Market Analysis

MARKET ANALYSIS | 12/11/2021


Stocks pull back on inflation concerns

Stocks retreated from record highs, as investors confronted data showing the highest inflation in three decades. On Tuesday, the S&P 500 Index registered its first decline in nine sessions, ending its longest winning streak since 2017. Consumer discretionary shares led the declines in the S&P 500 following a steep fall in Tesla, after CEO Elon Musk announced plans to sell some of his shares. Energy shares were also especially week as oil prices backed away from recent peaks. The small materials sector performed best, seemingly helped by the recent passage of the Biden administration’s USD 1.2 trillion infrastructure bill in the House of Representatives. The week was also notable for the initial public offering of electric vehicle maker Rivian—the largest for a U.S. company since Facebook’s in 2012. Fixed income markets were closed on Thursday in observation of Veterans Day.

The major indexes fell sharply on Wednesday morning following news that the consumer price index (CPI) jumped 0.9% in October, well above consensus expectations of around 0.6%. The increase brought the year-over-year CPI increase to 6.2%, the highest since December 1990. A surge in energy prices deserved much of the blame, but core inflation, which excludes the volatile energy and food segments, rose 0.6%, also more than expected. T. Rowe Price traders noted that a poorly received auction of long-maturity Treasury bonds may have further soured the mood for equity investors.

Job gains overshadowed by inflation worries

Most observers attributed the surge in inflation to ongoing supply chain pressures and higher consumer demand as the coronavirus ebbs and more people reenter the workforce. Positive news on the latter fronts may have helped cushion the week’s losses. T. Rowe Price traders noted that sentiment seemed to get a continuing boost from Pfizer’s announcement the previous week that it was seeking emergency approval for a highly effective treatment for COVID-19. Weekly jobless claims hit a new pandemic-era low of 267,000, and the Labor Department reported that there were 10.4 million job openings in September, a slight decline from August’s record but above expectations.

Consumers appeared to be paying much more attention to higher inflation than the healthy job market, however. On Friday, researchers at the University of Michigan reported that their gauge of consumer sentiment fell to its lowest level (66.8) in a decade due to inflation worries. (In comparison, the gauge’s previous nadir in April 2020 following the outbreak of the pandemic was 71.8.) Moreover, “rising prices for homes, vehicles, and durables were reported more frequently than any other time in more than half a century,” according to the survey’s chief economist.

Yields increase on inflation data

The upside inflation surprise forced U.S. Treasury yields higher, with the benchmark 10-year U.S. Treasury note’s yield ending the week around 1.58%. (Bond prices and yields move in opposite directions.) Earlier in the week, the 10-year yield fell to 1.41% during intraday trading on headlines surrounding geopolitical tensions between the U.S. and China and news that President Joe Biden had interviewed Federal Reserve Governor Lael Brainard for the role of Fed chair. Governor Brainard is generally viewed by investors as a more dovish alternative to the current Fed chair, Jerome Powell, who was also interviewed by President Biden.

Municipal bonds posted positive returns over the holiday-shortened trading week despite the sell-off in the Treasury market. The pace of flows into municipal bond funds industrywide increased during the most recent week measured, and T. Rowe Price traders observed strong demand for new muni bond offerings.

According to our traders, investment-grade corporate bond credit spreads widened over the holiday-shortened week, with more volatile and longer-maturity corporates underperforming slightly. (Credit spreads measure the amount of additional yield over a similar-maturity Treasury security that investors demand to hold a bond with credit risk.) Secondary trading volumes were relatively light amid an active primary calendar. Our traders observed strength in the high yield market as the week began, with buyers active across credit ratings and sectors and heavy new issuance ahead of the Veterans Day holiday. However, risk-off sentiment took hold after inflation data introduced more uncertainty regarding the timeline for a Fed rate hike.


Shares in Europe rose as continuing ultra-loose monetary policy and optimism about economic growth helped allay inflation concerns. In local currency terms, the pan-European STOXX Europe 600 Index gained 0.68%. Germany’s Xetra DAX Index tacked on 0.25%, France’s CAC 40 Index climbed 0.72%, and the UK’s FTSE 100 Index advanced 0.60%. However, Italy’s FTSE MIB fell 0.23%.

Core eurozone bond yields rose. While markets initially pared expectations for interest rate increases after dovish comments from the European Central Bank, higher-than-expected U.S. inflation caused a reversal, and yields ended higher. Peripheral eurozone and UK government bond yields broadly tracked core markets.

Dutch mull coronavirus lockdown: other countries reimpose restrictions

European nations began adopting or considering restrictions to curb a wave of coronavirus infections on the continent. The Dutch government is considering a short, partial lockdown to combat surging infections. The country reintroduced mask rules, while Denmark reinstated proof-of-vaccination requirements to access certain indoor spaces. Italy, which already had these safeguards in place and has not been hit so hard by the new wave of the pandemic, offered booster vaccines to anyone over 40 years old.

Germany’s national disease control center reported 50,196 new coronavirus cases during the week. Social Democratic Party leader Olaf Scholz, who is trying to form a coalition government, said more measures may be required to curb infections this winter. Hungary and the Czech Republic registered their biggest daily tally in confirmed coronavirus infections since the first quarter, while Slovakia reported the most cases since the pandemic began. In the UK, the daily infection rate hovered around 40,000, according to official data.

Eurozone industry output falls less than expected; EU raises growth forecast

Eurozone industrial production fell in September, although the magnitude of the decline was less than expected due to increased output of nondurable consumer goods. Output shrank 0.2% sequentially, for an annual increase of 5.2%. Economists polled by Reuters had expected a monthly decline of 0.5%. In its fall report, the European Commission (EC) raised its 2021 economic growth forecast for the eurozone to 5.0% from 4.8%. However, it said that the economy now faced “mounting headwinds,” including supply chain disruption, rising energy costs, and an acceleration in the number of coronavirus cases. The EC estimated that the eurozone economy would grow 4.3% in 2022 and 2.4% in 2023, with inflation projected to come in at 2.4% in 2021, before slowing to 2.2% in 2022 and 1.4% in 2023.

UK economy slows in third quarter despite September uptick

UK economic growth slowed to a 1.3% rate in the three months ended September 30, down from 5.5% in the second quarter and below the 1.5% forecast by the Bank of England. Shortages of goods, labor, and components and rising coronavirus cases weighed on activity. However, the monthly rate of expansion in September was 0.6%—an improvement from 0.2% in August—due to increased health care activity, although data for previous months were revised lower.


New details about the government’s upcoming fiscal stimulus package and perceptions that valuations were lagging behind U.S. peers provided some tailwinds for Japan’s stock markets during the week. The corporate earnings season mostly confirmed positive effects from yen weakness. Against this backdrop, the Nikkei 225 and the broader TOPIX indexes generated flat returns. The yen weakened to around JPY 114.05 against the U.S. dollar, from about JPY 113.41 the prior week, due to continued expectations that the Bank of Japan (BoJ) will maintain low interest rates for longer than other developed market central banks. The yield on the 10-year Japanese government bond was broadly unchanged at 0.07%.

Fumio Kishida reappointed prime minister after convincing election win

The Liberal Democratic Party’s (LDP’s) Fumio Kishida was reappointed Japan’s prime minister after his party’s convincing win in the October 31 general election, where it retained most seats in the powerful lower house of parliament. Except for one minister, Kishida kept his cabinet unchanged—key posts went to members of influential party factions, including those led by former Prime Minister Shinzo Abe and former Finance Minister Taro Aso. He appointed Yoshimasa Hayashi, a former defense and education minister who heads an association of parliamentarians that promotes relations with China, as new foreign minister.

New details about the government’s upcoming fiscal stimulus package

The LDP’s convincing election win leaves Kishida well placed to push ahead with fiscal stimulus to boost Japan’s pandemic-hit economy. He is compiling an economic stimulus package of about JPY 30 trillion (around USD 265 billion), said to include JPY 100,000 (approximately USD 880) in cash handouts to children aged 18 or younger and a restart of the Go to Travel subsidy program to promote domestic tourism, according to the Kyodo news agency. The package will also include wage hikes for care workers, nursery school staff, and nurses. The government is seeking to pass a supplementary budget by year-end to fund the package, while some measures will also be financed by a budget for the next fiscal year starting in April.

Producer prices rise at fastest pace in around four decades

The BoJ’s latest report on the Corporate Goods Price Index, which measures the price development of goods traded in the corporate sector, showed that producer prices surged 8.0% year on year in October. This marked the fastest pace of increase in around four decades and was attributable to both rising commodity prices and supply chain bottlenecks.

Many companies have, to date, refrained from passing on increasing costs to consumers, which has meant there has been limited upward pressure on consumer prices. The BoJ recently slashed its forecast for the CPI to 0% in fiscal year 2021. The central bank has reiterated its commitment to ultra-loose monetary policy until it reaches its 2% inflation target, a stance that diverges from other developed market central banks, which are signaling a shift toward monetary tightening.


Chinese stock markets advanced amid speculation that Beijing would announce easing measures to help indebted property companies as the specter of defaults continued to loom over the sector. The large-cap CSI 300 Index rose 0.95%, and the Shanghai Composite Index added 1.4%.

The previous week, cash-strapped developer China Evergrande Group averted a last-minute default for the third time in the past month. Meanwhile, Kaisa Group, which has the most offshore bonds of any Chinese developer after Evergrande, approached default as the company reportedly informed creditors that it “may not be able to pay the coupons” on its bonds because of legal and cross-default issues domestically and offshore. Kaisa was the first Chinese builder to default on its dollar bonds in 2015, a landmark event at that time.

Property is a key pillar of China’s economy, and worries have grown that the sector’s financial woes could spill into other sectors. The U.S. Federal Reserve noted in its November Financial Stability Report that China’s financial sector leverage is high and real estate valuations are stretched. It also said that Beijing’s focus on curbing leverage could stress highly indebted real estate companies, which could in turn spread to the country’s financial system and global financial markets and affect the U.S.

Producer prices rise sharply

In economic readings, China’s producer price index (PPI) accelerated to a greater-than-forecast 13.5% in October over a year ago, a 26-year high, from September’s 10.7% rise. However, stagflation fears remain muted as analysts point to China’s ability to export inflation amid strong external demand. New bank lending fell sharply in October from the previous month, indicating that tight loan supply could pose a headwind to growth.

Yields on China’s 10-year government bonds rose four basis points to 2.946% from the prior week as the PPI surge raised inflation worries. The renminbi inched up 0.1% to 6.3961 against the U.S. dollar. The renminbi is Asia’s best-performing currency this year, driven by a strong balance of payments, inflows into China’s bond market, and supportive central bank moves that have protected the downside.

An increase in China’s foreign currency reserves—the world’s largest—has also supported the renminbi. China’s foreign reserves rose to USD 3.218 trillion at the end of October, the foreign exchange regulator reported, the first monthly rise since July. The growth came as overseas investors increased their holdings of Chinese government bonds (CGBs) to a new high in October. Foreign investors held CGBs totaling RMB 2.3 trillion (USD 359.49 billion) at the end of October, according to China Central Depository & Clearing Co.



Chilean stocks, as measured by the S&P IPSA Index, returned about 2.2%.

Early in the week, lawmakers in the Senate cast their votes on the latest pension withdrawal legislation, the fourth since the pandemic started. The bill, however, was just one vote shy of the three-fifths majority needed for approval. However, the bill isn’t dead; it will now move to a mixed 10-member committee—composed of five representatives from each of the two chambers of Congress—that will attempt to make changes and return the bill to each chamber for a final vote.

T. Rowe Price emerging markets sovereign analyst Aaron Gifford believes that a “watered down” bill could still be passed by Congress, though he notes that the final votes could take place after the presidential and legislative elections. With the entire lower chamber and around half the Senate up for grabs on November 21, the postelection political landscape could look very different. Nevertheless, pension withdrawals remain very popular among citizens, and pressure on politicians—both current and incoming—to act will remain high.

In other political news, the lower house impeached President Sebastian Pinera over revelations contained in the so-called Pandora Papers, a cache of leaked international documents that allege unethical and, in some cases, illegal financial activities by various world leaders. The impeachment votes barely reached the simple majority needed in the 155-member body. The motion will now move to the Senate, which requires a two-thirds vote to convict and remove the president. Given that the ruling coalition has more than one-third of the seats in the Senate and that none of its members in the lower house favored impeachment, the probability of Pinera being removed is relatively low.


Mexican stocks, as measured by the IPC Index, returned about -0.9%.

On Thursday, the Mexican central bank decided to raise its key interest rate by 25 basis points, from 4.75% to 5.00%. The decision was not unanimous: Four Governing Board members voted for the increase, but one policymaker preferred no change. The size of the rate increase was generally expected, though some anticipated a 50-basis-point rate increase, especially following this week’s release of October inflation data that showed both headline and core inflation once again surprising to the upside and reaching multiyear highs.

Price analyst Gifford notes some hawkish elements in the central bank’s post-meeting statement. First, in its assessment of the balance of risks for inflation, policymakers continued to say that risks are “biased to the upside,” but they added that the balance of risks has “deteriorated.” Also, central bank officials, who previously deemed inflation pressures to be “transitory,” now believe that inflation pressures “are largely considered to be transitory.” Finally, the statement notes that there are “greater risks to the price formation process and to inflation expectations.” Previously, policymakers indicated that “the shocks that have increased inflation…may pose risks to the price formation process and to inflation expectations.

Gifford concludes that the central bank’s Governing Board is more worried about inflation, but policymakers’ decision to raise the overnight interbank lending rate by only 25 basis points reflected their desire to avoid validating fears that inflation is not temporary, which could then lead to a vicious cycle between inflation expectations and further rate increases—something that has been observed in other Latin American countries, such as Brazil and Chile. Gifford also notes that a 5.00% overnight interbank lending rate is already in the central bank’s estimated “neutral” (i.e., neither accommodative nor restrictive) monetary policy range of approximately 4.8% to 6.4%.