Last Week in Review – September 23, 2022

Last Week In Review

Last week stocks recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows in late 2020, while the S&P 500 Index, small-cap Russell 2000 Index and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022. The CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, remained more firmly below its spring highs but rose sharply at the end of the week. The technology-heavy Nasdaq Composite Index fared worst for the second consecutive week and briefly fell to a level more than one-third below its January record high.

Trading was subdued at the start of the week, as all eyes were on Wednesday’s Fed policy meeting. Stocks fell sharply at 2 p.m. on Wednesday after policymakers announced a 75-basis-point (0.75 percentage point) hike in the federal funds rate, bringing it to a target range of 3.00% to 3.25%, its highest since March 2008—when the Fed was in the process of cutting rates.

Federal Reserve Chair Jerome Powell’s post-meeting press conference initially seemed to reassure investors, sending stocks back higher. The Fed Chair acknowledged that Americans’ longer-term inflation expectations “appear to remain well anchored” and noted that policymakers expected their preferred measure of inflation, the year-over-year change in the personal consumption expenditures index, to ease significantly in 2023, from a median of 5.4% to 2.8%. But stocks then headed back lower after Powell acknowledged that “no one knows whether this process [of raising rates] will lead to a recession or, if so, how significant that recession would be.”

US – Markets & Economy

The selling accelerated Friday, seemingly fed by troubling European developments despite some modestly encouraging economic data. S&P Global reported current manufacturing and services activity measures that both surprised the upside. Manufacturing activity continued to expand and even accelerated a bit (51.8 versus 51.5, with levels above 50 indicating expansion) from August’s reading, while services sector activity continued to contract at a much more modest pace (49.2 versus 43.7). Weekly jobless claims, reported Thursday, rose a bit to 213,000 but would have been flat if the previous week’s number had not been revised downward; the four-week moving claims average fell to its lowest point in three months.

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

Short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred on Thursday amid elevated futures market activity. These moves pushed the two-year U.S. Treasury note yield above 4.10%—its highest level since October 2007—and the benchmark 10-year U.S. Treasury note yield briefly to 3.77%—its highest mark since November 2008. (Bond prices and yields move in opposite directions.)

Tax-exempt municipal bonds slumped as the continued climb in Treasury rates and persistent outflows from muni bond portfolios industrywide weighed heavily on the market. Very light issuance levels may have mitigated this week’s selling pressures. However, traders I spoke with noted that new supply is projected to ramp up next week, adding another perspective headwind to performance.

Traders noted that investment-grade corporate bonds held up relatively well ahead of the Fed meeting as higher-than-average trading volumes and muted primary issuance formed a supportive technical backdrop. However, after the meeting, the asset class weakened alongside moves lower in the equity market and rising U.S. Treasury yields. There was also an uptick in new issuance post-Fed, although the level of new deals fell short of weekly expectations.

The high-yield bond market saw lower-than-average volumes during the first part of the week as investors seemed to focus on positioning ahead of the Fed meeting. Below-investment-grade bonds experienced weakness following the Fed’s rate decision. New issuance remained light, but several new deals are expected over the next few weeks. Traders noted that the bank loan market traded lower along with broader risk markets following the Fed’s rate announcement and Powell’s press conference.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

European shares fell sharply for a second week as central banks raised interest rates, intensifying fears of a prolonged economic slowdown. The pan-European STOXX Europe 600 Index ended the week down 4.37%, dropping to the lowest levels in more than a year. Major indexes also tumbled. France’s CAC 40 lost 4.84%, Germany’s DAX slid 3.59%, and Italy’s FTSE MIB 4.72%. The U.K.’s FTSE 100 Index lost 3.01%.

Yields on German 10-year government bonds rose to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. That move echoed across European markets, with Italian, Spanish, and French yields rising. U.K. gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The U.K. pound fell to USD 1.09—a 37-year low.

Sweden’s central bank kicked off a spate of significant interest rate increases in Europe. It indicated policy might have to be tightened further to bring inflation under control, a judgment echoed by other central banks. The Riksbank raised its benchmark rate by one percentage point to 1.75%, which was more than expected. Switzerland’s central bank lifted borrowing costs by 0.75 percentage points, taking its benchmark rate to 0.5% and shifting into positive territory for the first time since 2015. In Norway, policymakers hiked rates by 50 basis points for the third time in a row to 2.25%. The Bank of England (BoE) also lifted its key rate to 2.25%, hiking by 0.50 percentage points for the second month. Markets had been pricing in the probability of a three-quarter-point increase in line with the U.S. Federal Reserve.

Things were not much better in the land of the rising sun as Japan’s stock markets closed at their lowest levels in more than two months in a holiday-shortened week. The Nikkei 225 Index fell 2.6%—dipping at one point below the 27,000-mark for the first time since July 19. The Nikkei tracked losses on Wall Street as the Fed’s hefty interest rate hike further widened the U.S.-Japan rate differential. The government intervened in the foreign exchange market to support the yen after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy.

Japan intervened in the currency market to support the yen for the first time since 1998 after it fell below JPY 145 to the U.S. dollar. At a press conference, Finance Minister Shunichi Suzuki said afterward: “In principle, exchange rates should be decided in the markets, but we cannot tolerate repeated rapid fluctuations by speculative moves.” He said the government will closely monitor the situation and take necessary actions against excessive rate swings. He did not reveal the size of the intervention nor whether the move was coordinated with other countries.

China’s stock markets also fell as global growth slowdown fears gripped investors. Reuters reported that the broad, capitalization-weighted Shanghai Composite Index slipped 1.2%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, dropped 1.9%.

On Friday, the yuan currency fell to a near 28-month low and traded at 7.1066 per U.S. dollar versus 7.0185 a week earlier, according to Reuters. According to Reuters, the People’s Bank of China (PBOC), which sets a reference rate each trading day for the onshore yuan versus the U.S. dollar, set the so-called fixing at its lowest level since early August 2020. The onshore yuan can trade up to 2% on either side of the fixing. However, the central bank has set the fixing stronger than market expectations in every single session for almost a month, indicating China’s efforts to slow the pace of depreciation.

Analysts regard any significant discrepancy between the market’s expectations of the fixing and where the PBOC sets the midpoint to signal how Beijing wants to influence the currency. The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. China’s surprise decision to lower key interest rates in August fueled the yuan’s slide.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com