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Week Ended June 22, 2012

Thursday's sell-off leads to modest decline

U.S. stocks declined slightly after a big sell-off on Thursday sparked by fresh signs of a global slowdown erased gains made earlier in the week. Stocks rose on Monday and Tuesday, as investors reacted positively to the outcome of last Sunday's victory of Greece's New Democracy party, which is working to form a coalition government and stay in the euro. But a downbeat forecast from the Federal Reserve on Wednesday followed by Thursday's bearish economic news eclipsed optimism after the Greek elections. The Standard & Poor's 500 Index suffered its second-biggest loss in 2012 on Thursday.

Data points to more weakness in Europe and China

Several indicators from around the world on Thursday raised anxiety about the health of the global economy: in Europe, an index of services and manufacturing output contracted in June for the fifth straight month; separately, an early gauge of manufacturing activity in China issued by HSBC stayed negative for the eighth straight month as export orders slowed. In the U.S., more people than expected filed for unemployment benefits for the week ended June 16, the latest sign of trouble for the weak jobs market. After Thursday's market close, Moody's Investors Service cut its credit ratings on 15 global banks, but the downgrades were largely expected, and in some cases, were less severe than analysts had feared.

Fed dials back U.S. growth forecast, extends Operation Twist

The Fed gave a subdued update of the economy on Wednesday, when it reduced its growth projections for this year and next and nudged up its 2013 unemployment forecast. In a statement, Fed officials said they expect the economy to grow at a "moderate pace," but noted a slowdown in employment growth and household spending. The Fed also said it would extend its "Operation Twist" stimulus program, which aims to suppress long-term interest rates by selling short-term Treasuries to buy longer-term issues.

Despite the week's disappointing data, T. Rowe Price economists believe the U.S. economy remains resilient and is on track for gradual growth. The housing market is slowly healing, corporate profit margins are strong, and the jobs market is gradually improving. However, global risks including Europe's crisis and China's slowdown have weighed on business decision-making on matters like spending and hiring, which have contributed to economic weakness in recent months.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	12641.69	-125.48	3.47%
S&P 500	1335.02	-7.81	6.16%
NASDAQ Composite	2892.42	19.62	11.03%
S&P MidCap 400	916.96	-3.14	4.30%
Russell 2000	775.39	3.95	4.65%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

¹Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

²The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.

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U.S. Bond Market

Week Ended June 22, 2012

Municipal bonds attract taxable investors

Treasury yields rose during the week, a reversal of recent trends, while yields on high yield bonds declined. Investors revealed an appetite for riskier assets as Europe appeared to have weathered the latest storm engulfing its sovereign debt crisis. Fixed income investors had been building up their cash reserves in recent weeks to take advantage of opportunities in the marketplace.

Municipal bonds presented an opportunity that many investors have not been able to resist. The combination of a historic rally in U.S. Treasuries and elevated supply in the municipal bond market has drawn taxable investors—so-called crossover buyers—to the attractive valuations in tax-free securities. With Treasury yields reaching record lows amid concerns about Europe and slowing global growth, many AAA municipal bonds offer an absolute yield advantage over U.S. Treasuries with the same maturities. Crossover investors see value in "munis," given that AAA munis do not add significant credit risk. Most tax-exempt securities are backed by dedicated revenue streams or by the full faith and credit of the municipality. A key measure of value in the municipal market is the ratio of the yield on AAA tax-exempt securities to U.S. Treasuries with the same maturities. Historically, these ratios have ranged from 70% to 90%, which means investors typically have been willing to accept a lower yield from municipal bonds because of the federal tax exemption on their income. Recently, however, these ratios have exceeded 115% as municipal yields have exceeded those of comparable Treasuries.

Federal Reserve extends its effort to spur U.S. economic growth

Fed Chairman Ben Bernanke announced on Wednesday that the central bank would extend "Operation Twist," a program designed to drive down long-term interest rates and reduce borrowing costs, through the end of the year. Under the program, the Fed sells short-term securities and uses the proceeds to buy long-term bonds. Some investors were disappointed that the Fed didn't come up with a new plan to stimulate economic growth, but Bernanke made it clear that he is prepared to take further action if the U.S. economy falters in the coming months. "I wouldn't accept the proposition that the Fed has no more ammunition," Bernanke said. He is concerned that a barrage of weak economic reports from Europe, China, and developing economies is already affecting U.S. manufacturing and could lead to a new round of layoffs. The U.S. economy has endured three consecutive months of disappointing job gains and a recent uptick in unemployment.

U.S. Treasury Yields¹
Maturity	June 22, 2012	June 15, 2012
2-Year	0.30%	0.27%
10-Year	1.67%	1.58%
30-Year	2.76%	2.69%

This table is for illustrative purposes only. Past performance cannot guarantee future results.

¹Source of data: Bloomberg.com, as of 4 p.m. ET Friday, June 22, 2012.

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International Market

Week Ended June 15, 2012

International Stocks

Foreign stock markets closed higher for the week ending June 15, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 2.33%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	2.33%	-0.21%
Europe ex-U.K.	2.40%	-1.44%
Denmark	2.66%	9.77%
France	2.43%	-1.16%
Germany	2.66%	3.33%
Italy	0.99%	-10.87%
Netherlands	2.89%	-2.63%
Spain	3.65%	-19.85%
Sweden	2.51%	0.89%
Switzerland	1.93%	1.25%
United Kingdom	2.26%	1.27%
Japan	2.45%	-1.24%
AC Far East ex-Japan	2.93%	4.72%
Hong Kong	2.79%	6.03%
Korea	1.93%	4.50%
Malaysia	1.44%	3.61%
Singapore	4.54%	11.53%
Taiwan	2.42%	1.37%
Thailand	4.88%	15.22%
EM Latin America	1.45%	-2.66%
Brazil	1.74%	-7.75%
Mexico	2.30%	4.26%
Argentina	-8.80%	-51.49%
EM (Emerging Markets)	2.36%	2.65%
Hungary	3.44%	9.00%
India	1.15%	6.05%
Israel	-3.21%	-5.52%
Russia	3.57%	1.18%
Turkey	2.98%	18.98%

International Bond Markets

International bond markets in developed countries were higher this week, with the J.P. Morgan Global Government Bond Less U.S. Index gaining 0.7%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.70%	0.01%
Europe
Denmark	0.69%	-0.26%
France	0.78%	1.25%
Germany	0.47%	0.09%
Italy	-0.17%	4.06%
Spain	-2.05%	-8.61%
Sweden	1.73%	-0.93%
United Kingdom	0.78%	2.40%
Japan	1.05%	-1.04%
Emerging Markets	1.37%	6.42%
Argentina	7.85%	-4.36%
Brazil	1.88%	5.71%
Bulgaria	0.03%	3.59%
Russia	0.57%	6.06%

International Currency Markets

On the currency front, the U.S. dollar was weaker against the major currencies for the week.


Currency	Close (June 15, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.730	-1.12%	2.27%
Euro	1.2625¹	-1.27%	2.75%
British pound	1.5643¹	-1.46%	-0.66%

¹U.S. dollars per national currency unit.

Sources: Foreign stock markets and currency sections are from Rimes Technologies, using MSCI data. International bond markets are from J.P. Morgan.

Note: All returns are in U.S. dollars. All bond indices are J.P. Morgan. All stock indices are Morgan Stanley Capital International (MSCI).

Equity Indices
EAFE:	MSCI Europe, Australasia, and Far East Index
Europe Ex-U.K.:	MSCI Europe ex-U.K. Index
Far East Ex-Japan:	MSCI AC Far East ex-Japan Index
Latin America:	MSCI Emerging Markets Latin America Index
Emerging Markets:	MSCI Emerging Markets Index

Bond Indices
Developed Markets:	J.P. Morgan Global Government Bond Less U.S. Index
Emerging Markets:	J.P. Morgan Emerging Markets Bond Index Plus

All charts are for illustrative purposes only and do not represent the performance of any specific security. Past performance cannot guarantee future results.