Markets last week 05/12/2022

United States

During the week, major US equity indexes finished higher, boosted by the possibility that the Federal Reserve might slow the pace of interest rate hikes. The S&P 500 Index’s growth stocks outperformed their value counterparts, while the technology-heavy Nasdaq Composite Index posted good gains. The Dow Jones Industrial Average also took a breather and ended marginally higher, even entering the bull market territory on November 30th, closing more than 20% above its September 2022 low.

US Treasury yields fell this week as Fed Chair Jerome Powell signalled smaller interest rate hikes in the future. However, yields partially retraced their earlier moves on Friday after November US employment data showed strong hiring and wage inflation.

On the last day of November, stocks rose sharply in response to Powell’s speech at the Brookings Institution. Powell emphasised the risk of too quickly relaxing monetary policy and reiterated that the peak interest rate for this tightening cycle is likely to be higher than previously estimated. Rates may also remain higher for a longer period, according to the Fed chair, who also acknowledged that the central bank is aware that the effects of monetary policy take time to be felt in the economy.

The labour market was a topic of discussion, with Powell telling an audience at the Brookings Institution that the central bank’s efforts to control inflation would likely necessitate a reduction in labour demand. According to the Bureau of Labor Statistics, the number of job openings fell by about 353,000 to 10.3 million, which was slightly less than the consensus estimates of 10.4 million available positions. According to nonfarm payrolls data, the United States added 263,000 jobs in November, exceeding a consensus estimate of around 200,000. The report noted job growth in leisure and hospitality, health care, and government, as well as job losses in retail, transportation, and warehousing. The unemployment rate remained unchanged at 3.7%.
In October, consumer spending increased by 0.8%, or 0.5% when adjusted for inflation. The core personal consumption expenditure price index, which excludes volatile food and energy costs, rose 5.0% year on year, slowing from 5.2% in September. The Conference Board’s index of consumer confidence, on the other hand, fell in November, with the survey registering an increase in inflation expectations and increased reluctance among households to purchase large-ticket items in the next six months.

For the first time since May 2020, the Institute for Supply Management’s purchasing managers’ index (PMI) for manufacturing fell to levels corresponding to a contraction in activity as the uncertain economic environment appeared to weigh on demand.

Europe

Europe’s stocks rose for the seventh week in a row as lower inflation fuelled hopes that central banks would slow the rate at which they tightened monetary policy. Speculations of China loosening some coronavirus restrictions boosted sentiment as well. The pan-European STOXX Europe 600 Index finished the week 0.58% higher in local currency. The major country stock exchange indexes were mixed. The CAC 40 Index in France rose 0.44%, the DAX Index in Germany was roughly flat, and the FTSE MIB Index in Italy fell 0.39%.

Government bond yields in Europe fell after data revealed that eurozone inflation slowed more than expected in November. Comments by US Federal Reserve Chair Jerome Powell implying that the central bank may slow the pace of rate increases fuelled a broader rally in bond markets, with yields in Italy, France, and Switzerland also falling. In the United Kingdom, 10-year gilt yields finished little changed.

For the first time in 17 months, eurozone inflation slowed in November. Smaller increases in energy and service costs aided in lowering consumer price growth to 10%, from a record high of 10.6% in October. In 14 of the 19 eurozone member countries, inflation has slowed.

The European Commission’s economic sentiment survey provided yet another indication that consumers and businesses are less pessimistic about the economy’s prospects. Eurozone economic confidence rose from a two-year low in November, the first increase since Russia invaded Ukraine in February. Furthermore, inflation expectations have dropped dramatically.

Interest rates are expected to rise further, according to central bank policymakers. Prior to the release of the latest consumer price data, European Central Bank (ECB) President Christine Lagarde told the European Parliament that eurozone inflation had not yet peaked and could even accelerate in the coming months.
Mortgage approvals in the United Kingdom fell more than expected in October to the lowest level since the pandemic lockdown in June 2020, according to Bank of England (BoE) data. In yet another sign that the housing market is cooling rapidly, mortgage lender Nationwide’s monthly survey revealed that house prices fell 1.4% sequentially in November, the largest drop since the lockdown in June 2020. Annual house price growth has slowed from 7.2%

Japan

The Nikkei 225 Index fell 1.79% for the week, and the broader TOPIX Index fell 3.17%, as exporters suffered from yen strength. Investors’ attention was drawn to COVID-related developments in China, where officials hinted that a slight relaxation of strict coronavirus containment measures could be in the works. Sentiment was influenced by growing expectations that the Federal Reserve of the United States would slow the rate at which it raises interest rates.

The 10-year Japanese government bond yield moved little in the previous week, remaining broadly unchanged at 0.25% and trading close to the Bank of Japan’s (BoJ’s) implicit policy cap. Meanwhile, the yen rose to its highest level in over three months against the US dollar, to around JPY 134.5, from around JPY 139.1 at the end of the previous week, in anticipation of the Fed shifting to a more dovish stance.

In terms of economic data, Japan’s industrial output fell 2.6% month on month in October. This unexpected drop was caused by declines in the manufacturing machinery, electronic parts and devices, and chemicals industries. However, the Ministry of Economy, Trade, and Industry anticipates an increase in output in November and December. In October, the unemployment rate remained at 2.6%, unchanged from the previous month. Labour-force declines outpaced employment gains, as both applications and job offers fell. Consumer confidence fell in November compared to October, owing to a deterioration in the labour market and wage growth.

Asahi Noguchi, a member of the Bank of Japan’s Board of Directors, stated that a near-term exit from ultra-easy monetary policy is unlikely, with more time needed to see wage growth to keep inflation around the central bank’s 2% target. He added that the possibility of a positive cycle of wages and inflation rising in tandem was now greater than before the coronavirus pandemic and that if trend inflation—focused on wage and service prices—reaches 2%, the BoJ’s monetary policy stance could shift.

China

Chinese stocks rose as the Fed slowed the pace of interest rate hikes and Beijing moved closer to fully reopening the economy after months of pandemic controls. According to Reuters, the blue-chip CSI 300 Index gained 2.5% for the week, its best week in a month.

Following reports of civil unrest in major cities across China over the weekend, Chinese markets fell early last week. The unrest began after ten people were killed in a fire in Urumqi, the capital of Xinjiang province, which protestors blamed on coronavirus restrictions.

Days later, Vice Premier, Sun Chunlan, said that efforts to combat the virus were entering a “new phase” as the omicron variant weakened and more people were vaccinated, according to state media. According to Bloomberg, Beijing also intends to allow low-risk infected individuals to isolate at home rather than in government quarantine facilities.