Global Markets Weekly Update: April 05, 2024
U.S.
Stocks pull back from record highs on signs of manufacturing revival
The large-cap indexes pulled back from record highs, as U.S. Treasury yields increased in response to signs that the manufacturing sector might finally be gaining traction. The market’s performance also narrowed again, with growth stocks faring better than value shares and large-caps falling less than small-caps. Energy stocks outperformed as oil prices reached their highest level since October on worries over rising tensions between Israel and Iran and a decision by major exporters to maintain production limits despite tight markets. Some late strength in Microsoft also boosted the technology sector.
The Institute for Supply Management’s (ISM’s) separate indexes of service and manufacturing sector activity seemed to play a particular role in driving sentiment over the week. T. Rowe Price traders reported that stocks moved lower following the release of the March ISM manufacturing reading on Monday, which came in well above expectations and indicated expansion—if barely—for the first time in 16 months. More concerningly from an inflation perspective, the ISM prices paid index also surprised handily on the upside, seemingly confirming recent data showing a rebound in input prices.
Price pressures for service providers fall to lowest level since March 2020
Conversely, the ISM services report, released Wednesday, appeared to ease worries. While still indicating expansion, the services index fell back for the second consecutive month—and, more significantly, perhaps, the index of prices paid fell back to its lowest level since pandemic lockdowns began in March 2020. Our traders noted that the data seemed to increase hopes for a June Federal Reserve rate cut, as reflected in futures prices.
The Friday jobs report from the Labor Department, typically among the most closely watched indicators of growth and inflation pressures, appeared to further reassure investors. Employers added 303,000 jobs in March, well above expectations and the most in nearly a year. Encouragingly, from a wage pressures standpoint, the solid gains came with only a modest increase in average hourly wages, from 0.2% in February to 0.3% in March. Part of the reason may have been a solid rise in the labor force participation rate, suggesting that employers might be enjoying an easier time filling empty slots.
Equity and bond investors react differently to strong jobs report
Equity investors appeared to welcome the signs of a healthy economy in the jobs report, but the yield on the benchmark 10-year U.S. Treasury note jumped on the news; earlier in the week, it hit its highest intraday level since late November. (Bond prices and yields move in opposite directions.) After starting the week with a quiet tone, tax-exempt municipal bond yields rose broadly alongside weakness in the Treasury market, led upward by the yields on short- and intermediate-term muni bonds. Amid the market weakness, our traders noted that high yield municipal bonds continued to hold up well relative to investment-grade bonds.
Issuance was lighter—and in line with expectations—in the investment-grade corporate bond market. According to T. Rowe Price traders, high yield corporate bonds traded lower amid broad macro softness following the strong ISM print. Our traders also noted that the asset class experienced weakness later in the week due to increased geopolitical risks.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
38,904.04 |
-903.33 |
3.22% |
S&P 500 |
5,204.34 |
-50.01 |
9.11% |
Nasdaq Composite |
16,248.52 |
-130.94 |
8.24% |
S&P MidCap 400 |
2,989.16 |
-57.20 |
7.46% |
Russell 2000 |
2,063.47 |
-61.08 |
1.80% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, 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 of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price’s presentation thereof.
Europe
In local currency terms, the pan-European STOXX Europe 600 Index fell 1.19% during the holiday-shortened week, snapping 10 straight weeks of gains. Hawkish comments from some U.S. Federal Reserve policymakers and higher crude oil prices cast doubt on the timing of interest rate cuts. France’s CAC 40 Index dropped 1.76%, Germany’s DAX weakened 1.72%, and Italy’s FTSE MIB lost 2.13%. The UK’s FTSE 100 Index declined 0.52%.
Eurozone inflation close to target; PMI revised up; ECB reaffirms rates policy
Headline annual inflation in the eurozone decelerated more than forecast to 2.4% in March from 2.6% in February. Core inflation, which excludes volatile food and energy prices, also slowed to 2.9% from 3.1%. The year-over-year increase in service prices, however, came in at 4.0% for the fifth consecutive month.
Evidence suggests that the economy may be picking up after stagnating for the past year. S&P Global revised its estimate for the eurozone’s composite purchasing managers’ index (PMI), which includes services and manufacturing, to 50.3 in March from an initial 49.9. A reading above 50 indicates an expansion of private sector business activity.
Meanwhile, the minutes from the European Central Bank’s (ECB’s) March meeting showed that policymakers were increasingly confident that inflation was slowing to the target level in a timely manner. The majority felt that the case for rate reductions was strengthening but that it would be prudent to wait for key economic data that are scheduled to come out after the ECB’s April meeting.
UK housing market recovery picks up
Data released by the Bank of England pointed to improvement in the housing market. Net mortgage approvals reached their highest monthly level since June 2022, increasing to 60,400 from 56,500 in January.
Riksbank says currency could become pivotal in rate decisions
Minutes of the March meeting of the Swedish central bank suggested that currency developments could become more influential in policy decisions in the months ahead. The Riksbank said it is important that the Swedish krona does not depreciate further, as this could stoke inflationary pressures. The Riksbank left its key rate unchanged at 4.0% in March, adding that it might start cutting rates in May if inflation continued to slow.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index slumping 3.4% and the broader TOPIX down 2.4%. Heightened geopolitical tensions and uncertainty about the U.S. Federal Reserve’s monetary policy trajectory weighed on global equities in general, while in Japan, speculation remained rife about whether the authorities would step in to prop up the yen.
The Finance Ministry reasserted its readiness to respond to excessive moves in the foreign exchange markets, as the Japanese currency hovered around the high-JPY 151 level against the U.S. dollar, its lowest level in about 34 years. Over the past three years, weakness in the yen has provided a significant boost to Japan’s exporters—companies that tend to derive a major share of their earnings from overseas.
BoJ governor signals that monetary policy could be used to address yen weakness
As the Bank of Japan (BoJ) hinted that another interest rate hike may be on the horizon, the yield on the 10-year Japanese government bond rose to 0.77% from 0.72% at the end of the previous week. BoJ Governor Kazuo Ueda signaled that the central bank could use monetary policy to address the historic weakness in the yen. Its primary concern is the impact of the Japanese currency’s weakness on price and wage growth, which have appeared to be on a reflationary trend. The BoJ targets a 2% level of inflation in a sustainable manner, accompanied by growth in wages, and asserts that monetary policy normalization hinges on these preconditions being met.
Last month, the central bank lifted short-term interest rates out of negative territory for the first time in over seven years—market participants seem to be converging around a view that two more rate hikes within the space of a 12-month period are likely. Nevertheless, Japan’s monetary policy remains among the most accommodative in the world, and financial conditions are expected to remain accommodative as well, for the time being.
China
Chinese equities advanced in a holiday-shortened week, as data added to evidence that the economy could be gaining traction. The Shanghai Composite Index gained 0.92%, while the blue chip CSI 300 added 0.86%. In Hong Kong, the benchmark Hang Seng Index rose 1.10%, according to FactSet. Markets in mainland China were closed on Thursday and Friday in observance of the Qingming Festival, also known as Tomb Sweeping Day, when Chinese people honor their ancestors by cleaning and placing offerings on their tombs. Hong Kong markets were closed on Thursday but reopened on Friday.
Manufacturing activity expands for first time in six months
March’s indicators reinforced hopes that China’s economy may start to recover. The official manufacturing PMI rose to an above-consensus 50.8 in March, up from 49.1 in February, due to a rebound in production and exports and marking the first expansion since September last year. The nonmanufacturing PMI grew to a better-than-expected 53.0 from 51.4 in February. Separately, the private Caixin/S&P Global survey of manufacturing activity edged up to 52.7 in March, in line with expectations and marking its 15th month of expansion.
On the monetary policy front, the People’s Bank of China said in its first-quarter policy report that it will intensify existing measures to encourage demand. The central bank pledged to maintain ample social financing and money supply to support Beijing’s annual growth target of 5% as it grapples with weak consumer confidence.
New home values continue to slump
The value of new home sales by the country’s top 100 developers slumped 49% in March from the prior-year period, easing from the 60% drop in February, according to the China Real Estate Information Corp. Sales rose 93% from the previous month, but remained weak compared with the monthly average of the third and fourth quarters of last year. China’s tumbling property sales remain a drag on the key sector for its economy and have stoked a liquidity crisis among some of its biggest property developers as they struggle to meet loan repayments.
Other Key Markets
Türkiye (Turkey)
Ruling party loses some support in local elections
On Sunday, March 31, Türkiye held local elections throughout the country, the results of which surprised many investors. According to T. Rowe Price sovereign analyst Peter Botoucharov, the opposition Republican People’s Party—which was the main loser in the May 2023 general elections—gained about 37% of the national vote and maintained control in all major cities, including the capital Istanbul. In contrast, President Recep Tayyip Erdogan’s Justice and Development Party saw its support drop to approximately 35%.
Botoucharov believes that the outcome could reflect lower voter participation (77% this year versus 87% last year), as well as voters’ disappointment with continuing high inflation and slowing economic growth stemming from rising interest rates. He also believes that Erdogan’s conciliatory post-election speech is noteworthy in that the president emphasized the democratic process, the need to work toward macroeconomic stabilization, and the importance of reducing inflation over the next few years, when there will be no scheduled elections. In addition, Botoucharov expects Minister of Treasury and Finance Mehmet Simsek and the rest of Erdogan’s economic team to remain in place and the current economic program to remain intact.
Poland
“Substantial uncertainty” about future inflation discourages central bank rate cut
On Thursday, the Polish central bank concluded its scheduled two-day monetary policy meeting and decided to keep its key interest rate, the reference rate, at 5.75%. Other rates controlled by the central bank were also unchanged.
The post-meeting statement was largely consistent with the last one issued in early March. Policymakers reiterated that “the process of disinflation” in the Polish economy is continuing, with inflation being “driven down by the reduction of cost pressures reflected in falling producer prices, and by the weak growth in economic activity.” They acknowledged that “incoming data indicate an increase in economic activity growth in early 2024,” specifically citing retail sales and industrial production, but noted some weakness in construction and assembly production.
Policymakers highlighted that the annual consumer price index (CPI) declined to 1.9% in March and “estimated that core inflation significantly decreased again.” They expect CPI growth “will run at the level consistent with” the central bank’s inflation target, but they anticipate that “core inflation will remain above CPI inflation” and that higher value-added taxes on food products “will act toward the rise in inflation.” As a result, policymakers decided to keep interest rates unchanged.
Officials once again justified their decision by noting that inflation developments in future quarters are “associated with substantial uncertainty, related in particular to the impact of fiscal and regulatory policies on price developments, as well as the pace of economic recovery…and labour market conditions.” They also mentioned other factors, such as higher energy costs and wage growth, that could lead to higher inflation in the second half of 2024 and over the medium term, respectively.
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