Last Week in Review June 10, 2022

Last Week In Review

Last week stocks finished with steep losses despite some early-week strength. The equities market turned south on Thursday afternoon, and the selling accelerated on Friday following the release of hotter-than-expected consumer price index (CPI) data for May. At the beginning of the week, trading volumes were light, and volatility measured by the Chicago Board Options Exchange (CBOE) Volatility Index, known as the VIX, was relatively low. Still, volatility turned sharply higher at the end of the week.

Oil prices climbed for most of the week before falling on Friday, finishing the week modestly higher and supporting energy sector stocks to some degree. Losses in the tech-heavy Nasdaq Composite were worse than in the broad market as higher interest rates reduced the appeal of companies that may not generate meaningful earnings until well into the future. Value stocks held up better than growth stocks.

In the latest sign of major retailers struggling with supply and demand mismatches, Target made profit estimates lower on Tuesday for the second time in three weeks. The company cited large stockpiles of goods like electronics and patio furniture that have fallen out of favor with consumers, forcing the retailer to discount them and higher transportation and energy costs. However, Target announced Friday that it would increase its annual dividend by 20%.

US – Markets & Economy

The May CPI release was the focus of the week’s economic data. The report showed that headline inflation was 8.6% from a year earlier, topping consensus estimates. May’s headline CPI was also higher than April’s 8.3% reading, disappointing investors who had been looking for price increases to slow. Core CPI, excluding food and energy, climbed 6% from a year ago, faster than consensus estimates.

In a sign that the labor market may be loosening, weekly initial jobless claims increased and hit their highest level since January. However, the acceleration in headline inflation keeps pressure on the Federal Reserve (Fed) to raise rates aggressively and anticipation of more hikes of 50 basis points each—rather than 25—into the year’s second half. (A basis point is 0.01 percentage points). The next Fed policy meeting is this week (June 14‒15).

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 U.S. Treasury yields increased, with yields on short- and intermediate-term maturities climbing sharply after the CPI release. According to traders, hawkish policy signals from the European Central Bank and soft demand for the Treasury Department’s sale of new 10-year notes helped drive U.S. government debt yields higher. (Bond prices and yields move in opposite directions.)

The broad municipal bond market slumped through most of the week, with yields increasing in intermediate- and long-maturity segments. Meanwhile, reinvestment proceeds from June bond maturities and coupon payments flowed to shorter-term issues, anchoring the short-maturity part of the yield curve. Sizable outflows from municipal bond funds industrywide posed a meaningful headwind to the market.

Traders also noted that the investment-grade corporate bond market experienced a glut of new issuance. The primary calendar exceeded weekly expectations, and the latest deals were met with generally solid demand. Later in the week, a risk-off tone gripped the market, and investment-grade corporates traded lower alongside equities. The high yield bond market experienced lower-than-average trade volumes as lower-quality bonds within the high yield universe slightly outperformed.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

European shares fell sharply after the European Central Bank (ECB) suggested that it may increase interest rates faster after July when it plans to end its ultra-loose monetary policy. The pan-European STOXX Europe 600 Index ended 3.95% lower in local currency terms. Germany’s DAX Index pulled back 4.83%, while France’s CAC 40 Index lost 4.60%. Italy’s FTSE MIB Index dropped 6.70% amid concerns about its ability to manage its national debt load without central bank support. The UK’s FTSE 100 Index slid 2.86%.

Core eurozone government bond yields, jumped, mostly in response to the ECB policy meeting, which markets perceived as more hawkish. Peripheral eurozone and UK government bond yields broadly tracked core markets.

The ECB signaled that it plans to raise its key deposit rate, which currently stands at -0.5%, by a quarter-point in July to contain record inflation. However, the central bank added: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” The ECB also confirmed it would end net purchases of bonds under its asset-buying program on July 1.

The ECB lowered its outlook for economic growth and raised its projection for inflation, which it now sees staying above the 2% target over the three-year forecast period. Inflation is expected to accelerate to 6.8% in 2022—compared with 2.6% last year—before declining to 3.5% in 2023 and 2.1% in 2024. The ECB called for the economy to expand by 2.8% this year, down from its previous forecast of 3.7%. The central bank’s projections show economic growth slowing to 2.1% in 2023 and 2024.

Late Friday, senior officials from the Bank of Japan (BoJ), Japan’s Ministry of Finance, and the country’s Financial Services Agency issued a joint statement voicing concerns about the rapid yen weakening. Earlier in the week, BoJ Governor Haruhiko Kuroda told a Financial Times conference that the exchange rate is not a target of any central bank, including the BoJ. He also said that, with Japan’s economic growth still below pre-pandemic levels, the BoJ must extend its support for economic activity by continuing with current monetary easing. While Kuroda conceded that monetary easing had not been entirely successful, given that the BoJ had not achieved its 2% inflation target stably and sustainably (with current inflationary pressures mainly attributable to rising energy prices), he gave assurances that the target is achievable in the coming years.

Growth in Japan’s producer prices slowed in May, to 9.1% from a year earlier compared with 9.8% in April, suggesting that the government’s efforts to ease the pain of rising prices, including increased fuel subsidies, were having some impact.

Prime Minister Fumio Kishida’s Cabinet approved plans for the government’s fiscal and economic policy program, initially presented as a “new form of capitalism” (aka socialism) with a strong focus on income redistribution. The plan has now shifted to emphasize policies designed to raise economic growth, with redistribution initiatives such as a higher capital gains tax excluded. Alongside investment in human capital, science and technology, start-up companies, and digital transformation, an essential focal point will be green transformation—including decarbonization efforts—to boost Japan’s economic growth prospects over the medium term.

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