Weekly Commentary: 17 October 2022 – 23 October 2022
The stock market ended lower last week after investors digested the release of the U.S. September Consumer Price Index (CPI) data on Thursday. Core CPI accelerated faster by 0.3 pp to 6.6% YoY, above market expectation, while headline CPI slowed down by 0.1 pp to 8.2% YoY, although the figure is expected to stay elevated moving forward due to rising energy prices in October. Value stocks as loosely represented by the Dow Jones Industrial Average (+1.17%) managed to stay in the positive but not for the NASDAQ Composite Index (-3.11%) and the S&P 500 Index (-1.53%). Other key market indices including the STI (-3.35%) and Hang Seng Index (-6.50%) 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 (+1.45%) and Healthcare (+0.87%), in addition to Financials (+0.23%). In contrast, growth sectors such as Consumer Discretionary (-4.09%), InfoTech (-3.22%), and Utilities (-2.58%) were the bottom three sectors.
The yield-curve continued to be inverted as the 10Y-2Y US Treasury spread further slipped by 5 bps to -0.48% last week. Both the U.S 2-year and 10-year Treasury yields surged by 17 bps and 12 bps to 4.48% and 4.00% respectively. The stock market still remained largely risk-off and volatile as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened by 14 bps to 3.58% and the CBOE Volatility Index (VIX) climbed by 66 bps to 32.02%.
Market focus will continue to be on the 3Q22 earnings announcements where many notable tech and financial names are reporting this week – i.e. Netflix, Tesla, IBM, Goldman Sachs, JPMorgan, etc. We can expect a more positive market sentiment if the outlook of corporate earnings remained bright enough to offset the repercussions of the Fed’s policy tightening. The overall sentiment so far 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%. 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.
As can be seen below, most of the global REIT markets delivered negative returns with the exception of Malaysia, Canada, and France. However, the overall 12-month yield spreads remained positive and favorable towards forward total returns. Back at home, the iEdge S-REIT Index’s (-5.27%) subsectors ended the week lower with Hospitality (-7.64%) and Retail (-5.79%) SREITs faring the worst. In contrast, Specialized (Pureplay DCs) (-0.07%) and Healthcare (-4.90%) were the ones that were holding up the best. The REIT sector overall continued to be affected by decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions from the increased financing costs. Hospitality and Retail SREITs are affected by the new pandemic wave and high inflation that will increase travel costs and reduce consumer spending. With regards to the pandemic, the 7-day moving average of total COVID-19 cases surged to around 8000 cases last week due to the highly transmissible XBB variant. However, there were no further announced changes to the current COVID-19 measures although Health Minister Ong Ye Kung had stated that Singapore “cannot rule out” measure retightening such as the wearing of face masks indoors in the coming weeks.
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