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Week Ended September 28, 2012

Stocks end strong quarter on weak note

Stocks suffered a second week of declines as investors continued to worry about the slowing global economy and whether governments would be able to implement measures to support growth. Some market observers speculated that the decline may have reflected investors locking in gains after a solid third-quarter rally, however.

Slowing global demand shows up in heavy equipment forecast

The market's biggest decline came on Tuesday, following a lowered long-term forecast from construction and mining equipment maker Caterpillar. Investors were especially disappointed that the company lowered its earnings and revenue forecast through 2015. Caterpillar's announcement also followed lowered forecasts last week by other firms that depend heavily on economic activity overseas.

Policymakers in Asia and Europe take steps to boost growth

Some encouraging political developments in Europe and Asia helped limit the week's losses. Spain unveiled an aggressive budget-cutting plan, raising hopes that it would receive bailout funds from the eurozone. The Chinese central bank also injected liquidity into the nation's banking system in record amounts, sparking a rally in Asian markets.

Conflicting signals on U.S. economy

Investors continued to worry about how much the U.S. economy would be affected by a slowdown overseas, but the week provided conflicting signals. On the positive side of the ledger, consumer confidence rose sharply in September, home prices increased during the summer, and weekly jobless claims continued to decline. On the negative side, retail sales growth proved disappointing in August, and durable goods orders slumped. New home sales also slowed in August, but T. Rowe Price economists note that sales appear to remain on a gradual recovery track after bottoming in early 2011.

Is Fed optimism fading?

The announcement at mid-month of further stimulus from the Federal Reserve provided a large boost to stocks, but worries over how effective it would be in stimulating economic growth dogged markets during the week. On Tuesday, a Fed official expressed doubts that the central bank's new mortgage bond-buying program—informally known as QE3, the Fed's third round of quantitative easing since the 2008 financial crisis—would actually help the housing market.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13437.13	-142.34	9.98%
S&P 500	1440.67	-19.48	14.56%
NASDAQ Composite	3116.23	-63.73	19.62%
S&P MidCap 400	990.08	-16.52	12.58%
Russell 2000	838.95	-16.62	13.26%

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 28, 2012

Flight to safety drives Treasury yields lower

Investors searching for safety drove Treasury yields lower during the week, as protests against austerity measures erupted in Europe and a Fed official voiced criticism about the latest Fed effort to spur the U.S. economy. T. Rowe Price analysts view Spain's budget assumptions as overly optimistic and expect the country to have trouble meeting targets this year and next. Spanish bond yields have recently been pressured higher again, with the 10-year yield hovering close to 6%. Investors are also awaiting a decision from Moody's on whether it will downgrade the country's debt to junk status.

High yield bonds decline slightly; municipals advance

High yield bonds experienced slight declines this week as investor sentiment turned cautious. The new issues calendar continues to be the main focus. Demand for new issues remained strong, and most of the proceeds are going toward refinancing. However, many of the new deals have not been that appealing for investors, with unconventional call structures and historically low coupons. As always, our high yield investment team is taking a disciplined approach when assessing new issues. Municipals, on the other hand, performed well throughout the week. Yields trended lower in the face of underwhelming issuance and robust demand. New deals were generally well received.

Purchasing power limited by modest income gains and higher prices

Personal income and consumption rose 0.1% and 0.5%, respectively, in August, but the increases were restrained by higher prices. Consumer spending expanded 1.4% over the past three months, but it has been checked by rising inflation, which recently has been running at an annual rate of 2.2%. That said, T. Rowe Price expects price pressures to ease in the fourth quarter, thanks to falling gasoline and energy costs. If this scenario holds true, inflation-adjusted consumer spending should continue to grow in the range of 1.5% to 2.0%. The bright spot in the economy continues to be a recovery in housing prices and declining mortgage rates, which could lead to stronger demand for real estate and increased home construction.

U.S. Treasury Yields¹
Maturity	September 28, 2012	September 21, 2012
2-Year	0.23%	0.26%
10-Year	1.63%	1.75%
30-Year	2.82%	2.94%

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 28, 2012.

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International Market

Week Ended September 21, 2012

International Stocks

Foreign stock markets closed lower for the week ending September 21, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -0.87%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-0.87%	13.60%
Europe ex-U.K.	-1.37%	17.56%
Denmark	1.21%	30.26%
France	-2.35%	16.83%
Germany	-0.64%	26.84%
Italy	-4.43%	10.44%
Netherlands	-1.66%	14.98%
Spain	-0.67%	2.91%
Sweden	-1.60%	20.22%
Switzerland	-0.34%	15.27%
United Kingdom	-1.02%	13.56%
Japan	0.03%	3.82%
AC Far East ex-Japan	-0.38%	14.79%
Hong Kong	-0.34%	19.76%
Korea	-1.13%	15.29%
Malaysia	-1.30%	9.90%
Singapore	0.08%	28.64%
Taiwan	0.43%	16.20%
Thailand	-0.42%	26.26%
EM Latin America	-1.63%	6.29%
Brazil	-2.02%	0.19%
Mexico	-1.46%	20.73%
Argentina	2.41%	-43.42%
EM (Emerging Markets)	-0.71%	12.75%
Hungary	-3.85%	27.43%
India	3.71%	22.89%
Israel	-1.16%	-2.50%
Russia	-4.51%	15.34%
Turkey	-0.82%	41.87%

International Bond Markets

International bond markets in developed countries were lower this week, with the J.P. Morgan Global Government Bond Less U.S. Index losing -0.15%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	-0.15%	3.56%
Europe
Denmark	-0.27%	0.75%
France	-1.18%	6.77%
Germany	-0.48%	2.39%
Italy	-1.13%	15.68%
Spain	-0.57%	1.61%
Sweden	0.11%	5.78%
United Kingdom	0.99%	6.73%
Japan	0.19%	0.09%
Emerging Markets	-0.01%	13.89%
Argentina	2.54%	16.66%
Brazil	0.85%	10.27%
Bulgaria	0.14%	7.95%
Russia	-0.15%	12.95%

International Currency Markets

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


Currency	Close (September 21, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.160	-0.21%	1.56%
Euro	1.2989¹	1.21%	-0.06%
British pound	1.6255¹	-0.05%	-4.59%

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.