All major indices were down at least 4.1% last week amid a hotter-than-expected CPI report. In fact, the S&P 500 index booked its
worst session in over 2 years on Tuesday as the Volatility index surged as high as 28 intraday.
• Headline and core CPI both rose with core up to 6.3%y/y and headline up to 8.7% y/y.
• The World Bank revised its Q3 GDP estimates lower, warning that the aggressive tightening from central banks across the globe could
lead to a global recession.
• The Bloomberg World index dropped 4.07% last week, with growth down 5.32% and value down 3.16%.
• In China, the city of Chengdu, population of 21 million people lifted its two-week lockdown as cases plateau nationwide.
• In Japan, Bank of Japan (BOJ) spent close to $10 billion on government debt last week to cap yields as the 10-year nearly crossed
• In India, Prime Minister Narendra Modi met with Vladimir Putin on Friday urging Putin to find a path toward peace in Ukraine.
All major indices were down at least 4.1% last week amid a higher-than-expected CPI report. In fact, the S&P 500 Index booked its worst session in over 2 years as the Volatility Index (VIX) surged as high as 28 intraday. The inflated CPI report, was to some, a signal of a future with a more aggressive Fed and a more difficult path towards a “soft landing”. The World Bank revised its Q3 GDP estimates lower, warning that the aggressive tightening from central banks across the globe could lead to a global recession. Apart from the main themes, CPI and the FOMC meeting this week, the market news flow has been relatively anemic
despite the drastic downturn in equity prices.
Growth names underperformed value, but both factors were sharply lower as the pullback in equity prices affected the entire market. The treasury yield curve became even more deeply inverted as the 2/10-year treasury yield inversion, a historical leading indicator for recession, moved back towards its lowest levels since 2000. The Dollar Index edged up 0.6% for the week and gold, a common hedge for the Dollar, continued to drop, coming near its 2-year low as the USD continued to outperform most currencies, especially the British pound sterling. Oil, along with energy in general, dropped last week on global demand concerns from the world’s largest economies with the WTI booking its third consecutive week of decline.
Materials was the worst performing sector, down 6.65% on the week amid broad market weakness. Mega-cap names such as Meta (-13.5%) and Google (-7.1%) dragged communication services, already one of the worst performing sectors of 2022. The potential railway strike weighed on industrials, the negotiations on potential strikes having now been pushed to October. A rail shutdown could freeze almost 30% of U.S. cargo shipments by weight and cost the American economy as much as $2 billion per day. In Tech, Adobe was down 24.1% on the week after its acquisition of tech startup Figma for a whopping $20 billion. Health Care was the highest performer, only down (2.34%), helped by managed care giant Humana, up 4.5%. Defensive sectors did better in general but broadly speaking, the market showed weakness across the board.
August CPI was released last Tuesday and the markets reacted poorly to the higher-than-expected reading. Expectations were high for this print to be the beginning of a series of gradual declines to span the remainder of the year. Instead, headline (which includes food and energy) and core CPI both rose with core up 0.6% m/m to 6.3%y/y and headline up 0.1% m/m 8.7% y/y. Services such as shelter and medical care were some of the major contributors which had, up until this point, been lagging behind goods inflation and received a fair deal of attention. The move to services versus goods was expected to soften inflation metrics, but if services are now showing inflation as well, this assumption could fall apart. Food inflation, which has been one of the most affected categories, has decelerated somewhat but still posted its highest y/y number since 1979 (+11.4%). This was not the reading the Fed had been seeking and speculation began immediately on whether a higher rate hike would result from this reading.
The August PPI released last Wednesday and was mixed with headline dropping 0.1% compared to its 0.0% consensus but Core PPI coming in slightly higher. August retail sales were higher than expected and manufacturing gauges did not have a clear directional theme. Taken in aggregate, there were not enough positive market indicators to balance out the CPI print and keep the markets optimistic.
FINANCIAL CONDITIONS TIGHTENING
The balance sheet run-off of Fed assets began on September 15th as bonds hit their maturity mid-month. The 14th marked the last scheduled bond purchase by the Fed that will settle in October. At this point, the Federal Reserve owns around a third of all mortgage-backed-securities
and treasury securities. As the Fed’s balance sheet begins to shrink, the fear is that the lack of purchase of these almost $100 billion of assets per month could cause a liquidity crisis in the bond market. However, additional liquidity for the bond market may exist within the repo market that allows the sale of a treasury security, federal agency debt, or a mortgage backed security issued or fully guaranteed by the government with a guaranteed repurchase at a specified time in the future.
The Bloomberg World index dropped 4.07% last week, with growth down 5.32% and value down 3.16%. Brent crude oil futures finished the week 1.6% lower amid dollar strength and global growth concerns. The WCI Composite container freight benchmark rate per 40 foot box is at the lowest level since April 2021. In fact, the cost of shipping containers is now down 52% from the peak, although at current levels ($4,941), rates remain 2.5 times higher than pre-pandemic levels. The Bloomberg Commodity index declined 1.49% last week, with grains up 0.31%% and industrial metals up 0.58%.
Germany is considering buying a controlling stake in Uniper SE as well as two other gas providers in response to Moscow’s energy supply squeeze. The three companies targeted will allow Germany to control the full energy supply chain including production, storage, transportation and distribution. Uniper CEO claims that his company is losing close to $100 million a day since Moscow cut off its main pipeline. The government plans to inject liquidity in Uniper after the deal closes. Another target, VNG, which is the main gas supplier for over 400 municipalities and industrial operators applied for state aid last week. The DAX index dropped 2.65% last week.
Bundesbank President, Joachim Nagel told reporters regarding interest rates, “If the data trend continues, more interest-rate increases have to follow. We have to be determined in October and beyond. We must bring inflation back under control. We must not let up, even if the economy worsens”. His European Central Bank (ECB) colleague, Francois Villeroy, said at an IMF event last week that the ECB should reach neutral rate around 2%. According to a Bloomberg survey of economists conducted last week, economists see 80% of chance of a euro-area recession in the next 12 months. European stocks declined 2.42% last week.
In China, data released by China Real Estate Information Corp show that new home sales are still declining in tier one cities such as Beijing, Shanghai, Guangzhou and Shenzhen. Property developer Evergrande announced it has resumed construction of 668 out of 706 frozen projects. This announcement came as the regulator is considering seizing undeveloped land from distressed property developers to help
fund the completion of construction projects. More and more cities are announcing measures to support the real estate market. For instance, the city of Taizhou in eastern Jiangsu province announced revisions to down payment requirements to attract more buyers. The Shanghai Composite index gained 2.37% last week, led by real estate, up 7.27%.
In Japan, Bank of Japan Governor Haruhiko Kuroda met with Prime Minister Fumio Kishida amid the rapid weakening of the yen. Last week, the yen closed at 142.47 yen per dollar, crossing the 140 level for the first time since 1990. The 10-year rose by 1 basis point to 0.25% during the same period. Prime Minister Fumio Kishida announced a new stimulus package taking effect in October, including $347 handouts to
low-income households and grants to regional governments. In July, energy and fresh food costs greatly contributed to the 2.6% increase in inflation. In fact, electricity prices climbed 20% year-over-year and some fresh food items rose as much as 70% in July. The NIKKEI 225 index dropped 0.87% last week.
South Korea began talks with the Biden administration regarding their dispute over electric vehicles. Indeed, provisions from the Inflation Reduction Act include tax credits up of $7,500 for consumers that purchase electric vehicles made in North America. South Korea, home of Hyundai and Kia, views this provision as unfair as it does not currently have manufacturing plants in the US. Last year, Korean companies invested $27.6 billion in the United States and plan to ramp up investments to build EV and battery facilities. The KOSPI index declined 0.06% last week, with electricity and gas down 3.6%. Transport and storage climbed 3.25%.
In India, Prime Minister Narendra Modi met with Vladimir Putin on Friday for the first time since the Ukraine invasion. Modi urged Putin to find a path toward peace in Ukraine. The Russian President responded, “I know your stance on the conflict in Ukraine and the concerns you constantly express. We’ll do everything to end this as soon as possible”. Putin accuses Ukraine’s leadership of refusing to negotiate a peace deal. India’s position echoes that of Beijing as Xi Jinping also asked Russia to engage in peace talks with Ukraine. India’s largest and most liquid stocks represented in the Nifty 50 index dropped 1.70% last week.
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