Last Week in Review – September 9, 2022

Last Week In Review

Last week stocks broke a string of three weekly losses as investors appeared to grow more confident that the market had reached at least a temporary bottom after surrendering about half of its summer rally. Some moderating inflation fears may have also been at work, and a midweek decline in oil prices—which briefly hit their lowest level since Russia’s invasion of Ukraine—caused energy shares to underperform within the S&P 500 Index. However, the sector still recorded a gain. A rally in heavily weighted Tesla helped the consumer discretionary sector outperform. Markets were closed Monday in observance of Labor Day.

The market’s upturn began Wednesday, primarily attributed to a “relief rally” on light trading volumes. Federal Reserve Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester also delivered comments that seemed more “dovish” than markets expected, with Brainard stating that she still believed the economy could avoid a recession as the Fed raised rates.

Signs that inflation was cooling quicker than expected also seemed to support sentiment. Stocks rallied after the Wednesday afternoon release of the Fed’s “Beige Book” summarizing economic reports from its branch banks. The report indicated that price increases were moderating in nine of its 12 districts, as “lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.” The report also noted some declines in prices for steel, lumber, and copper. A surprise moderation in Chinese producer price inflation seemed to help foster a rally on Friday.

US – Markets & Economy

The week’s light calendar of economic data brought what may have been confusingly mixed signals. On Tuesday, the Institute for Supply Management (ISM) and S&P Global released widely divergent final readings on August service sector activity, with the ISM gauge upwardly revised to 56.9, the fastest pace of expansion since April. However, the S&P Global measure fell more than expected to 43.7, the most significant contraction since early 2020. (The number 50 marks the boundary between contraction and expansion for both indexes.) The ISM gauge is somewhat broader, including construction and other nonmanufacturing industries not in the S&P services measure. The labor market appeared to remain on solid footing, with weekly jobless claims coming in much lower than expected (222,000 versus roughly 240,000) and hitting their lowest level since summer.

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 yield on the benchmark 10-year U.S. Treasury note jumped to its highest level since mid-June at the start of the trading week on Tuesday, which our traders attributed to anticipation of a large European Central Bank (ECB) interest rate increase on Thursday (see below) and heavier issuance of U.S. corporate bonds. (Bond prices and yields move in opposite directions.) The broad municipal bond market backtracked through most of the week amid continued outflows industrywide and upward pressure on interest rates. However, state general obligation deals from California and Pennsylvania were met with solid demand from investors.

According to traders, the upward move in rates and an active primary calendar created a challenging environment for investment-grade corporate bonds early in the week. New issuance exceeded weekly expectations in a front-loaded week for the primary calendar. While the new issues were met with generally adequate demand, our traders noted some weakness when they reached the secondary market. However, as the level of primary issuance decreased, secondary trading volumes improved, and investment-grade corporates strengthened later in the week.

The U.S. high yield market advanced heading into Friday on a broad rebound in risk sentiment, while the bank loan market posted flat returns. Traders noted that bank loan investors continued to focus on the new issue calendar as they digested commentary from Fed officials and awaited the release of critical inflation data the following week.

US Treasury Markets – Current Rate and Bi-Monthly Change

Interesting News Overseas

Shares in Europe rose after some countries announced plans to deal with the energy crisis and boost their economies. The pan-European STOXX Europe 600 Index ended the week 1.06% higher in local currency terms. Major indexes also posted gains. Germany’s DAX Index rose 0.29%, France’s CAC 40 Index advanced 0.73%, and Italy’s FTSE MIB Index added 0.79%. The UK’s FTSE 100 Index increased 0.96%.

The British pound depreciated further against the U.S. dollar before retracing to roughly USD 1.16, a level near the low hit in 1985. This weakness appeared to stem, in part, from uncertainty about the economic agenda of new UK Prime Minister Liz Truss. The euro rose above parity with the U.S. dollar after the ECB hiked its key rates by a record amount.

The ECB increased its key interest rates by a record 0.75 percentage points in a bid to curb inflation. The deposit rate now stands at 0.75%, while the refinancing rate sits at 1.25%—their highest levels since 2011. “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” the ECB explained in its official statement. Even so, the central bank indicated that more rate increases are likely. “Over the next several meetings, the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations,” the ECB added.

Truss announced that the government would intervene to help reduce soaring energy costs for British households and businesses. The Financial Times reported that internal government estimates showed the size of the package could be around GBP 150 billion—more significant than bailouts during the COVID-19 crisis—and would be funded by government borrowing. In Germany, Chancellor Olaf Scholz said the government would spend EUR 65 billion to shield households and businesses, raising the monies from a tax on electricity companies and a planned corporate tax.

Separately, Finland, Sweden, Switzerland, and the UK pledged emergency liquidity support for electricity generators facing a potential cash flow crisis due to sharp increases in collateral required to hedge future production. European energy ministers are meeting to discuss intervention in the electricity market. The main topics include price caps on electricity, potential price caps on Russian gas imports, windfall taxes, and efforts to improve energy efficiency.

Bank of England (BoE) Chief Economist Huw Pill hinted in testimony to Parliament that the government’s energy bailout plan could force the central bank to raise interest rates further. Asked by MPs whether the package would mean higher rates, Pill replied: “In response to the question, will fiscal policies generate inflation—we are here to ensure that they don’t generate inflation…Our remit is to get inflation back to target.” “We do have work to do,” he added.

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.04% and the broader TOPIX Index up 1.83%. The government announced new measures to help Japan cope with rising inflation, while the yen fell to its lowest level in 24 years, prompting fresh comments from officials. The Japanese currency weakened to around JPY 142 against the U.S. dollar, from about JPY 140 the prior week. The 10-year Japanese government bond yield fell to 0.23%, from 0.24% at the end of the previous week.

Lastly, China’s stock markets rose as tame inflation data and expectations of further policy support prompted buying. The broad, capitalization-weighted Shanghai Composite Index advanced 2.4%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, added 1.7%, Reuters reported.

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