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Week Ended September 7, 2012

Europe hopes drive U.S. stocks higher

Stocks gained for the week and reached multiyear highs following a solid rally Thursday, as a new plan to ease the European debt crisis and some positive economic data boosted sentiment. The large-cap S&P 500 Index reached its highest level in four years, while the technology-oriented Nasdaq Composite Index reached levels last seen in 2000. The S&P MidCap 400 Index reached back to the all-time record levels it established earlier in the year.

European stocks soar on new ECB program

The primary catalyst for gains was an announcement Thursday by the European Central Bank (ECB) that it would engage in unlimited short-term sovereign debt purchases to keep bond yields at manageable levels in heavily indebted countries that seek formal financial assistance. Investors have worried in recent months about rising borrowing costs in Italy, and especially Spain, where yields have periodically breached the 7% threshold into unsustainable territory. European stocks soared on the news, with markets in some countries rising by more than 4%.

ECB plan should prove politically palatable

Ken Orchard, T. Rowe Price's London-based sovereign credit analyst, observes that one key provision of the "Outright Monetary Transactions" program is the requirement that nations borrowing from it need only be in a precautionary adjustment program approved by the International Monetary Fund (IMF) and the European Union (EU). This should make it easier for political leaders in Spain, Italy, and elsewhere to gain domestic approval for seeking aid. IMF- and EU-mandated austerity programs have proven highly unpopular in Greece and elsewhere.

Weak Friday jobs report deflates earlier hopes

Positive U.S. data were another factor driving the rally Thursday. A gauge of service sector activity came in surprisingly strong—and in pleasant contrast to a weak manufacturing reading earlier in the week. Investors were also encouraged by a sharp rise in payrolls reported by payroll processing firm ADP, as well as a surprising drop in weekly jobless claims. The most comprehensive reading on the labor market arrived Friday but proved disappointing. The Commerce Department revealed that employers had created only 96,000 jobs in July, well below most estimates.

Poor labor market data may not result in "QE3" next week

Stocks remained little changed after the news, however, as some investors appear to think that the poor data will lead to further monetary stimulus. The Fed is scheduled to meet September 12-13, and some hope that it will announce a new round of "quantitative easing" designed to suppress long-term interest rates. T. Rowe Price economists believe the Fed is more likely to extend its guidance for "exceptionally low levels" for official short-term interest rates into 2015.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13306.64	215.88	8.91%
S&P 500	1437.92	31.35	14.34%
NASDAQ Composite	3136.42	69.46	20.39%
S&P MidCap 400	1004.31	32.22	14.20%
Russell 2000	841.69	29.86	13.63%

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 September 7, 2012

Municipal yields stable, Treasury yields rise; weak jobs report points to new Fed action

Municipal bond yields were stable against the backdrop of reasonable demand and thin supply during the holiday-shortened week. Tax-free 10- and 30-year yields remained higher than the yields on comparable U.S. Treasury bonds, despite rising Treasury yields. U.S. Treasuries were generally weak in anticipation of the European Central Bank's announcement of support for the bonds of troubled eurozone countries. A decline in weekly unemployment claims also contributed to softness in the Treasury market. High yield new issue activity picked up significantly after two weeks of low volume. The slowdown had been expected due to seasonal factors. Demand for new high yield issues has been strong among investors searching for income. In the investment-grade corporate market, bond yields fell in an environment of low new issuance and firm demand.

ECB announces plan to support troubled eurozone debt

Global investors were anticipating comments from European Central Bank President Mario Draghi, who outlined the ECB's latest monetary intervention strategy on Thursday. Draghi said the ECB would begin to buy the bonds of member nations on the condition that those countries agreed to outside fiscal oversight. Before any action can be taken, highly indebted countries like Spain must first request assistance, with specific conditions attached. The program is primarily designed to reduce the risk of catastrophic meltdowns caused by soaring yields on the bonds of troubled eurozone nations.

Disappointing news on the labor market

The U.S. economy added 96,000 net new jobs in August, and the unemployment rate fell from 8.3% to 8.1%. The Labor Department report was weaker than expected, as the decline in unemployment resulted from a shrinking labor market. The labor force participation rate fell to a 31-year low of 63.5%, and the year-to-date average of 63.7% is 0.4% below the comparable year-ago figure. The manufacturing sector, which had previously exhibited strength, shed 15,000 positions, breaking a 10-month string of gains totaling 217,000 new jobs. The disappointing report argues for additional stimulus action by the Federal Open Market Committee, although probably not as soon as at its meeting next week, in the view of T. Rowe Price economists.

U.S. Treasury Yields¹
Maturity	September 7, 2012	August 31, 2012
2-Year	0.25%	0.22%
10-Year	1.66%	1.55%
30-Year	2.82%	2.67%

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, September 7, 2012.

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International Market

Week Ended August 31, 2012

International Stocks

Foreign stock markets closed lower for the week ending August 31, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -0.78%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-0.78%	7.38%
Europe ex-U.K.	0.35%	9.16%
Denmark	1.00%	24.89%
France	0.12%	9.21%
Germany	0.66%	15.24%
Italy	2.21%	1.14%
Netherlands	1.09%	9.39%
Spain	2.30%	-9.85%
Sweden	-1.66%	13.06%
Switzerland	-0.53%	9.02%
United Kingdom	-0.72%	8.12%
Japan	-2.98%	0.03%
AC Far East ex-Japan	-1.51%	8.36%
Hong Kong	-1.06%	12.51%
Korea	-1.27%	8.38%
Malaysia	-1.01%	8.53%
Singapore	-0.38%	23.27%
Taiwan	-0.69%	8.08%
Thailand	-1.43%	18.17%
EM Latin America	-2.20%	0.46%
Brazil	-2.85%	-5.77%
Mexico	-1.90%	14.27%
Argentina	-1.61%	-46.91%
EM (Emerging Markets)	-1.83%	5.92%
Hungary	-1.18%	14.92%
India	-2.59%	9.36%
Israel	-0.95%	-4.27%
Russia	-2.93%	5.80%
Turkey	2.05%	39.30%

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 0.5%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.50%	1.86%
Europe
Denmark	0.45%	-0.09%
France	0.03%	4.31%
Germany	0.81%	0.86%
Italy	0.84%	7.59%
Spain	-0.58%	-6.53%
Sweden	-0.37%	5.46%
United Kingdom	0.70%	6.04%
Japan	0.53%	-0.16%
Emerging Markets	0.42%	12.74%
Argentina	-1.41%	0.41%
Brazil	0.59%	9.77%
Bulgaria	-0.08%	7.06%
Russia	0.40%	12.01%

International Currency Markets

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


Currency	Close (August 31, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.300	-0.45%	1.74%
Euro	1.2605¹	-0.70%	2.90%
British pound	1.5884¹	-0.44%	-2.20%

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.