Weekly Commentary: 29 August 2022 – 4 September 2022
During his annual policy speech on Friday, the U.S. Federal Reserve Chair has delivered a stern and hawkish commitment in halting inflation, even at the expense of the U.S. economy. The speech killed any market expectations of a lower future rate hikes and set the stock market sharply down last week. As a result, growth stocks as loosely represented by the NASDAQ Composite (-4.43%) fared worst again, followed by the Dow Jones Industrial Average (-4.20%) and the S&P 500 (-4.02%). Other key market indices with the exception of the STI (+0.13%) and the Hang Seng (+2.03%) were in the negative as well. All eleven S&P 500 sectors reported negative returns except for Energy (+4.27%) as oil prices moved higher – 5-day WTI (+13.92%). Materials (-1.29%) and Utilities (-2.60%) also held up relatively the best. In contrast, growth sectors such as InfoTech (-5.58%), Communication Services (-4.82%), and Consumer Discretionary (-4.74%) were the most affected.
On a positive note, the Fed’s preferred inflation gauge – U.S. Personal Consumption Expenditure (PCE), has indicated a peaking trend where both the headline and core PCE decelerated by 0.5 pp to 6.30% YoY and by 0.4 pp to 4.60% YoY in July respectively. This means that the Fed’s tightening policy has shown some effectiveness in reducing consumer spending. Nevertheless, rising energy prices remained a concern as it is the primary driving force behind the elevated inflation level. 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 July has accelerated by 0.3 pp MoM to 7% YoY, the highest since the GFC, while MAS core inflation also moved up by 0.4 pp to 4.8% 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 supply constraints.
The yield-curve continued to be inverted as the 10Y-2Y US Treasury fell by 9 bps to reach -0.35% last week. Both the U.S 2-year and 10-year treasury yield climbed by 22 bps to 3.46% and by 27 bps to 3.11% respectively. The overall stock market sentiment remained risk-off and more volatile as the global High Yield (HY) – Investment Grade (IG) spread widened by 19 bps to 3.15% and the CBOE Volatility Index (VIX) surged by 496 bps to 26.70%.
As can be seen below, the global REIT markets largely moved downwards with the exception of Thailand. 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 (-1.96%) and its subsectors reported negative returns with the exception of Diversified (+0.02). Healthcare (-0.23%) and Office (-0.35%) were the least affected as well. In the other hand, Industrial (-0.2.42%) and Hospitality (-1.81%) 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 three thousand cases by the end of the week. Donning of masks will be optional indoors starting this week where it is only required in public transports and healthcare settings.
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