Last Week in Review – October 28, 2022

Last Week In Review

Last week stocks were higher but offered widely divergent returns for the week as investors reacted to a busy calendar of third-quarter earnings reports. Energy and other industrial economy stocks handily outperformed growth shares, with the latter weighed down by steep declines in several mega-cap technologies and internet-related stocks, including Microsoft, Amazon.com, Alphabet (parent of Google), and especially Meta Platforms (parent of Facebook), following earnings misses and lowered outlooks. The CBOE Volatility Index (VIX), widely considered Wall Street’s “fear gauge,” fell below its 50-day moving average on Wednesday—only the fourth time since February.

Hopes that the Federal Reserve might slow its pace of rate increases seemed to be a driver of positive sentiment last week. Stocks rose after the Bank of Canada’s unexpected decision on Wednesday to raise rates by only 0.50% instead of the 0.75% widely anticipated, leading to hopes that the Fed might follow its example. Worries that the Fed’s aggressive rate hikes and the consequent steep rise in the U.S. dollar might spark instability in the global financial system have led to speculation that the Fed might soon dial back its pace of rate hikes or even pause them.

US – Markets & Economy

The week’s economic data offered conflicting signals on how much room the Fed has to maneuver. S&P Global’s gauge of U.S. manufacturing activity fell into contraction territory for the first time since June 2020. Its service sector gauge also surprised the downside and indicated an even sharper slowdown in activity. The Conference Board’s consumer confidence index fell for the first time in three months, reflecting persistent inflation fears, but weekly jobless claims surprised the downside.

The Commerce Department released its first estimate of gross domestic product (GDP) growth in the third quarter, which showed the economy expanding at an annualized rate of 2.6%, above consensus estimates of around 2.4% and the first positive reading this year. Resilient consumer spending, business investment, and increased government outlay helped offset a steep decline in residential investment—perhaps the first apparent victim of the Fed’s rate hikes. Pending home sales fell 10.2% in September, their sharpest monthly drop since the early days of the pandemic.

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

A mid-week rally in Treasuries sent the benchmark 10-year U.S. Treasury note yield back below 4.00% before rising a bit on Friday. In addition to the Bank of Canada’s smaller-than-expected rate hike, traders I spoke with pointed to technical indicators as a catalyst for the rally. Despite the pullback in Treasury yields, the broad municipal bond market produced negative returns amid increased issuance and continued outflows industrywide. Softness in the secondary market noted that several new deals were oversubscribed and repriced to lower yields.

Investment-grade corporate bonds posted gains as risk assets rallied. Corporate credit spreads tightened, although spread movements were varied across issuers, with earnings releases and new issuance serving as drivers. The primary calendar was active throughout the week, with the level of new deals surpassing weekly expectations.

High-yield bonds also traded higher as broader risk markets rallied. No new issues were announced, but the market is anticipating increased leveraged buyout activity given the recent stability. Conversely, leveraged loans were under pressure due to the slowdown in collateralized loan obligation formation—an important source of demand—and selling pressure on the retail side. Downgraded concerns weighed on the performance of lower-quality issues.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose strongly on hopes that central banks might slow the pace of interest rate increases. The pan-European STOXX Europe 600 Index ended the week 3.65% higher in local currency terms. The main stock indexes also surged. Germany’s DAX Index advanced 4.03%, France’s CAC 40 Index added 3.94%, and Italy’s FTSE MIB Index climbed 4.46%. The UK’s FTSE 100 Index gained 1.12%.

European government bond yields softened across the board. The yield on Germany’s 10-year government bond fell to a three-week low. Italian bond yields also retreated, with the 10-year yield falling to a five-week low. UK gilts enjoyed a week of calm amid hopes the new conservative government could offer more stability. Ten-year yields also slipped to a five-week low.

The European Central Bank (ECB) raised its key interest rates for a second consecutive time by 0.75 percentage points and said it may have to increase them further to curb inflation that is still “far too high.” The deposit rate now stands at 1.5%, its highest level since 2009.

Japanese equities finished higher for the week. The benchmark Nikkei 225 ended the week above the 27,000 mark—at 27,105—while the broader TOPIX index finished essentially flat at 1,899. Local markets rose early in the week amid hopes that the U.S. central bank may adopt a less aggressive policy stance than previously anticipated. Late in the week, however, local markets lost some ground as investors digested domestic earnings reports and the announcement by Prime Minister Fumio Kishida of a JPY 71.6 trillion government economic stimulus package.

The yen started the week on a softer trend, despite signs that the government was ramping up its intervention strategy. Early Monday saw a sharp rally of almost 1.5% from a Friday surge that saw the yen soar the most against the U.S. dollar since March 2020. The currency meandered for most of the remaining week, finishing in the JPY146 range against the dollar.

On Wednesday, the Bank of Japan (BoJ) increased its purchases of Japanese government bonds (JGBs), adding a further JPY 100 billion in 10- to 25-year debt and JPY 50 billion in longer-dated purchases. This increase was not unexpected, but it nevertheless prompted sharp gains at the long end of the yield curve, where yields fell sharply to their lowest levels since mid-October. Meanwhile, benchmark 10-year JGBs also dipped sharply late in the week, finishing around 0.237%, having started the week at 0.251%.

Lastly, China’s stock markets pulled back as new COVID-related lockdowns dampened investor sentiment in several parts of China. Several Chinese cities doubled down on COVID-19 curbs after the country reported more than 1,000 new cases nationwide in three days. Data also showed that profits at China’s industrial firms declined faster in September. The broad, capitalization-weighted Shanghai Composite Index fell 4.05%.

Reports emerged that major Chinese state-owned banks sold U.S. dollars in both onshore and offshore markets during the week after the yuan’s recent slide. According to Dow Jones, the 10-year Chinese government bond yield fell to 2.691% from last week’s 2.75% amid growing expectations that global central banks may stall their aggressive rate-hike policies.

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