MFS Week in Review (7/15/22)

by MFS Investment Management Canada

A review of the week's top global economic and capital markets news.

U.S. inflation posts fresh 40-year high

As of noon on Friday, global equities eased on the week amid fears the U.S. Federal Reserve could raise rates as much as a full percentage point at its upcoming rate-setting meeting. The yield on the U.S. 10-year Treasury note declined to 2.91% from 3.09% a week ago as the yield curve flattened considerably following a sharp rise in U.S. consumer prices. The price of a barrel of West Texas Intermediate crude oil fell $5 to $98 while volatility, as measured by the Cboe Volatility Index (VIX), fell to 24.69 from 28.4 a week ago.


Fed officials downplay odds of full-point hike

Larger-than-expected rises in U.S. consumer (9.1%) and producer prices (11.3%) in June had investors nearly fully pricing in a 100-basis point rise in the fed funds rate at the 27 July meeting of the Federal Open Market Committee meeting before several committee members suggested that a 0.75% hike might be more appropriate. As of Friday morning, there is a roughly 40% chance of a full-point hike. The broad-based nature of the inflation surge, which has spread far beyond just food and energy, has investors questioning their assumption that inflation is close to a peak. The prospects for rapid rate hikes, and the increased risks of those actions resulting in a recession, undermined equity markets and dramatically flattened yield curves this week. The closely-watched 2-year/10-year yield curve inverted more deeply after the data, to -21 bps on Friday morning after falling as far as -27 bps in the wake of the CPI report. Additionally, commodities weakened in anticipation of a global growth slowdown while the U.S. dollar index reached a 20-year high at midweek as wider interest rate differentials and global risk aversion supported the greenback versus a basket of currencies.

Recession fears, inflation expectations eased late in week

On Friday morning, U.S. inflation expectations, as measured by the University of Michigan consumer sentiment survey, declined to 5.2% from 5.3% over a one-year horizon and to 2.8% from 3.1% over a 5- to-10-year horizon. The Fed is particularly concerned about inflation expectations becoming untethered and will likely take comfort in the modest decline. Conversely, U.S. retail sales rose a more-than expected 1% in June, with core sales rising a better-than-expected 0.8%. This, combined with an upbeat Empire State Manufacturing index (+11.1 versus -2 expected), means U.S. recession fears could ease a bit, giving the Fed increased scope to raise rates.

Energy crisis, recession fears send euro below parity

Increasing recession fears, concerns that Moscow won’t restart gas flows to Europe once maintenance on the Nord Stream 1 pipeline is complete, diving consumer and investor confidence and political instability in Italy all helped push the euro below $1.00 at several points during the week. Interest rate differentials are also a drag, with futures markets predicting a more muted tightening cycle from the European Central Bank than the one underway in the United States given the headwinds being faced by Europe in the wake of Russia’s invasion of Ukraine. The central bank is set to meet next Thursday and raise rates by 0.25% to -0.25%. The ECB is also expected to unveil its antifragmentation tool that is designed to limit spread-widening between German bunds and the bonds of eurozone countries with weaker credit fundamentals, such as Italy. Like most other developed market central banks, the ECB must contend with intensifying upside risks to inflation and downside risks to growth.

From east to west and north to south, central banks tighten policy

The Bank of Canada surprised markets on Wednesday by hiking its policy rate 100 basis points to 2.5%, the largest hike in 24 years, amid higher and more persistent inflation than the bank expected. The Philippines raised rates 0.75% while the Reserve Bank of New Zealand and the Bank of Korea each hiked by a half-point. The Monetary Authority of Singapore also tightened monetary policy by shifting its nominal effective exchange rate.

COVID restrictions slowed China’s Q2 growth

China’s economy grew just 0.4% in the just-ended quarter, held back by sweeping lockdowns in some of the country’s largest population centers during the period, though economic activity in June showed an upswing. The data suggest that Beijing’s 5.5% annual growth target for 2022 is likely far out of reach. China’s slower growth pace, as it continues to grapple with the spread of COVID-19 variants, is contributing to the recent correction in global commodities prices. China’s troubled real estate market was hit with more bad news this week, with the 10th monthly fall in a row for home prices and reports that a growing number of buyers of unfinished homes have stopped paying their mortgages, depriving developers of much-needed funds.


  • Amid discontent over planned economic reforms, former European Central Bank President Mario Draghi submitted his resignation as Italy’s prime minister on Thursday after the Five Star Movement, one of the parties in his coalition, failed to support the government in a confidence motion. Italian President Sergio Mattarella rejected his resignation and asked Draghi to try to forge a unified coalition. Another confidence vote could follow such efforts next week.
  • Bloomberg reported on Thursday that China is preparing a $1.1 trillion infrastructure package to spur economic growth.
  • Former Chancellor of the Exchequer Rishi Sunak won the first round of balloting to replace Boris Johnson as leader of Britain’s Conservative Party.
  • U.S. Securities and Exchange Commission Chair Gary Gensler said this week that he is not confident an agreement can be reached with Chinese regulators on the sharing of audit reports.
  • The Fed’s Beige Book said that as long as economic growth is modest, the outlook for future GDP growth will remain mostly negative. Household demand appears to be ebbing due to negative real income growth, the report stated, while it noted a clear deceleration in housing demand. Substantial price increases were seen in all Fed districts, the report said.
  • In June, French utility EDF reported a 27% drop in nuclear power generation compared with a year ago, adding to Europe’s energy crisis. Twelve of the firm’s 56 reactors are offline due to problems with their cooling systems.
  • U.S. weekly jobless claims continued their rise this week, reaching 244,000, up nearly 80,000 from the cycle low. Historically, when claims rise more than 100,000 from their low, recessions have typically followed within a matter of months.
  • The U.S. Senate confirmed former U.S. Department of Treasury official Michael Barr as the Fed’s vice chair for supervision. His confirmation means that the seven-member Board of Governors is fully staffed for the first time in nearly nine years.
  • A report issued by the Fed’s inspector general issued on Thursday cleared Chair Jerome Powell and former Vice Chair Richard Clarida of any wrongdoing regarding trading in their personal accounts during the early days of the pandemic. Probes of the former presidents of the Federal Reserve Banks of Boston and Dallas are ongoing.
  • Amid slowing sales, the supply of U.S. homes for sale rose in June for the first time in three years, according to Redfin.
  • Hopes among U.S. Senate Democrats for a slimmed-down climate and energy package were dashed late this week as Senator Joe Manchin (D-WV) said he could not support the legislation due to inflation concerns.
  • U.S. President Joe Biden arrived in Saudi Arabia on Friday to meet with Crown Prince Mohammed bin Salman in an effort to encourage the Saudis to increase oil production.


With only about 6% of the constituents of the S&P 500 Index having reported for Q2 2022, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings growth is running at 4.7% while sales rose about 10.2% compared with the same quarter a year ago, according to data from FactSet Research. The pace of earnings growth in Q1 was about 9.2%.


Past performance is no guarantee of future results.

Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research,

This content is directed at investment professionals only.


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