Weekly Commentary: 14 November 2022 – 20 November 2022
Stocks rallied last week with the S&P 500 recording its strongest week since June 2022. US equity markets started the week on a tentative tone amid a lack of clarity on the US midterm election outcome, under the sentiment that a loss of one or both chambers of Congress could potentially hinder President Biden’s passage of future legislation. A weaker-than-expected inflation print for October announced by the US Bureau of Statistics provided market participants with the hope that inflationary pressures are finally cooling off leading the US Federal Reserve to reassess its current restrictive monetary policy stance. U.S. October labour statistics also remained resilient although the U.S. labor market has shown a slower pace of hiring and higher unemployment – Around 261,000 jobs were added in October and the unemployment rate rose by 0.2 pp to 3.7% MoM. Consequently, growth stocks as loosely represented by the NASDAQ Composite Index (+8.11%) were the main outperformer with the S&P 500 Index (+5.93%) and the Dow Jones Industrial Average (+4.22%) trailing. Other key market indices including the STI (+3.36 %) and the Hang Seng Index (+7.27%) also delivered positive returns partly boosted by China’s further easing of domestic Covid measures. All eleven S&P 500 sectors reported positive returns with the outperformers hailing from sectors that benefit from risk-on sentiments such as Information Technology (+10.07%), Communication Services (+9.23%), and Materials (+7.74%). Laggards for the week mainly came from more defensive sectors – i.e. Utilities (+1.49%), Healthcare (+1.78%), and Energy (+2.00%).
The yield-curve continued to be inverted as the 10Y-2Y US Treasury spread fell marginally by 1 bps to -0.51% last week. Both the U.S 2-year and 10-year Treasury yield contracted by 27 bps to 4.41% and by 26 bps to 3.90% respectively. Bond markets however failed to embody the risk-on sentiment as evidenced from the U.S. High Yield (HY) – Investment Grade (IG) credit spread widening by 11 bps to 3.21%, even as market volatility softened with the CBOE Volatility Index (VIX) dropping by 203 bps to 22.52%.
Market focus will fixate on the upcoming release of the U.S. October Producer Price Index (CPI) data, where market participants would positively perceive any deceleration as a sign of moderating cost pressure, although we expect this to be unlikely due to the rising energy prices over the course of October. In October, both consumer price indices surprised on the downside with the U.S. core CPI decelerating by 0.3 pp to 6.3% YoY, and the headline CPI slowing down by 0.5 pp to 7.7% YoY. The Fed’s preferred inflation gauge – the U.S. Personal Consumption Expenditure (PCE), has its headline rate unchanged at 6.20% YoY in September, whereas the core PCE climbed by 0.20 pp to 5.10% 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 elevated inflation level. Singapore’s CPI in September was unchanged at 7.5% YoY, the highest since the GFC, while MAS core inflation moved up by 0.2 pp to 5.3% YoY. There are also the rest of the 3Q22 earnings announcements from which we can expect a more positive market sentiment should the outlook of corporate earnings remain bright enough to offset the aftereffects of the Fed’s policy tightening. So far, the earnings season has been mostly positive – around 85% of the S&P 500 companies have reported actual results for 3Q22 where around 71% and 70% of them have reported positive Revenue and EPS surprise respectively.
As can be seen below, most of the global REIT markets delivered positive returns across the week with the sole exception of Malaysia. Domestically, the iEdge S-REIT Index’s (+6.28%) and most of its subsectors closed off the week higher with outperformers coming from Healthcare (+8.10%), Industrial (+6.86%) and Retail (+6.55%). In contrast, Office (+4.61%) and Diversified (+4.91%) SREITs lagged their subsector peers. REITs on the overall have been affected by decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions stemming from the increased financing costs, but we do expect inflows to return to the sector when market sentiment improves due to the attractive valuations and yields. With regards to the pandemic, the 7-day moving average of total COVID-19 cases stayed elevated due to the highly transmissible XBB variant but has been trending down at around four thousand cases. 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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