U.S. stocks drifted between losses and gains. They were losing ground early this week as retail sales for December fell more than expected. They climbed on Friday in the wake of Alphabet (GOOG - up +6.98%), the latest company to announce thousands of job cuts after Microsoft, Meta, and Amazon. On the same day, Fed Governor Christopher Waller said he would favour a 25-basis point interest rate increase at the next meeting, confirming market expectations.
The Dow Jones Industrial Average lost 927.12 points week-over-week, or -2.70%, to 33,375.49, the S&P 500 fell -0.56% to 3,972.61 while the Nasdaq Composite added 61.27 points, or +0.55%, to 11,140.43.
European indices ended the week in the red with the MSCI EMU down -0.51% and the FTSE 100 down -0.94%. The European Central Bank maintained its hawkish tone. Klaas Knot, who serves as the governor of the Dutch central bank, said that the board members “will not stop after a single 50-basis point hike” at the next meeting in February.
In Asia, equity markets bucked the trend. The Shanghai composite notched its fourth consecutive weekly gain (up +2.18%) amid China’s rapid reopening. Yet growth in the world’s second largest economy slowed sharply in the fourth quarter. Japan’s Nikkei gained 1.66% as the Bank of Japan defied market speculation in keeping its key rate and yield curve control policy unchanged.
Growth stocks set the pace
The job cuts at Alphabet-Google (6% of their global workforce slashed, or 12,000 jobs) sent the communication services index up +2.97%. Its performance was also boosted by Netflix. NFLX shares rallied again (up +2.91%) after the streaming giant posted an increase of 7.6 million in subscribers in the fourth quarter, ending the year 2022 with 230.75 million subscribers.
Among the week’s top performers, the I.T. sector gained +0.68%, pushed higher by Apple stocks (APPL), up +2.31%. Energy was also in the green (up +0.74%) as WTI crude oil prices rose +1.82% despite weak U.S. economic data and an industry report showing a surprise jump in U.S. crude stocks.
All the other S&P sectors finished the week in negative territory. The worst performance came from industrials (-3.36%). Industrial production fell -0.7% in December, significantly higher than the consensus estimate (decline of -0.1%). It’s the biggest drop in industrial activity since September 2021. Defensive sectors were also facing headwinds. Utilities and consumer staples lost -2.93% and -2.86% respectively.
Treasury yields stabilize
After the best start to a year for bond markets, U.S. Treasuries showed signs of stabilizing. The yield on the benchmark 10-year Treasury note settled at 3.48%, down from 3.50% a week ago. The spread between the 2-year and 10-year yields fluctuated around -70 basis points. It is highly likely that the Fed will hike rates by 25 basis points at its next policy meeting on January 31 - February 1. Indeed, Governor Christopher Waller, a hawkish official at the U.S. central bank, joined other policymakers in backing another moderation in the size of rate increases. The terminal rate remained unchanged below 5% (Fed funds futures at 95.10 in June).
In Europe, the yield on the German 10-year Bund edged up one basis point to 2.18%. European Central Bank President Christine Lagarde said inflation remains far too elevated. As a result, the ECB will leave interest rates in restrictive territory for as long as it takes to bring down inflation to its 2% target.
By contrast, the Bank of Japan maintained its dovish policy after its two-day meeting, defying market expectations that higher inflation could force the Policy Board to move away from low interest rates. Instead, the central bank decided to continue to set short-term interest rates at -0.1% and guide 10-year yields to around 0%, through its yield curve control program.
Prices on corporate bonds continued to rise for the third week in a row, though to a lesser extent. Investment grade corporate bond prices were up +0.16% in Europe (IBOXX € Liquid Corporates index) and up +0.23% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index).
High-yield bonds were mixed. They gained +0.22% in Europe (IBOXX € Liquid High Yield Index) and lost -0.49% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).
Lastly, emerging debt in local currencies edged down -0.27% while the dollar index was virtually unchanged and gold extended its winning streak for the fifth straight week. The yellow metal closed at its highest levels since April at $1,928/Oz.
Against this backdrop, it’s worth noting that global bond issuance hit a record of nearly $590 billion in January, meeting with high demand across all regions.
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