Despite a Friday rally, large-cap benchmarks recorded their biggest weekly drops since February and rounded out the worst monthly declines since the onset of the pandemic, seemingly weighed down by inflation and interest rate fears.
Throughout the week, rising US Treasury yields continued to overshadow sentiment, with many investors appearing to take the Federal Reserve’s policy announcement from the previous week in a more hawkish manner. Following the meeting, policymakers indicated a small increase in their short-term interest rate projections, as well as intentions to reduce monthly asset purchases. At midweek, the yield on the benchmark 10-year US Treasury note reached a three-month high before sliding down to finish the week roughly where it began.
The fiscal policy environment also appeared unsettling. The possibility that the federal government would experience another partial shutdown was averted late in the week when the Senate and the House of Representatives passed, and President Joe Biden signed, a short-term spending bill. No progress was made in raising the federal debt limit, however, and Treasury Secretary Janet Yellen warned again that the limit needed to be suspended or raised by October 18 in order for the Treasury to meet its obligations. While most observers agree that an actual default on the country’s debt is highly unlikely—especially given that Democrats may turn to tools to do it unilaterally—substantial market volatility followed previous episodes of brinkmanship a decade ago.
Meanwhile, the outlook for the bipartisan, $1 trillion infrastructure bill also remained clouded. Democratic leaders abandoned plans for a vote on the bill on Thursday evening, following demands from progressives in the party to link its passage to a separate bill focusing on health care, education, climate measures, and other social policy priorities.
The week’s inflation data was arguably not alarming, with the Commerce Department’s core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rising 3.6% over the 12 months ending in August, matching consensus. Continuing reports of supply restraints seemed to concern investors, however. Shares in Nike, Bed Bath & Beyond, and Kohl’s fell sharply, for example, after the companies reported stressed supply chains and higher labor costs ahead of the holiday shopping season. The recent surge in oil prices, which benefited energy stocks, also raised broader inflation worries, with Crude Oil WTI up 2.43% for the week.
US small and mid-cap indexes ended with only modest losses. Declines within the S&P 500 were broad-based at -2.2% for the week, with only energy shares notching a gain. Growth stocks fared worse than value shares, which was mirrored in the underperformance of the technology-heavy Nasdaq Composite Index, down 3.2%. Shares in Europe fell sharply amid fears that the economy might be sliding into a period of low growth and high inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.24% lower as eurozone consumer prices jumped 3.4% in August—up from 3% a month earlier and the highest level since September 2008.
Japanese stocks followed the lead of U.S. markets and declined during the week. The Nikkei 225 Index lost 4.89%, whilst in China stocks ended the week on a mixed note. The Shanghai Composite Index declined from the previous weeks close whilst the Hang Seng Index edged up 0.26% as positive news concerning indebted property developer China Evergrande Group supported investor sentiment.
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