Weekly Commentary: 01 August 2022 – 07 August 2022
The stock market continued its rally despite another 75 bps rate hike from the Federal Reserve and the U.S. reported its second consecutive quarter of negative growth last week. The rally can be mostly attributed to investors factoring in a lower terminal rate as the Fed’s policy seemed to be working and there would be lesser probability for more aggressive hikes in the second half of the year. Growth as loosely represented by the NASDAQ Composite (+4.72%) performed the best while the S&P 500 (+4.28%) and DJIA (+2.97%) trailed not far behind. The other key market indices including the STI (+0.97%) were in the positive as well, with the exception of the Hang Seng (-2.20%). All of the S&P 500 sectors reported positive gains with Energy (+10.38%), Utilities (+6.51%), and Industrials (+5.71%) being the top three. Energy outperformed as the U.S. oil inventory dropped and Russia cut its gas flows to Europe. In contrast, Consumer Staples (+1.65%), Healthcare (+2.00%), and Communication Services (+2.49%) relatively underperformed the rest.
The U.S. consumer price index (CPI) has accelerated by 0.5 pp to 9.1% YoY in June, currently the highest in the trailing 40-year period. On the positive side, the Federal Reserve’s preferred gauge – core inflation, fell by 0.1 pp to 5.9% YoY. The U.S. five-year inflation expectations had also declined sharply in early July to 2.8%, the lowest in over a year (University of Michigan, July 2022). Inflation remained elevated globally and has reached our shores as Singapore’s CPI in May increased by 0.2 pp MoM to 5.6% YoY, the highest since the GFC, while core inflation also moved up by 0.3 pp to 3.6% YoY. Nearly four dozen countries have raised interest rates in the past six months as central banks hope to contain inflation by increasing borrowing costs and slowing down growth on the demand side, at the risk of driving the global economy into a recession. Inflation is also likely to remain high in the second half of 2022 due to lack of resolutions to the current energy and commodity supply constraints, propagated by the Ukraine-Russia conflict that could last for years according to the NATO head a month ago.
The yield-curve continued to be inverted as the 10Y-2Y US Treasury further fell by 3 bps to -0.24% last week. Both the U.S 2-year and 10-year treasury yield have fallen by 14 bps to 2.90% and by 16 bps to 2.66% respectively. The overall stock market sentiment turned more positive as the global High Yield (HY) – Investment Grade (IG) spread further contracted to 3.25 % and the CBOE Volatility Index (VIX) fell by 203 bps to 21.33%.
As can be seen below, all of the global REIT markets reported positive gains and the overall 12-month yield spreads remained favorable towards forward total returns. Back at home, the iEdge S-REIT Index (+2.99%) and all of the S-REIT subsectors were also in the positive with Industrial (+3.14%) and Retail (+3.28%) being the top two. In contrast, Diversified (+0.88%) and Hospitality (+1.35%) relatively underperformed. With regards to the pandemic, Singapore is experiencing a new wave as the 7-day moving average of total COVID-19 cases stayed elevated at around eight thousand cases. There are no changes in the COVID measures for now but it was stated by the Singapore government that future tightening has yet to be ruled out.
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