Weekly Commentary: 19 December 2022 – 25 December 2022
Stocks on the overall closed lower within the preceding week, as markets failed to hang on to optimism stemming from a weaker-than-expected inflation print before the FOMC implemented a 50bps hike to the Federal Fund rate and delivered a hawkish narrative on the policy rate outlook that triggered the sell-down during the latter half of the week. Consequently, value stocks as loosely represented by the Dow Jones Industrial Average (-1.65%) outperformed, compared the S&P 500 Index (-2.05%) and the NASDAQ Composite Index (-2.70%). Other key market indices including the STI (-0.20%) and Hang Seng Index (-2.26%) also reported negative weekly returns. As China pressed on with economic reopening by abandoning rigid Covid-19 preventive measures that precipitated a new wave of infections, the policymaker announcement following the Central Economic Work Conference indicated that authorities would pursue a proactive fiscal and monetary policy stance to support the economy in the year to come. Most of the eleven S&P 500 sectors were negative with the notable exception being Energy (1.72%) whereas key underperformers came from the more growth-sensitive sectors such as Consumer Discretionary (-3.62%), Information Technology (-2.65%) and Communication Services (-2.46%). Energy’s outperformance across is attributed to the early week increase in WTI and Brent futures in response to supply tightness concerns pertaining to the shutdown of the Keystone pipeline, before recessionary risk fears kicked in and pared gains. Other sectors that fared better consisted of Utilities (-0.51%) due to their defensive nature and Industrials (-1.05%) which benefited from continued easing of supply chain bottlenecks and production costs.
The yield-curve continues to be inverted as the 10Y-2Y US Treasury spread inversion eased to around -0.67% driven by U.S 2-year and 10-year Treasury yields dipping by 19 bps to 4.18% and 10bps to 3.51% respectively. The U.S. High Yield (HY) – Investment Grade (IG) credit spread also widened by 23bps to 3.25% reflecting the more risk-off environment. On the contrary, stock market sentiment ended the week on a firmer footing as the CBOE Volatility Index (VIX) cooled down by 238 bps to 22.62% by Friday.
The conclusion of the December FOMC meeting saw the Federal Reserve raise Federal Fund rates by 50bps to 4.00-4.25%, in the process dashing hopes of market participants leaning towards a policy pivot by revising up the terminal policy rate guidance from the 4.6% in September 2022 to the current 5.1% and warning that the restrictive policy rate will be sustained at elevated levels well into 2024. The FOMC also revised lower its forecast for 2022 economic growth the US from 1.2% to 0.5%, while reiterating their intent to ease policy tightness only after there is adequate evidence of inflationary pressures being well and truly brought under control. In November, the U.S. core CPI decelerated by 0.2 pp MoM to 6.0% YoY while headline CPI also slowed down to 0.1 pp MoM to 7.1% YoY. Market focus in the coming days would be fixated on the announcement of the U.S. headline and core Personal Consumption Expenditure (PCE) index which slowed down by 0.3 pp to 6% YoY and by 0.2 pp to 5% YoY respectively in October. In Singapore, both the CPI and MAS core inflation have slowed by 0.8 pp and 0.2 pp MoM to 6.7% and 5.10% YoY respectively for the same month. Furthermore, 3Q22 earnings updates have mostly been positive and have lifted market sentiment in the past few weeks. Almost all of the S&P 500 companies have reported their results for 3Q22 where around 71% and 70% of the companies have reported positive revenue and earnings surprise respectively.
As seen below, global REIT markets delivered mixed returns but yield spreads remained positive overall. Back at home, the iEdge S-REIT Index (+0.09%) was flat for the week and its subsectors reported significant dispersion within weekly return figures. Hospitality (+4.72%), Industrials (+0.48%), and Retail (+0.20%) were the top-performing subsectors for the week, whereas underperformers came primarily within the Diversified (-2.64%), Specialized (Pureplay DCs) (-2.32%) and Office (-1.01%) space. REITs overall have been affected by decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions from the increased financing costs, but we do expect inflows to return to the sector once market sentiment recovers underscored by the attractive valuation and yields.
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