Last week the global markets narratives and performances were shaped by another hot inflation reading and more signs that high prices are taking a toll on consumer sentiment. The expectations for more aggressive Fed tightening were ratcheted higher, and rate-sensitive sectors along with growth stocks underperformed.
United States.
After another volatile week, the large-cap indexes ended the week lower, while the S&P MidCap 400 and small-cap Russell 2000 indexes recorded modest gains. The technology-heavy Nasdaq Composite fared worst and ended the week down roughly 15% from its recent peak, still in correction territory.
Declines in mega-cap technology stocks—including Facebook parent Meta Platforms, Microsoft, and Google parent Alphabet—weighed on the broader indexes on Monday, but the so-called reopening trade helped stocks regain their footing at midweek. Shares in restaurants, hotels, casinos, air and cruise lines, and online travel agency stocks all rallied.
Highly anticipated inflation data on Thursday unwound the gains, however. The Labor Department reported that the headline consumer price index (CPI) advanced 7.5% over the year ended January, more than consensus expectations and its highest annual gain since February 1982. Core prices, which exclude food and energy purchases, rose 6.0%, the most since August 1982.
Inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment in February, released Friday morning. At 61.7, the index reading came in well below expectations of roughly 67 and hit its lowest level since October 2011. The survey’s chief researcher termed the drop “stunning” and pointed out that “nearly half of all consumers [are] expecting declines in their inflation-adjusted incomes during the year ahead.” According to FactSet, roughly three out of four S&P 500 companies that have reported earnings have referred to inflation in their earnings calls, but net margin estimates for the current quarter have fallen only slightly, suggesting that many businesses are successfully passing on higher input costs to customers.
The upside CPI surprise, combined with hawkish comments from St. Louis Federal Reserve Bank President James Bullard, sent short-term rates racing higher on Thursday, resulting in a flattening of the yield curve. The two-year U.S. Treasury note yield reached its highest level since January 2020 as investors priced in expectations for an accelerated rate hike schedule by the Fed—including the probability for a 50-basis-point rate increase at the central bank’s March policy meeting.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 34,738.06 | -351.68 | -4.40% |
| S&P 500 | 4,418.64 | -81.89 | -7.29% |
| Nasdaq Composite | 13,791.15 | -306.86 | -11.85% |
| S&P MidCap 400 | 2,647.46 | 24.28 | -6.85% |
| Russell 2000 | 2,030.15 | 27.79 | -9.58% |
Europe.
Shares in Europe rallied in line with most global markets, buoyed by strong corporate earnings. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.61% higher. Value-oriented stocks in global markets and those in cyclical industries fared well, reflecting inflationary pressures and the possible implications for key central banks’ monetary policies. Germany’s Xetra DAX Index advanced 2.16%, Italy’s FTSE MIB Index gained 1.36%, and France’s CAC 40 Index tacked on 0.87%. The UK’s FTSE 100 Index climbed 1.92%, helped by better-than-expected economic data.
Core and peripheral eurozone government bond yields rose on the higher-than-expected inflation forecast issued by the European Commission (EC) and an upside surprise in U.S. inflation. UK gilt yields increased, rising in line with global markets after data indicated that the economy contracted less than expected in December and grew 1% in the fourth quarter. This resilience appeared to contribute to market expectations for the Bank of England to increase interest rates again.
The heads of the Dutch and German central banks, both of whom are members of the European Central Bank’s (ECB’s) governing council, separately commented that the ECB should wind down its asset-purchase programs to set the stage for potentially raising interest rates before year-end.
The EC lowered its 2022 outlook for economic growth in the European Union (EU) and eurozone to 4.0% from its previous forecast, issued last fall, for a 4.3% expansion. The winter update to the EC’s forecasts also said inflation was expected to accelerate to 3.9% in the EU and 3.5% in the eurozone—faster than previously expected—before easing to less than 2.0% in 2023.
Asia
- China
Chinese stocks rose in line with global markets amid supportive official comments and a perception that the country’s regulatory crackdown cycle had peaked. The Shanghai Composite Index gained 3% and the CSI 300 Index added 0.8% since January 28, the last day of trading before a weeklong Lunar New Year holiday.
During the week, the People’s Bank of China (PBOC) said that loans for affordable rental housing would not count toward the limited amount banks can lend to the property sector. An editorial in the Communist Party newspaper People’s Daily stated that China’s economy still required capital for growth despite needing rules on the use of capital to reduce monopolistic behaviour. Another article suggested that regulatory curbs on the internet sector would become more rules-based, raising the prospect that the government’s crackdown on the tech sector would ease.
In global markets economic readings, the private Caixin/Markit services purchasing managers’ index (PMI) fell to 51.4 in January, a five-month low, from December’s 53.1 reading. Growth momentum slowed amid the renewed rise in COVID-19 cases across China and restrictions to stop its spread, Caixin said in the release.
PBOC data showed that China’s foreign currency reserves fell in January by roughly USD 28 billion to USD 3.22 trillion, a lower-than-expected level in a month when the dollar gained. New aggregate financing and new loans rose more than forecast to record levels in January, central bank data showed, providing evidence of frontloading lending to local governments and companies. China’s credit growth will likely continue to accelerate in the coming months amid declines in borrowing costs, a looser fiscal stance, and easing constraints on mortgage lending, analysts believe.
- Japan
In a holiday-shortened week, Japan’s stock markets generated a positive return in return with global markets, with the Nikkei 225 Index rising 0.93% and the broader TOPIX index up 1.66%, supported by solid corporate earnings. The yen weakened to around JPY 116.02 against the U.S. dollar, from the previous week’s JPY 115.22, after a higher-than-expected inflation reading in the U.S. sent the dollar higher and amid expectations of aggressive monetary policy tightening by the Federal Reserve. With the 10-year Japanese government bond (JGB) yield finishing the week at 0.22% (compared with 0.20% at the end of the prior week), the Bank of Japan (BoJ) acted to curb rising yields and to maintain favourable financial conditions.
A rise in the benchmark JGB yield to its highest level since 2016, due primarily to global inflation risks and higher U.S. Treasury yields, prompted the BoJ to announce that it would buy an unlimited amount of 10-year JGBs at a yield that corresponds to 0.25% on February 14. The BoJ has sought to cap the 10-year JGB yield at around 0% and, under its policy of yield curve control, has allowed it to fluctuate 25 basis points (0.25 percentage point) on either side of the target.
The government extended by three weeks to March 6 the coronavirus quasi-states of emergency in Tokyo and 12 other prefectures, as well as adding the Kochi region to the list. While Prime Minister Fumio Kishida said that the increase in new cases has been slowing, health experts say the latest wave has yet to peak. Amid some criticism that the government has been slow to roll out its COVID-19 booster program, Kishida has set a target of administering 1 million booster shots a day by the end of February.
Other Key Global Markets.
- Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about 5.5% in line with global markets. During the week, the government’s Ministry of Finance held its first meeting with international investors in London since March 2021. The Minister of Treasury and Finance, Nureddin Nebati, presented and discussed President Recep Tayyip Erdogan’s New Economic Program (NEP) that Turkey has been following in recent months.
- Chile – Chilean stocks, as measured by the S&P IPSA Index, returned about 5.1%. Chilean assets were hurt by the latest inflation data, which were much stronger than expected. During the week, the government reported that headline inflation in January increased 1.2% month over month and 7.7% year over year. Expectations were for increases of 0.5% and 7.0%, respectively.
