Last Week in Review June 24, 2022

Last Week In Review

Last week signs that inflation might be moderating as growth cooled helped stocks rally sharply over the holiday-shortened week, lifting the S&P 500 Index out of bear market territory. Nearly every sector in the index recorded substantial gains. Energy stocks were the notable exception, as oil continued to back off from its recent highs over most of the week. Traders I spoke with noted that month- and quarter-end flows may have increased trading volumes, as did the rebalancing of Russell indexes following the close of trading Friday. Markets were closed last Monday in their first observance of Juneteenth.

The week’s economic data offered several signals that the Federal Reserve’s forceful turn toward monetary tightening had the intended effect of slowing the economy and moderating inflation. On Tuesday, the National Association of Realtors reported that existing home sales fell to their lowest level in May since June 2020. Its chief economist predicted further declines in the face of higher mortgage rates. The Chicago Federal Reserve also reported that its gauge of national economic activity had reached an eight-month low. On Thursday, S&P Global’s index of June manufacturing activity came in well below forecasts (52.4 versus roughly 56), while its services gauge also missed estimates and hit its lowest level since January.

US – Markets & Economy

Investors reacted favorably to the S&P Global data, partly because it showed that manufacturing input inflation, although still elevated, fell to its lowest level in five months. Meanwhile, output charge inflation (the prices companies charge) had reached its lowest level since March 2021. Although firms continued to pass through hikes in costs to clients, some mentioned concessions were made to customers, the report noted.

The week’s largest gains came Friday, following signs that consumers were stabilizing their inflation expectations as confidence in their finances reached new lows. The University of Michigan’s final reading of June consumer sentiment was revised to 50.0, its lowest record level dating back over four decades. The report also showed that consumers expect inflation to rise at an annualized rate of 5.3% for the second month in a row, below forecasts and the peak rate of 5.4% recorded in March and April. Consumers’ five-year inflation expectations rose slightly to 3.1%, somewhat below consensus expectations and in line with January’s reading. Since August, expectations have remained at 2.9% to 3.1%.

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

Fed Chair Jerome Powell testified before Congress last Wednesday and Thursday that inflation expectations appeared to remain anchored, which seemed to play a role in boosting sentiment in equity and fixed income markets. Despite hawkish comments from some other current and former Fed officials, futures markets began pricing a slightly higher chance of only a 50-basis-point (bp, or 0.50 percentage point) increase in the federal fund’s target rate at the next policy meeting—although another 75 bp increase still seemed the most likely. Powell’s comments and the weaker-than-expected economic readings also briefly pushed the yield on the benchmark 10-year Treasury note near 3.0%, down significantly from the previous week’s intraday peak of nearly 3.5%. (Bond prices and yields move in opposite directions.)

The broad municipal bond market generated solid gains through most of the week, aided by the pullback in Treasury yields. Municipal bond traders reported that favorable supply conditions—marked by manageable issuance levels and light dealer inventories—mitigated technical headwinds from continued fund outflows industrywide.

A relatively quiet primary calendar supported investment-grade corporate bonds from a technical perspective. However, Powell’s acknowledgment to lawmakers that the tightening cycle may induce a recession and the below-consensus manufacturing data weighed on market sentiment.

After tightening at the beginning of the week, corporate credit spreads widened alongside the less supportive macro backdrop.

Higher-quality credits outperformed in the high yield market given the move in Treasury rates. Traders observed increased selling across sectors and ratings to maintain cash levels amid continued outflows from the asset class. The primary market was quiet, with no new deals announced. It was also a subdued week in the bank loan market, as new collateralized loan obligations drove most of the buying activity. New issuance was manageable as only a couple of new deals were priced, and loan funds reported negative flows.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Shares in Europe snapped three weeks of losses as signs that the slowing economy cast doubt on whether central banks would aggressively seek to increase interest rates. The pan-European STOXX Europe 600 Index advanced 2.40% in local currency terms. Major stock indexes were mixed. France’s CAC 40 Index rose 3.24%, while Italy’s FTSE MIB Index gained 1.52%. Germany’s DAX Index, however, was little changed. The UK’s FTSE 100 Index climbed 2.74%.

Core eurozone government bond yields, fell as weaker-than-expected Purchasing Managers’ Index (PMI) readings sparked fears of an economic slowdown and prompted the market to pare expectations for policy tightening. Peripheral euro zone government bond yields broadly tracked core markets, as did UK gilt yields. Record UK inflation and a drop in consumer confidence intensified fears about the economic outlook, exerting further downward pressure on yields. Norway’s central bank raised interest rates by a larger-than-expected 50 bps to 1.25%.

Germany moved to the second “alarm stage” of its emergency plans to reduce gas consumption and increase storage inventories of the thermal fuel after Russia sharply reduced pipeline flows. Sweden and Denmark joined Germany, Austria, and the Netherlands in implementing measures to counter a supply squeeze and averting winter shortages. In addition, Germany, Austria, and Romania moved to reopen some coal plants for electricity generation.

UK inflation accelerated to a record 9.1% in May as food costs rose at the fastest rate in 13 years. Meanwhile, the S&P Global/CIPS UK Flash Composite PMI remained at a 15-month low of 53.1 in June as businesses struggled with falling orders. Consumers reined in their spending, the Office of National Statistics reported, with the volume of retail sales falling 0.5% in May from April.

Japan’s stock markets registered gains for the week, with the Nikkei 225 Index rising 2.04% and the broader TOPIX index up 1.68%. The sentiment was supported by continued expectations that the Bank of Japan (BoJ) would keep its monetary policy ultra-loose, despite upward trending consumer prices and the yen at fresh lows. June Purchasing Managers’ Index data showed a substantial expansion in business activity in the services sector, also providing a boost. However, fears that aggressive monetary policy tightening by the U.S. Federal Reserve could lead to a global recession kept risk appetite in check.

The 10-year Japanese government bond yield fell to 0.23%, down slightly from the previous week’s 0.24%. The yen remained near a 24-year low against the U.S. dollar, finishing the week at the high end of the JPY 134 range. BoJ Governor Haruhiko Kuroda reiterated his view that recent rapid yen moves were undesirable and that the central bank hoped to respond appropriately to currency markets in close cooperation with the government.
Japan’s core consumer price index rose 2.1% year-over-year in May, topping the BoJ’s 2.0% inflation target for the second consecutive month, as positive contributions increased in non-fresh food and household durables. The contribution from energy declined during the month.

The minutes of the BoJ’s April monetary policy meeting released during the week showed that, while inflation expectations had risen—particularly in the short term and at a more moderate pace over the medium- to long-term—many members expressed the view that underlying inflation, excluding such factors as energy, remained relatively low. Members shared the recognition that there was no change in the BoJ’s stance—for the time being, it would closely monitor the impact of the coronavirus pandemic and not hesitate to take additional easing measures if necessary.

Chinese stock markets advanced on stimulus hopes after President Xi Jinping pledged to roll out more measures to support the economy and minimize the impact of COVID-19. The broad, capitalization-weighted Shanghai Composite Index added 1.0%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose 1.97%.

The yuan was marginally firm at CNY 6.69 per U.S. dollar from CNY 6.70 last week. The 10-year China government bond yield dipped to 2.81% from 2.83% a week ago after the People’s Bank of China (PBOC) injected seven-day reverse repos totaling CNY 60 billion into the financial system. The PBOC kept its benchmark lending rates unchanged to avoid further divergence in monetary policy as other global central banks have started hiking interest rates to battle inflation. Analysts believe Beijing is wary of the risks that the yuan will depreciate and that capital outflows will accelerate if it reduces rates to support a slowing economy.

At a virtual BRICS (Brazil, Russia, India, China, and South Africa) Business Forum, President Xi stated that China will “strengthen macro-policy adjustment and adopt more effective measures to strive to meet the social and economic development targets for 2022 and minimize the impacts of COVID-19.” Separately, China’s Finance Minister Liu Kun said that Beijing would accelerate fiscal spending and the sale of special local government bonds.

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