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Week Ended August 31, 2012

Friday rally falls short and leaves stocks modestly lower for week

Large-cap stocks edged lower for the week as a rally on Friday helped compensate for a sharp pullback the previous day; the smaller-cap indexes moved modestly higher. Trading in the U.S. was light ahead of the Labor Day holiday weekend, and global economic concerns appeared to overshadow the relatively light flow of corporate earnings news.

European debt crisis remains in flux

The debt situation in Europe continued to dominate global concerns. While European credit markets have calmed somewhat in recent weeks, investors worry that Germany will oppose stronger European Central Bank intervention to drive down borrowing costs, particularly in Spain. European markets recovered some momentum at the end of the week after an ECB official seemed to indicate that central bank purchases of troubled sovereign debt were a possibility. Investors were also encouraged that Spain strengthened its bank rescue fund.

Bernanke causes burst of enthusiasm

Throughout the week, investors kept a close eye on whether the Federal Reserve would take additional actions to support the economic recovery. Markets jumped on Friday morning following a highly anticipated speech by Federal Reserve chairman Ben Bernanke at the central bank's annual conference in Jackson Hole, Wyoming. In his speech, Bernanke deplored the poor state of the labor market, which he attributed to cyclical factors that might be responsive to monetary policy. One of the Federal Reserve's statutory mandates is to achieve maximum sustainable employment; the others are price stability and moderate long-term interest rates.

Fed likely to hold back on QE3

Despite the enthusiasm that greeted Bernanke's remarks, T. Rowe Price economists believe the Fed is unlikely to undertake significant additional stimulus anytime soon, especially because it has not finished its current program—which is scheduled to conclude at the end of 2012—of selling shorter-term Treasuries and buying longer-term U.S. government bonds. This may disappoint investors hoping for "QE3," or a third round of "quantitative easing" in the form of long-term bond purchases designed to suppress long-term interest rates. Previous quantitative easing measures, although aimed at the credit markets, appear to have given a large boost to stock prices since the 2008 financial crisis.

Would more stimulus work in any case?

Indeed, additional Fed stimulus might not be particularly effective. The recovery in the housing sector remains sluggish despite already low mortgage rates, and Fed policy can do little to help the millions of "underwater" homeowners who owe more on their mortgages than their houses are worth. In addition, the Fed's monetary policy, in Bernanke's own words, "cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces." Those risks include the effects of the European sovereign debt crisis and the so-called "fiscal cliff" of federal tax increases and spending cuts scheduled to take place at year-end 2012.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13090.76	-67.21	7.15%
S&P 500	1406.57	-4.56	11.85%
NASDAQ Composite	3066.96	-2.83	17.73%
S&P MidCap 400	972.09	2.27	10.53%
Russell 2000	811.83	3.07	9.60%

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 August 31, 2012

Treasury yields fall modestly as stimulus hopes increase

U.S. Treasury yields declined in a week of light pre-holiday trading. Investors nervously awaited Federal Reserve Chairman Ben Bernanke's speech on Friday at the central bank's annual conference in Jackson Hole, Wyoming. Long-term Treasury yields fell modestly after the speech, which hinted at the possibility of further monetary easing if the recovery does not accelerate. Although some economic data has improved in recent weeks, the Fed chairman made clear that the economic environment remains "far from satisfactory"—particularly given the headwinds of declining government spending and the sluggish housing sector.

T. Rowe Price economists believe Fed is unlikely to act soon

Despite the troubled outlook, T. Rowe Price economists do not believe that the Fed is likely begin another round of quantitative easing, or "QE3," anytime soon. Before undertaking additional stimulus, the central bank is likely to wait until the end of the year, when it has completed the "Operation Twist" program to drive down long-term interest rates by trading short-term Treasury securities for long-term holdings. In addition, Fed officials appear to recognize the limits of additional stimulus at this phase of the recovery. Bernanke acknowledged in his speech that monetary policy "cannot neutralize the fiscal and financial risks that the country faces."

Draghi to follow Bernanke at center stage next week

Global credit markets wavered as investors also anticipated remarks from European Central Bank President Mario Draghi, who is expected to outline the ECB's intervention strategy next Thursday. Draghi has indicated a willingness to take stronger steps to contain the European debt crisis—including a well-publicized commitment to do "whatever it takes" to save the euro. However, German officials have expressed reluctance to back an ECB initiative to purchase sovereign debt, fearing that such purchases would be ineffective and sideline needed austerity measures in Spain and other highly indebted nations.

Trading light ahead of holiday weekend

There was scant activity in the broader fixed income market. Trading in municipal bonds was light heading into Labor Day. Municipal issuance has plummeted but should ramp up after the holiday, a pattern that is likely to hold true for corporate and emerging markets bonds as well. Nevertheless, there continues to be strong investor demand for fixed income investments. Based on data from the Investment Company Institute, cash has continued to flow from equity mutual funds into bond funds in August, continuing a trend that has helped drive yields to historically low levels.

U.S. Treasury Yields¹
Maturity	August 31, 2012	August 24, 2012
2-Year	0.22%	0.27%
10-Year	1.55%	1.68%
30-Year	2.67%	2.79%

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, August 31, 2012.

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International Market

Week Ended August 24, 2012

International Stocks

Foreign stock markets closed lower for the week ending August 24, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -0.03%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-0.03%	8.23%
Europe ex-U.K.	0.22%	8.78%
Denmark	0.67%	23.66%
France	0.22%	9.08%
Germany	0.64%	14.49%
Italy	0.03%	-1.05%
Netherlands	0.47%	8.21%
Spain	-1.56%	-11.88%
Sweden	-1.61%	14.98%
Switzerland	0.97%	9.60%
United Kingdom	-0.44%	8.91%
Japan	-0.04%	3.11%
AC Far East ex-Japan	-0.64%	10.02%
Hong Kong	-0.41%	13.72%
Korea	-1.69%	9.77%
Malaysia	1.04%	9.64%
Singapore	-0.18%	23.75%
Taiwan	0.39%	8.82%
Thailand	0.61%	19.88%
EM Latin America	-1.32%	2.73%
Brazil	-1.78%	-3.01%
Mexico	-0.63%	16.48%
Argentina	-1.95%	-46.04%
EM (Emerging Markets)	-0.52%	7.89%
Hungary	-0.10%	16.30%
India	0.80%	12.27%
Israel	0.12%	-3.35%
Russia	0.98%	8.99%
Turkey	-0.08%	36.50%

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 1.61%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	1.61%	1.35%
Europe
Denmark	2.76%	-0.54%
France	2.41%	4.27%
Germany	2.64%	0.05%
Italy	1.96%	6.70%
Spain	1.94%	-5.98%
Sweden	2.36%	5.85%
United Kingdom	1.75%	5.30%
Japan	1.12%	-0.68%
Emerging Markets	0.96%	12.27%
Argentina	0.44%	1.85%
Brazil	0.80%	9.13%
Bulgaria	0.47%	7.14%
Russia	0.94%	11.56%

International Currency Markets

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


Currency	Close (August 24, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.650	-1.11%	2.17%
Euro	1.2517¹	-1.79%	3.58%
British pound	1.5815¹	-0.88%	-1.76%

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.