Last Week in Review, June 3, 2022

Last Week In Review

Last week stocks surrendered a portion of the previous week’s substantial gains as investors continued to question whether the Federal Reserve will be able to rein in inflation without causing a recession. Industrials shares outperformed, helped by a rise in Boeing. Consumer discretionary shares also proved resilient, boosted by gains in Amazon.com.

Volatility has continued to moderate since its recent peak in mid-May. However, traders I spoke with noted that warnings from JPMorgan Chase CEO Jamie Dimon that an economic “hurricane” was coming because of rising interest rates and elevated commodity prices seemed to unnerve some investors on Wednesday. A report Friday that Elon Musk had emailed fellow executives that Tesla might have to lay off 10% of its workforce—and that he had a “super bad feeling” about the global economy—also seemed to unsettle investors somewhat. Markets were closed last Monday in observance of Memorial Day.

US – Markets & Economy

Last week’s economic data arguably did little to support worries of an impending recession—particularly one driven by layoffs. Last Friday, the Labor Department reported that employers added 390,000 nonfarm jobs in May, well above consensus expectations of around 320,000. Weekly jobless claims reported the day before surprised modestly on the downside, while April job openings remained slightly below record highs at 11.4 million. Nevertheless, the Conference Board’s index of consumer confidence fell in May as workers grew somewhat less enthusiastic about their job prospects, with modestly more Americans saying that jobs were “hard to get.”

Much of the rest of the week’s data suggested continued solid economic expansion, at least for now. The Institute for Supply Management’s (ISM’s) gauge of services sector activity fell more than expected and hit its lowest level in over a year. However, it remained well in expansion territory. The ISM’s manufacturing data showed a surprising acceleration in manufacturing activity, driven by new orders in May.

Inflation signals were perhaps more challenging to decipher, as were comments from Fed officials about the future path of rate hikes—remarks watched closely given the Fed’s upcoming “blackout” period ahead of the June 14‒15 policy meeting. Some speculation grew that the Fed might pause rate hikes at its September meeting to gauge their impact to date on the economy, and Federal Reserve Vice Chair Lael Brainard remarked last Thursday that financial conditions had already tightened considerably—while warning that policymakers could still raise rates by half a percentage point in September. The Conference Board report showed that Americans’ inflation expectations were moderating. The Labor Department payrolls report brought reassuring news to investors worried about wage pressures, with average hourly earnings rising less than consensus estimates in April (0.3% versus 0.4%).

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

Despite the signs of slowing inflation and speculation about a possible Fed pause, U.S. Treasury yields increased substantially during the week. The benchmark 10-year U.S. Treasury note yield rose from 2.74% to roughly 2.96%. (Bond prices and yields move in opposite directions.) While the strong payroll gains seemed to play a role, traders reported that several international developments also contributed to the increase: A jump in eurozone inflation data and news that the European Union will ban most Russian oil imports by the end of this year helped push Treasury yields broadly higher at the start of the trading week. At the same time, hawkish policy actions by the Bank of Canada added upward pressure to shorter-term U.S. interest rates.

The broad municipal bond market extended its rally over the week headed into Friday, aided by the first week of industrywide fund inflows for the asset class in several months. A light issuance calendar and summer coupon payments also provided technical support to the muni market.

Investment-grade corporate bonds traded lower as U.S. Treasury yields increased amid inflation and growth concerns. Still, traders noted some support from an uptick in overnight activity from Asia and higher-than-average secondary trading volumes ahead of month-end. Primary issuance exceeded expectations for the week. Meanwhile, the high yield bond market saw slightly higher-than-usual trade volumes as the new month began with strong positive flows and the pricing of several recent deals. The new issues were met with solid demand, especially for higher-quality bonds. Our traders noted that banks and exchange-traded funds continued to drive demand in the bank loan market.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

European shares fell in thin volume as the UK market closed early to celebrate Queen Elizabeth II’s 70th year on the throne. Investors continued to struggle with concerns about elevated inflation, slowing economic growth, the pace of central bank policy tightening, and the invasion of Ukraine. The pan-European STOXX Europe 600 Index ended the week 0.87% lower. Major indexes were generally weaker. Germany’s Xetra DAX Index was little changed, France’s CAC 40 fell 0.47%, and Italy’s FTSE MIB lost 1.91%. The UK’s FTSE 100 Index declined 0.69% through Wednesday.

European Union (EU) leaders agreed at the end of the month to ban all seaborne Russian oil deliveries, covering about two-thirds of such imports, within months. Hungary, Croatia, Slovakia, and the Czech Republic—countries that rely heavily on Russian energy supplied via pipelines—were exempted temporarily from the embargo. The agreement also includes a coordinated ban with the UK on insuring ships carrying Russian oil. The European Commission announced a EUR 300 billion plan to end the EU’s dependence on Russian energy imports before 2030.

Meanwhile, Russia’s state-owned energy company Gazprom cut off gas to the Netherlands, the fourth country to be sanctioned for refusing to pay in rubles rather than dollars. Russia stopped supplies to Finland, Poland, and Bulgaria earlier in the month.

European Central Bank (ECB) Chief Economist Philip Lane appeared to suggest policymakers could back an end to the asset purchase program early in the third quarter, followed by a series of gradual 25-basis-point interest rate increases starting in July. His comments echoed those made last week by ECB President Christine Lagarde but were more specific. “Normalization [of monetary policy] has a natural focus on moving in units of 25 basis points, so increases of 25 basis points in the July and September meetings are a benchmark pace,” Lane said in an interview with Spanish newspaper Cinco Días. He added: “What we see today is that it is appropriate to move out of negative rates by the end of the third quarter and that the process should be gradual.” Many policymakers are now agreed on the need to start raising rates to curb inflation, but they are divided over the pace of tightening, with some calling for an increase of 50 basis points in July. The ECB’s key deposit rate is -0.5% and has been negative since 2014.

Japan’s stock market returns were positive for the week, with the Nikkei 225 Index gaining 3.66% and the broader TOPIX index up 2.43%. Further relaxation of Japan’s strict border controls and Chinese authorities’ decision to allow segments of the economy to reopen following stringent coronavirus lockdowns supported sentiment. The 10-year Japanese government bond yield finished the week broadly unchanged at 0.23%, while the yen weakened to around JPY 129.88 against the U.S. dollar, from about JPY 127.10 at the end of the previous week.

Japanese authorities took further steps toward a wider reopening of the country’s borders after a two-year ban on foreign tourism due to the coronavirus pandemic. From June 1, the daily cap on visitor arrivals was lifted to 20,000, from 10,000. Starting June 10, tourists can enter Japan, but with conditions. Packaged tours with guides and fixed itineraries will be allowed, but individual tourists will still be banned. Prime Minister Fumio Kishida said that the resumption of inbound tourism carries great significance in that the benefits of the weak yen can be felt. A weaker yen gives travelers from overseas more purchasing power.

While short-term inflation expectations in Japan have increased—and the rising prices of daily necessities could hurt household sentiment, according to Bank of Japan (BoJ) Governor Haruhiko Kuroda—medium- to long-term inflation expectations are still low. BoJ Deputy Governor Masazumi Wakatabe said that the central bank does not consider that it has achieved its price stability target of 2.0% in a sustainable and stable manner, despite the core consumer price index (CPI) rising 2.1% in April from a year earlier. The year-on-year rate of increase in the CPI is anticipated to decelerate as the positive contribution of a rise in energy prices wanes. Wakatabe stated that it is necessary for the BoJ to continue with monetary easing persistently and not rule out taking additional easing measures without hesitation.

Chinese stocks rallied in a holiday-shortened week after Beijing unveiled a raft of support measures to cushion an economic slowdown triggered by the country’s zero-tolerance approach to the coronavirus. The broad, capitalization-weighted Shanghai Composite Index rose roughly 2.1% for the week ended Thursday. The blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.2%. China’s stock and bond markets were closed Friday for the Dragon Boat Festival.

China’s government unveiled more details of the stimulus programs it announced the previous week, with 33 measures covering fiscal, financial, investment, and industrial policies. Demand for Chinese bonds—already weakened due to rising U.S. Treasury yields—received a further setback amid reports that the government plans to accelerate the issuance of local government special bonds for funding various projects.

According to a private-sector survey, China’s factory activity shrank less sharply in May as virus restrictions eased and some production resumed. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to a stronger-than-expected 48.1 in May from 46.0 in April, when it hit its lowest level in 26 months. The latest Caixin/Markit reading reflected a similar improvement in the official manufacturing PMI in May, which also beat forecasts and signaled that the worst of the country’s lockdown-related disruptions was over.

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