euro’s decline because of its impact on inflation. He also suggested that the move in the currency pair is not necessarily due to the euro’s fundamentals. “When we look at what’s happened since the start of the year, it’s not so much the euro that’s weak,” he remarked, “but the dollar that’s strong, notably because it is traditionally a safe haven.”

Russia closed the Nord Stream 1 gas pipeline supplying Germany for scheduled maintenance work until the following Friday. The German government is concerned that Russia may not fully reopen it on that date in retaliation against European sanctions, which could force Germany to impose rationing on industries and households to preserve winter stockpiles. Russia has already cut the flows to 40% of the pipeline’s capacity, citing delays in the return of equipment being serviced in Canada by German company Siemens.

The European Commission (EC) will hold an extraordinary summit on July 26 to discuss a coordinated gas savings plan to preserve European reserves should Russia cut off supplies.

Lastly, Chinese stock markets eased as data revealed that the country’s economy slowed sharply in the second quarter. A growing movement among homebuyers to stop paying their mortgages hurt property and banking shares. The broad, capitalization-weighted Shanghai Composite Index fell 3.8%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 4.1%, Reuters reported.

China’s GDP for the June quarter grew a worse-than-expected 0.4% from a year earlier, official data showed, compared with a 4.8% expansion recorded in the first quarter. Friday’s GDP followed reports of a rapidly growing number of Chinese homebuyers who have refused to pay mortgages for unfinished construction projects. Bloomberg reported that homebuyers had halted mortgage payments on at least 100 projects in more than 50 cities across China as of Wednesday, a sharp increase from just days before, citing researcher China Real Estate Information Corp. The payment refusals for unfinished homes came despite Beijing’s assurance that local governments would get help to deliver property projects on time. Chinese developers are allowed to sell houses before completion, though they must put those funds in escrow accounts.

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