United States
As fears rose that inflation was pushing consumers to cut back on discretionary spending, setting the groundwork for a future recession, Wall Street resumed its weekly losing streak. The S&P 500 Index was down around 20.9% from its January intraday high at its worst point on Friday, surpassing the 20% threshold for a bear market and returning to levels last seen in February 2021. The index’s largest losses were on Wednesday when it lost the most in a single day since June 2020.
Several large retailers’ disappointing earnings and revenue figures looked to have spilled over into a negative broader mood. Target’s stock dropped around 25% after earnings missed projections by nearly a third, which the company blamed on a combination of lower sales of discretionary products like televisions and higher expenditures. Aside from the negative impact on profit margins, investors were concerned that major retailers will be compelled to pass on more of their increased input costs to customers in the coming months, keeping inflation high.
The economic statistics released this week sent confusing signals about the likelihood of a recession, and Wall Street’s reaction to the news was similarly difficult to interpret. On Tuesday, investors reacted positively to news that retail sales, excluding the volatile car sector, rose more than predicted in April (0.6% versus 0.4 %), while March’s advance was revised up to 2.1%. In April, industrial production, manufacturing production, and capacity utilisation all exceeded expectations.
In intraday trade on Thursday, the yield on the benchmark 10-year US Treasury note fell to 2.77 %, its lowest level in over a month. Throughout most of the week, the broad tax-exempt bond market posted negative returns and trailed US Treasury bonds. Our municipal bond traders, on the other hand, saw more positive market circumstances on Thursday, as yields partially retraced their early-week gains. Certain major retailers’ earnings disappointments sparked a wave of fundamental concerns across the market. Despite these reservations, freshly issued bonds performed well in general, thanks to favourable concessions that boosted investor demand. High yield bonds performance marginally improved early in the week as the earnings season progressed. However, the market later retraced the gains with CCC-rated names faring worse than higher-quality bonds.
Europe
Fears of slower economic growth and faster interest rate hikes pushed European stocks lower. The pan-European STOXX Europe 600 Index fell 0.55 % in local currency. The DAX Index in Germany underperformed along with the CAC 40 Index in France, which was down 1.22%, and the FTSE MIB Index in Italy, however, increased a little.
The yields on core eurozone government bonds fluctuated but remained steady. Early in the week, yields rose due to hawkish signals from numerous European Central Bank (ECB) officials. Klaas Knot, a member of the European Central Bank Governing Council, appeared to hint at the likelihood of a 50-basis-point interest rate hike in July.
Following that, yields fell as fears of an economic slowdown were exacerbated by disappointing retail profits in the United States. Peripheral eurozone bond rates closed the week marginally higher, closely tracking core markets. UK bond yields climbed as inflation (9.0%) hit its highest level in 40 years, employment data above expectations, and Bank of England Chief Economist Huw Pil made hawkish comments.
The European Union cuts its forecast on growth as energy prices have had a driving effect on inflation. The EU cut its forecast on growth for 2022 to 2.7% from 4% and raised its estimated inflation to 6.1% from 3.5%, which further reinforced the inflated energy prices. German producer prices rose by a record amount in April, surging 33.5% year on year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas.
japan
The Nikkei 225 Index increased by 1.18% this week, while the wider TOPIX Index increased by 0.71 %. The latest in a series of monetary easing measures geared at supporting an economy bogged down by coronavirus lockdowns, China’s decision to support its property industry, improved regional optimism near the end of the week. A government announcement in Japan that the country’s tight border controls would be lowered even more gave some assistance. Considering this, the 10-year Japanese government bond yield declined to 0.23 % from 0.24 % at the end of the previous week, while the yen rose to roughly JPY 127.98 against the US dollar, up from JPY 129.27 the week before.
Japan’s recovering economy has been lagged due to its GDP lagging over the first three months of 2022. Factors behind the contraction included deteriorating trade as import prices soared and sluggish consumer spending due to the coronavirus restrictions that had been in place. The Bank of Japan (BoJ) has repeatedly said that it will continue with its massive monetary stimulus to support the post-pandemic recovery—the relatively weak GDP data are likely to reinforce this stance. Inflation exceeded the BoJ’s 2.0% target in April, as the core consumer price index rose 2.1% from a year earlier. However, consumer price pressures remained far weaker in Japan than elsewhere in the world, also supporting the case for continued easing.
Separate data showed that Japan’s exports rose 12.5% year on year in April, led by U.S.-bound shipments of cars, while shipments to China fell sharply as the economic slowdown caused by the country’s coronavirus lockdowns weighed on demand. Imports increased by 28.2% after energy prices soared due to the war in Ukraine.
China
Even as dismal economic statistics weighed on morale, Chinese stocks climbed as the central bank lowered interest rates to assist the country’s ailing property sector. The broad, capitalisation-weighted Shanghai Composite Index rose 2.0%, while the blue-chip CSI 300 Index, which monitors Shanghai and Shenzhen’s largest listed companies, rose 2.2 %.
The People’s Bank of China (PBOC) dropped the five-year loan prime rate (LPR), a benchmark for residential mortgages, by an unexpected 15 basis points to 4.45 % the previous Friday. The central bank had previously slashed the bottom limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC slashed rates in response to statistics showing a drop in home sales in April.
The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, which has affected how people view housing as an investment. Last week’s economic figures indicated that growth was decreasing. Retail sales and industrial output numbers for April fell short of expectations, showing China’s zero-COVID attitude to pandemics. Fixed asset investment increased 6.8% year over year from January to April but fell short of expectations. Home prices in China declined for the eighth consecutive month in April, falling 0.3 % from March, the fastest drop in five months.
Markets this Week
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Weekly Index |
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YTD Index |
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Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
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UK |
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FTSE 100 Index |
-0.18% |
-0.18% |
1.79% |
1.79% |
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US |
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S&P 500 Index |
-3.01% |
-4.93% |
-17.81% |
-10.71% |
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– |
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Euro Stoxx 50 |
-1.55% |
-1.87% |
-13.78% |
-12.94% |
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Asia |
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Nikkei 225 Index |
1.18% |
0.23% |
-7.13% |
-9.56% |
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Hang Seng Index |
4.22% |
2.18% |
-11.03% |
-3.98% |
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MSCI Emerging Markets Index |
2.37% |
1.09% |
-12.46% |
-8.08% |
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