Weekly Commentary: 10 October 2022 – 16 October 2022
The stock market rebounded last week but surrendered most of its gains after September’s U.S jobs report showed a strengthened job market despite the Fed’s efforts to slow the economy. Nevertheless, stocks mostly ended higher by Friday. Value as loosely represented by the Dow Jones Industrial Average (+2.03%) had the best gain last week, with the S&P 500 (+1.56%) and the NASDAQ Composite Index (+0.75%) trailing closely behind. Other key market indices including the STI (+0.50%) and Hang Seng (+3.00%) reported positive returns as well. All eleven S&P 500 sectors saw mixed returns with Real Estate (-4.06%), Utilities (-2.63%), and Consumer Discretionary (-1.11%) relatively underperforming the rest. In contrast, Energy (+13.86%), Industrials (+2.87%), and Materials (+2.15%) were the top three sectors. Energy outperformed after OPEC+ announced a major reduction in oil production, driving both WTI and Brent crude up last week.
The market focus next will be on the 3Q22 earnings season announcements and the U.S. September Consumer Price Index (CPI) data that will be released later this week. Overall market sentiment is still largely centred around recession and rate hike expectations, especially after the stubbornly elevated inflation data in August. The Fed’s preferred inflation gauge – the U.S. Personal Consumption Expenditure (PCE), has its headline rate decreased by 0.20 pp to 6.20% YoY in August. However, inflationary pressure persists as core PCE climbed by 0.20 pp to 4.90% YoY, well above the Fed’s target range of 2%. The U.S. core CPI had also accelerated to 6.3% YoY, from 5.9% in August. Globally, rising energy prices remained a concern as it is the primary driving force behind the rising inflation level. Singapore’s CPI in August has accelerated by 0.5 pp MoM to 7.5% YoY, the highest since the GFC, while MAS core inflation also moved up by 0.3 pp to 5.1% YoY. Three weeks ago, the U.S. Federal Reserve announced a 75 bps hike on its benchmark interest rate, elevating the target range to 3.00%-3.25%, the highest since March 2008. The market is currently pricing in a more aggressive Fed as its monetary tightening seemed to have yield little effectiveness so far.
The yield-curve continued to be inverted as the 10Y-2Y US Treasury spread slipped by 1.2 bps to -0.43% last week. Both the U.S 2-year and 10-year Treasury yields surged by 10 bps and 9 bps to 4.31% and 3.88% respectively. The stock market remained largely risk-off and volatile, although the U.S. High Yield (HY) – Investment Grade (IG) spread contracted by 49 bps to 3.44% and the CBOE Volatility Index (VIX) fell by 26 bps to 31.36%.
As can be seen below, most of the global REIT markets delivered negative returns with the exception of Australia, Hong Kong, and Malaysia. However, the overall 12-month yield spreads remained positive and favorable towards forward total returns. Back at home, the iEdge S-REIT Index’s (+0.03%) subsectors reported mixed returns with Office (-1.77%) and Specialized/Pureplay DCs (-1.38%) faring the worst. In contrast, Diversified (+1.15%) and Retail (+0.87%) were the top two subsectors. The sectors overall continued to be punished due to decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions from the increased financing costs. With regards to the pandemic, the 7-day moving average of total COVID-19 cases surged to around 5000 cases last week. However, there were no further announced changes to the current COVID-19 measures.
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