Last Week in Review – November 4, 2022

Last Week In Review

Last week stocks fell after the Federal Reserve dashed market hopes for an impending pivot in monetary policy in the form of a pause or slower pace of rate hikes. The technology-heavy Nasdaq Composite Index was hit particularly hard as growth stocks declined more than value companies. The Dow Jones Industrial Average held up much better, extending its relative outperformance from October.

Tech stocks suffered as the fallout from a largely disappointing earnings season for bellwethers such as Facebook parent Meta Platforms, Amazon.com, and Microsoft continued. Late in the week, Amazon.com announced that it was pausing its corporate workforce hiring, further dampening sentiment. Although it is now a private company, the deep job cuts expected at Twitter under new owner Elon Musk added to the malaise of the tech sector.

Wednesday’s Federal Open Market Committee (FOMC) announcement and Fed Chair Jerome Powell’s post-meeting press conference were the week’s focus. Stocks were little changed until the release of the post-meeting statement, a typical pattern for an FOMC announcement day. As was widely expected, the committee said that it was raising rates by 75 basis points. (A basis point is 0.01 percentage points.) The statement referred to the FOMC taking cumulative policy tightening into account and being aware of the lagged effects of monetary policy, which markets took as a dovish signal, briefly pushing stocks higher.

However, Powell’s press conference took a hawkish turn. He said that the FOMC had revised its estimate of the terminal rate (the highest federal funds rate in the hiking cycle) up from its September projections, and he referred to the pace of hikes not being as important as the terminal rate or how long rates stay there. Notably, Powell stated that it is “very premature” to consider pausing rate hikes, and the S&P 500 Index finished the day down 2.50%.

US – Markets & Economy

On Friday, stocks wavered after the October employment report painted a mixed picture of the labor market. The Labor Department report showed employers added 261,000 jobs to nonfarm payrolls, above consensus estimates, and revised its September jobs figure higher. However, the unemployment rate rose to 3.7% from 3.5% in September as the labor force participation rate moved slightly lower.

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 through most of the week, with short-term rates climbing more than yields on long-maturity bonds. The two-year U.S. Treasury note yield reached a 15-year high above 4.75% on Friday morning. Municipal bonds generated positive returns for most of the week, although municipal fund outflows industrywide continued to hold back market performance, according to municipal traders.

Early in the week, investment-grade corporate bonds benefited from hopes for a dovish pivot by the Fed. Bonds in the banking and automotive sectors outperformed, and demand for longer-maturity debt was strong. However, investment-grade corporates traded lower after the FOMC meeting. High-yield corporate bonds also fell after the Fed policy meeting, with bonds in the media, telecommunications, and mining sectors declining more than the broad high-yield market.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose for the third week as central banks signaled that they might curb the pace of rate increases. Investor sentiment also received a boost from hopes that China might walk back its zero-COVID policies. The pan-European STOXX Europe 600 Index ended the week 1.51% higher in local currency terms. Germany’s DAX Index added 1.63%, France’s CAC 40 Index gained 2.29%, and Italy’s FTSE MIB Index advanced 3.34%. The UK’s FTSE 100 Index climbed 4.07%.

European government bond yields headed back toward 11-year highs after record inflation data for October kept the pressure on the European Central Bank to raise interest rates aggressively. The moves were broad-based, with the yields on French, Italian, and Swiss sovereign bonds rebounding from recent lows. In the UK, 10-year gilt yields climbed after the Bank of England (BoE) raised borrowing costs significantly.

To contain inflation, the BoE increased its benchmark interest rate by 0.75 percentage points to 3%, the highest level since 2008. BoE Governor Andrew Bailey said he would make no promises about future increases but signaled that borrowing costs might not rise as much as the market expects. The BoE also warned that the UK faced a “very challenging” two-year slump and predicted that inflation would stay above 10% for the next six months and above 5% in 2023. Against this backdrop, the central bank forecasts unemployment to rise to almost 6.5% by 2025.

Equity market returns in Japan were positive for the week, with the Nikkei 225 Index gaining 0.35% and the broader TOPIX Index up 0.86%. The sentiment was supported by data showing expansion in Japan’s services sector in October and some speculation about China’s reopening. The U.S. Federal Reserve’s hawkish stance curbed gains somewhat.

The 10-year Japanese government bond yield rose to 0.25%, up from 0.23% at the end of the previous week. The Bank of Japan (BoJ) reiterated its commitment to ultra-loose monetary policy. Still, BoJ Governor Haruhiko Kuroda suggested that the central bank may reassess its yield curve control policy to fight inflation. He added that if inflation continues to exceed the BoJ’s 2% target and wages rise, it could become necessary to tweak monetary policy.

Lastly, China’s stock markets rallied amid speculation that the country was preparing to relax its zero-tolerance approach to the coronavirus. The broad, capitalization-weighted Shanghai Composite Index gained 5.3%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, advanced 6.4%, Reuters reported.

Several reports surfaced last week saying that China was preparing to retreat from the zero-COVID approach that has hurt the country’s economy. An unverified report widely circulated on social media stated that high-level officials met the previous weekend at the request of President Xi Jinping to discuss a conditional opening plan aimed at substantially opening by March 2023, Bloomberg reported. Separately, a report in a state-run newspaper stated that China must strive to control coronavirus outbreaks and “correct mistakes from overly strict measures that have caused damage to people’s properties and lives.”

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