Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
In an interview with The Wall Street Journal on Thursday, St. Louis Fed President James Bullard questioned whether inflation had really peaked despite the surprise downturn in the year-over-year increase in the consumer price index (from 9.1% in June to 8.5% in July) reported the previous week. “The idea that inflation has peaked is…not statistically really in the data at this point,” Bullard told the Journal, while stating that he was likely to vote in favour of another 75-basis-point (bp) increase in the federal funds target rate at the Federal Reserve’s next policy meeting.
Bullard’s comments came on the same day as the release of the Fed’s minutes from its July policy meeting, which contained few surprises. Stocks did rally a bit following the release, however, which may have reflected policymakers’ acknowledgment at the meeting of the risk of moving too aggressively. Fed officials discussed the recent slowdown in many areas of the economy – with the notable exception of the labour market. While concurring on the need to continue raising rates, “a number of participants posited that some of the effects of policy actions and communications were “showing up more rapidly than had historically been [due to] a significant tightening of financial conditions.”
Some upward surprises in the week’s economic data may have fuelled rate fears, even as they offered hope that the economy would avoid a recession. Retail sales proved more resilient than expected in July, rising 0.7% once the volatile gas and auto segments were excluded. Notably, sales rose solidly on an inflation-adjusted basis given the smaller 0.3% increase in core (less food and energy) inflation. Industrial production was also strong, rising 0.6% in the month, roughly twice consensus expectations. Weekly jobless claims ticked lower, betraying expectations for an increase. On the downside, housing data remained weak, and Target reported a sharp decline in earnings as shoppers continued to pull back on discretionary purchases.
European Central Bank (ECB) Executive Board member Isabel Schnabel said that the eurozone’s inflation outlook had not improved since July’s large interest rate hike, indicating that she might vote for another large increase next month. "In July, we decided to raise rates by 50 basis points because we were concerned about the inflation outlook," she told Reuters in an interview. "The concerns we had in July have not been alleviated... I do not think this outlook has changed fundamentally."
Eurozone inflation hit a record 8.9% in July. Meanwhile, Eurostat lowered its estimate of second-quarter economic growth to 0.6% from 0.7%. Factory-gate prices in Germany rose 37.2% in July from a year earlier, driven by strong increases in natural gas and electricity costs.
Norway’s central bank raised its key interest rate 0.5% to 1.75% in an effort to quell inflation. “The rise in prices has been broad-based in recent months and may entail that inflation will remain high for longer than expected,” the Norges Bank noted in a statement. “This suggests a faster rise in the policy rate than forecast in June.” The Bank stated it was planning to raise rates again next month.
The UK’s headline inflation rate hit 10.1% in July – the first double-digit reading since February 1982 – fuelled by sharply higher food costs. The year-over-year increase in consumer prices exceeded a consensus forecast of 9.8% in a FactSet survey of economists. The core rate, which excludes food and energy prices, also came in higher than expected, rising to 6.2%.
Meanwhile, underlying wage growth in the UK (excluding bonuses) rose to an annual rate of 4.7% in the second quarter. However, factoring in inflation, regular wages declined 3.0% – the fastest drop since comparable records began in 2001. Unemployment rose 0.1% to 3.8% in the same period. But job vacancies at 1.27 million in the three months to July, a small decrease from record levels, suggest that the labour market remained tight.
Japan's GDP expanded by an annualised 2.2% in the second quarter of 2022, according to the Cabinet Office’s preliminary reading, released on Monday. This missed consensus expectations of around 2.5% growth, however. More positively, Japan's industrial production rose by more than anticipated in June, according to the Ministry of Economy, Trade and Industry. Industrial production increased by a seasonally adjusted 9.2% in June, bettering initial expectations of 8.9%.
Meanwhile, inflation in Japan continued to remain above the 2% target, influenced by higher fuel prices and a weaker yen, official data showed on Friday. Excluding fresh food, core inflation increased to 2.4%, from 2.2% the previous month. This was in line with consensus expectations. Core inflation has now exceeded the central bank's 2% target for four consecutive months.
Data released during the week showed retail sales in July grew 2.7% year on year while industrial output was 3.8% higher than a year ago. Both data sets were below expectations. In the property sector, data showed China’s home prices fell for an 11th month in July. New home prices in 70 cities declined 0.11% from June, when they fell 0.1%, according to the National Bureau of Statistics. Existing-home prices fell 0.21%, the same as a month earlier.
It was the worst seven-day period for China in terms of COVID infections since mid-May, with more than 18,000 new local cases recorded, Bloomberg reported. The government also issued a national drought alert as soaring temperatures threatened crops and industrial activity, with regions from Sichuan in the southwest to Shanghai in the Yangtze Delta facing extreme heat. The severe heat wave has sparked power shortages and forest blazes. Sichuan, which accounts for 5% of China’s GDP, is exceptionally vulnerable due to its reliance on hydropower. A range of industries from steel to new electric vehicle batteries are likely to be affected.
On Wednesday, second-quarter’s wage growth came out at 0.72% quarter-over-quarter, in line with the prior quarter but less than consensus. By industry, wage momentum was broad-based, and private-sector remained stronger than public-sector outcomes. With inflation at elevated level, real wage growth was still deeply negative, which would be a headwind to near-to-medium-term consumer spending. Later in the week, July unemployment rate fell to 3.4%, the lowest print since 1874. On the other hand, measured employment fell 41,000 month-over-month, dragged down by the full-time component. Declining participation rate (66.4% in July) was at least partially responsible for the situation.
Last week, the MSCI All Country World Index (MSCI ACWI) returned -1.6% (-13.0% YTD).
In the US, the S&P 500 lost -1.2% (-10.4% YTD). Stocks gave back a portion of the previous week’s strong gains after a prominent “hawkish” Fed policymaker appeared to dampen hopes that inflationary pressures had peaked. The growth-oriented technology and communication services sectors underperformed within the S&P 500 Index, with the latter dragged down by a sharp decline in Facebook parent Meta Platforms. Subdued summer trading was accompanied by some volatility on Friday as USD 2.3 trillion in options expired. Growth stocks underperformed value stocks, while small-caps finished behind their large-cap counterparts. Russell 1000 Growth returned -1.6% (-17.2% YTD), Russell 1000 Value -1.2% (-4.8% YTD) and Russell 2000 -2.9% (-12.1% YTD).
In Europe, the Euro STOXX 50 Index retreated -1.2% (-10.6% YTD) amid renewed fears that central banks would need to tighten their policies aggressively to stamp out persistently high inflation. Most of the major stock indexes fell. Germany’s DAX Index declined -1.8% (-14.7% YTD), France’s CAC 40 slipped -0.9% (-6.7% YTD) and Italy’s FTSE MIB decreased -1.9% (-14.6% YTD). Switzerland’s SMI returned 0.3% (-11.0% YTD). The euro finished the week weaker at 1.00 (parity) USD per EUR, down from 1.02.
In the UK, the FTSE 100 firmed by 0.9% (5.1% YTD), as the UK pound depreciated against the US dollar to 1.18 USD per GBP, down from 1.21. A weaker pound lends support to the index because many of its companies are multinationals with overseas revenues. The more domestic-focused FTSE 250 moved lower -2.2% (-13.8% YTD).
Japanese shares were solidly higher through the first half of the week as investors reacted to positive US economic data released late the previous week. This raised hopes that the Fed may be less aggressive with rate hikes in the coming months. Indeed, despite a mixed bag of domestic economic releases and weak data out of China stoking concerns about slowing global growth, Japanese equity markets rallied on Wednesday, with both the Nikkei 225 Index and the TOPIX breaching the psychological 29,000- and 2,000-point levels, respectively.
The hopeful sentiment proved to be short-lived, however, after the minutes from the US Fed’s July meeting, released on Thursday, pointed to rates staying higher for longer. The minutes also reaffirmed the central bank's plans to continue raising interest rates in an effort to return inflation to its 2% long-term objective. This saw Japanese stock markets close Thursday’s session notably lower, giving up the gains made in the previous session. Weakness was felt across most sectors, particularly technology stocks, which tracked US peers in the tech-heavy Nasdaq Composite Index. Fed officials continued to talk up the need for further interest rate hikes on Friday, ensuring that Japanese equities finished the session without impetus. Over the week, the Nikkei 225 Index was up 1.3% (1.6% YTD), the broader TOPIX Index added 1.1% (1.5% YTD) and the TOPIX Small advanced 1.0% (2.0% YTD).
Bullard’s comments helped the US dollar strengthen against the Japanese yen. Having started the week around JPY 133.5, versus the USD, the yen weakened into the end of the period, ultimately closing at JPY 137.0. Meanwhile, on the bond market, benchmark 10-year Japanese Government Bond (JGB) yields edged higher during the week, from 0.18% at Monday’s start to 0.20% by Friday’s close.
In Australia, the S&P ASX 200 gained 1.5% (-1.3% YTD) on the back of US stock market rally, second-quarter earnings releases and underwhelming wage growth data. Australian government bond yields abated marginally with yield largely unchanged. The Australian dollar gave back the appreciation against the US dollar of the previous week, finishing the week at 0.69.
Emerging Markets and Other Markets
MSCI Emerging Markets Index gave up -1.5% last week (-16.7% YTD), with a positive contribution to performance from the stock markets of Taiwan and India and a negative contribution from those of China, South Korea and Brazil.
China’s stock markets posted a loss for the week in reaction to weak economic data and elevated levels of COVID cases, with drought conditions in parts of the country adding to the gloom. The broad, capitalisation-weighted Shanghai Composite Index dipped -0.5% (-8.4% YTD) and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, moved lower -0.9% (-14.4% YTD).
The 10-year Chinese government bond yield fell sharply after the People’s Bank of China (PBOC), China’s central bank, unexpectedly cut a key interest rate. The PBOC lowered its seven-day reverse repo rate – the main rate at which it provides short-term liquidity to banks – to 2.00% from 2.10% and the one-year Medium-Term Lending Facility (MLF) rate to 2.75% from 2.85%. EXM Capital analysts attribute the policy action to July’s disappointing economic data. More steps could follow, including a cut in the loan prime rate (LPR). The LPR is a lending reference rate set monthly by 18 banks and announced by the PBOC. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate. The PBOC sets the MLF rate on which banks base the LPR, which then leads to actual loan rates.
The yuan struck a three-month low versus the US dollar, as the currency reacted to soft economic data and tracked the central bank’s weakened midpoint guidance. The PBOC allows the exchange rate to rise or fall 2% from the official midpoint rate it sets each morning.
In Turkey, the BIST-100 Index returned 5.5% (68.3% YTD). On Thursday, Turkey’s central bank unexpectedly reduced its key interest rate, the one-week repo auction rate, from 14.0% to 13.0%. According to the post-meeting statement, policymakers justified the rate cut by indicating that they expect the “disinflation process to start on the back of measures taken and decisively implemented for strengthening sustainable price and financial stability.” Policymakers also claimed that “leading indicators for the third quarter point to some loss of momentum in economic activity” and that it is “important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment.”
With headline consumer price index inflation in July at a year-over-year rate of nearly 80% and corporations lobbying for the ability to adjust or revise their financial statements to reflect the elevated inflation environment, EXM Capital sovereign analyst Paul Botoucharov believes that the rate cut confirms the central bank’s support for President Recep Tayyip Erdogan’s “New Economic Programme” – at least until the June 2023 presidential and legislative elections. The goals of the programme, which is based on a highly stimulative monetary policy and an exchange rate that increases the competitiveness of Turkish exporters in world markets, are stronger economic growth and job creation. The downside of these policies, however, is higher inflation and a weaker lira.
Fixed Income Markets
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.8% (-8.0% YTD), Bloomberg Global High Yield Index (hedged to USD) -1.3% (-10.7% YTD) and Bloomberg Emerging Markets Hard Currency Index -1.1% (-15.1% YTD).
Along with a generally dovish interpretation of the Fed’s July meeting minutes, the strong economic data appeared to fuel an increase in longer-term bond yields, with the yield on the benchmark 10-year note nearing 3.0% for the first time since 21 July. The closely watched 2-year/10-year segment of the Treasury yield curve remained inverted – a common, if imperfect, signal of a coming recession. Over the week, the US 10-year Treasury yield increased 15bp from 2.83% to 2.98% (up 146bp YTD).
Core eurozone government bond yields rose following a double-digit increase in UK consumer prices and ECB official Isabel Schnabel’s comment that inflation could tick higher in the near term. Over the week, the German 10-year bund yield rose 25bp to 1.24% from 0.99% (up 141bp YTD). Peripheral eurozone government bond yields broadly tracked core markets.
The UK 10-year gilt yield increased 30bp, up from 2.11% to 2.41% (144bp higher YTD).
Trading volumes within the US investment-grade corporate bond secondary market were below daily averages, and primary issuance exceeded expectations. Segments with more credit risk, including the banking and the technology, media and telecom sectors, underperformed, while short-maturity and higher-quality credits performed relatively well. The impact of the more supportive macroeconomic tone was muted by an uptick in issuance.
The below investment-grade US market experienced low volumes throughout most of the week. However, high yield bond prices endured their largest setback since 29 June as a hot UK inflation reading and the resilient US retail sales figures reignited Fed policy concerns. Several new deals were generally met with strong demand, however. The primary calendar is expected to be fairly quiet for the rest of the month with issuance picking up after Labour Day. Liquidity was relatively thin in the bank loan market amid the summer lull.