Last Week in Review – October 21, 2022

Last Week In Review

Last week equities recorded substantial gains as investors appeared to react to some prominent earnings reports and hints that the Federal Reserve might moderate its pace of interest rate hikes. The S&P 500 Index enjoyed its best weekly gain in nearly four months, while the Dow Jones Industrial Average marked its third consecutive week of gains. Energy shares outperformed within the S&P 500 as oil prices proved resilient despite announcing a U.S. Strategic Petroleum Reserve release. The small real estate sector lagged. Trading remained active and volatile due to the expiration of USD 2 trillion in options contracts on Friday.

The week started strongly due to a reversal in the UK government’s fiscal stimulus plans. Investors appeared to be climbing the proverbial “wall of worry” after the previous Friday’s steep decline and a perceived surplus of short positions taken by hedge funds. Better-than-expected quarterly results, guidance, and buybacks from Goldman Sachs and Lockheed Martin also seemed to boost sentiment broadly.

More tough talk from Fed officials appeared to cause a pullback at midweek. On Tuesday afternoon, Minneapolis Fed Bank President Neel Kashkari said in a speech, “if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping [rate hikes] at 4.5%, or 4.75% or something like that.” Futures markets reacted by pricing in the federal funds rate nearing 5% by the Fed’s March 2023 meeting and remaining at that level into the second half of next year.

Friday morning, however, stocks bounced after The Wall Street Journal reported that “some officials have begun signaling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy.” In particular, the paper cited recent warnings from Kansas City Fed President Esther George that “a series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points.” The journalist behind the story, Nick Timiraos, has earned the reputation of “Fed whisperer” for accurate advance reporting of previous changes in Fed policy.

US – Markets & Economy

Last week’s economic calendar offered mixed evidence on how deeply the Fed’s rate hikes are cutting into growth. Our traders reported that the weak housing market was a focus in Wednesday’s pullback following sharp declines in mortgage applications and housing starts, along with analysts’ downgrades of home supply stores Home Depot and Lowe’s. An index of homebuilder sentiment also fell more than expected and hit a 10-year low. On the other hand, manufacturing production rose more than expected in September (up 0.4%), and jobless claims for the week ended October 15 fell much more than anticipated to their lowest level since late September.

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

The hawkish Fed comments pushed the yield on the 10-year U.S. Treasury note to a 14-year high of 4.33% last Friday. (Bond prices and yields move in opposite directions.) Municipal bonds produced modestly negative returns over most of the week as rising U.S. Treasury yields and a heavier-than-average new issue calendar presented headwinds for the asset class.

Investment-grade corporate bonds performed well at the start of the week alongside a move higher in equity futures. However, traders noted that expectations of an active primary calendar limited positive momentum. While this expected uptick in supply did not fully materialize, moves lower in the equity market and hawkish Fed rhetoric weighed on the asset class later in the week. Traders also observed swift reactions to earnings releases and noted that fundamentals were still a driving force.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose on the resignation of UK Prime Minister Liz Truss and the scrapping of her fiscal policies. The pan-European STOXX Europe 600 Index ended the week 1.27% higher in local currency terms. The main stock indexes rose as well. France’s CAC 40 Index gained 1.74%, Germany’s DAX Index advanced 2.36%, and Italy’s FTSE MIB Index climbed 3.04%. The UK’s FTSE 100 Index added 1.62%.

European government bond yields climbed ahead of a European Central Bank meeting that is expected to result in another 0.75-percentage-point increase in interest rates. Germany’s 10-year debt yields rose to their highest levels in over a decade. In the UK, the 10-year gilt yields surged above 4% in another volatile week of trading amid political uncertainty and data indicating that inflation jumped to a 40-year high in September. In addition, the Bank of England (BoE) confirmed it would begin selling bonds on November 1 that it accumulated under its quantitative easing program.

Political and economic confusion deepened in Britain as Truss resigned after 45 tumultuous days in office, making her the shortest-serving prime minister. Her government collapsed in the wake of the market turmoil sparked by her proposals to slash taxes and boost borrowing and spending. Conservative Members of Parliament—not the entire party membership—will vote on a new leader on October 28. Still, Chancellor of the Exchequer Jeremy Hunt pressed on with a new budget due October 31 that will seek to undo most of Truss’s tax pledges and cut spending to plug a GBP 40 billion hole in the public finances.

A surge in food prices reignited an acceleration of UK inflation in September. The consumer price index rose 10.1% year-over-year—matching July’s 40-year high—accelerating from the 9.9% inflation rate registered in August. Core inflation, which excludes food and energy prices, also climbed, hitting a 30-year high of 6.5%. British shoppers cut their spending that month as well. Retail sales volumes dropped 1.4% in September from August. A sharp fall in fuel sales and a bank holiday marking Queen Elizabeth II’s funeral drove the decline. Meanwhile, GFK’s consumer confidence index, a closely watched measure of how people view their finances and economic prospects, plumbed 50-year lows in October.

On the other side of the globe, Japanese equities ended a choppy week of trading lower than they began as global recessionary fears and further currency weakness remained prevalent themes. Despite a solid midweek rally, as investors picked up battered stocks at knockdown prices following recent market weakness, the benchmark Nikkei 225 ended the week 0.7% lower at 26,891. In comparison, the broader TOPIX index fell 0.8% to 1,882. U.S. inflation data released the previous week seemed to hit Japan’s markets with delayed impact amid growing expectations that the Federal Reserve could announce another 75-basis-point hike in interest rates at its November meeting.

Lastly, China’s stock markets recorded a weekly loss after Beijing delayed releasing key economic data without explanation. The broad, capitalization-weighted Shanghai Composite Index eased 1.1%, and the blue-chip CSI 300 Index (which tracks the largest listed companies in Shanghai and Shenzhen) slipped 2.6%, Reuters reported.

China’s statistics bureau announced last Monday that it would postpone releasing the third-quarter gross domestic product (GDP) and other key indicators, including monthly readings of industrial production, fixed asset investment, and retail sales. The data were initially scheduled for release the next day. The bureau did not say when it would publish the data.

The delay raised speculation that the third-quarter GDP report would show that China’s economy was on track to miss the official growth target of around 5.5% this year and that officials sought to avoid any fallout from its release during the weeklong Communist Party congress, which began October 16. The twice-a-decade gathering of the country’s top leadership was expected to wrap up on October 23 and hand President Xi Jinping a third five-year term as party chief.

The onshore yuan fell to its weakest closing level against the U.S. dollar since the 2008 global financial crisis despite the efforts of state banks to support the currency.

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