Weekly Commentary: 22 August 2022 – 28 August 2022
The stock market retreated after the release of the Federal Reserve’s July meeting minutes last week that indicated a more hawkish tone. In summary, the Fed’s officials saw “little evidence” late last month that U.S. inflation pressures were easing and acknowledged the risk of overtightening its monetary policy. As a result, growth stocks as loosely represented by the NASDAQ Composite (-2.58%) fared worst, followed by the S&P 500 (-1.16%) Dow Jones Industrial Average (-0.05%). Other key market indices including the STI (-0.34%) and the Hang Seng (-1.88%) were in the negative as well. All eleven S&P 500 sectors reported negative returns with the exception of the defensives such as Consumer Staples (+1.97%), Utilities (+1.28), and Energy (+1.30%). In contrast, Communication Services (-3.28%), Materials (-2.43%), and Real Estate (-1.91%) were the bottom three sectors.
Investors’ next focus is on the U.S. Personal Consumption Expenditure (PCE), the Fed’s preferred inflation gauge that would be released this week (26th August). The stock market rally is likely to regain momentum if the data indicates a decelerating rate as it would mean that the Fed’s tightening has shown some effectiveness in reducing consumer spending. Nevertheless, inflation remained elevated globally. The U.S. Consumer Price Index (CPI) has slowed down by 0.6 pp MoM to 8.5% YoY in July while core inflation stayed constant at 5.9% YoY. Singapore’s CPI in June also rose by 1.1 pp MoM to 6.7% YoY, the highest since the GFC, while MAS core inflation also moved up by 0.8 pp to 4.4% YoY. Nearly four dozen countries have raised interest rates in the past six months as central banks hope to contain it, but the level 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, made worst by the ongoing Ukraine-Russia conflict.
The yield-curve continued to be inverted although the 10Y-2Y US Treasury gained 15 bps to reach -0.26% last week. Both the U.S 2-year and 10-year treasury yield climbed by 3 bps to 3.24% and by 14 bps to 2.84% respectively. The overall stock market sentiment turned risk-off and more volatile as the global High Yield (HY) – Investment Grade (IG) spread widened by 19 bps to 2.96% and the CBOE Volatility Index (VIX) surged by 107 bps to 20.60%.
As can be seen below, the global REIT markets saw mixed returns. However, the overall 12-month yield spreads are largely positive and remained favorable towards forward total returns. Back at home, the iEdge S-REIT Index (-0.09%) and its S-REIT subsectors reported mixed returns. Healthcare (+2.23%) and Industrial (+0.43%) were the best performing subsectors. In the other hand, Diversified (-0.93) and Hospitality (-0.86%) underperformed. With regards to the pandemic, the 7-day moving average of total COVID-19 cases stayed elevated, but we continued to see the figure to be down trending, reaching around four thousand cases by the end of the week. The Singapore government has also announced that masks will be optional indoors, required only on public transport and in healthcare settings.
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