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Global Markets Weekly Update: April 14, 2023
U.S.
Encouraging inflation reports drive gains but fail to quell rate fears
The major benchmarks ended the week higher, as investors weighed slowing growth signals against signs that inflation pressures were receding a bit more than expected. Materials and industrials shares outperformed within the S&P 500 Index. Technology shares lagged, weighed down in part by a decline in graphics and artificial intelligence chipmaker NVIDIA, which continued a recent retreat from a 52-week high. T. Rowe Price traders noted that trading was exceptionally thin early in the week, which may have reflected closed markets in Europe following the Easter holiday.
Volumes picked up but remained muted for much of the week, as investors waited for the unofficial start of quarterly earnings season on Friday, kicked off by reports from banking giants JPMorgan Chase, Wells Fargo, and Citigroup. All three topped consensus estimates, seemingly helped in part by customers moving deposits from smaller, regional banks, which have come under scrutiny following the collapse last month of Silicon Valley Bank and New York-based Signature Bank. At the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have contracted 6.5% on a year-over-year basis in the first quarter. Despite the banking turmoil, earnings in the financials sector were expected to increase moderately.
The most highly anticipated event of the week may have been the Labor Department’s Wednesday morning release of the consumer price index (CPI) for March. Stocks jumped on the news that the CPI rose only 0.1%, a tick below expectations, bringing the year-over-year rate to 5.0%, the slowest pace since May 2021. The indexes fell back later in the day, however, which our traders attributed in part to comments from Federal Reserve Bank of Richmond President Thomas Barkin, who stated that “there is still more to do” in calming inflation.
Prices paid by businesses fall for the first time since the height of the pandemic
Thursday brought further encouraging inflation news on the producer side, suggesting that better prices might be in the pipeline for consumers. The core (excluding food and energy) producer price index declined 0.1% in March, marking the first decrease in the prices businesses pay for inputs since the height of the pandemic shutdowns in April 2020.
Uruçi: Good inflation news doesn’t guarantee rate hikes are over
T. Rowe Price Chief U.S. Economist Blerina Uruçi acknowledges that the week’s data suggest encouraging progress in curbing inflation, but she believes the reports are not yet consistent with the Fed being able to cut rates substantially by the end of the year, as many investors seem to expect. Shortly before the end of trading Friday, the CME Fedwatch Tool indicated that futures markets were pricing in a roughly 46% chance on the federal funds rate ending the year at least 50 basis points (half a percentage point) below its current target range of 4.75% to 5.00%, and a roughly 78% chance that the target would be at least 25 basis points lower. While the recent banking turmoil has tightened credit conditions and may cause the Fed to pause in its rate-hiking cycle, Uruçi believes policymakers would only consider cutting rates after seeing a dramatic deterioration in the labor market and signs that a recession is imminent.
The week’s other data arguably brought little evidence of either. Weekly jobless claims rose to 239,000, a bit more than consensus estimates, but remained below their levels through most of March. While March retail sales fell more than expected, this nominal decline partly reflected cuts in some prices—such as a 4.6% decline in the price of gasoline. According to the study’s chief researcher, the University of Michigan’s preliminary gauge of consumer sentiment rose surprisingly. According to the study’s chief researcher, rising optimism among lower-income Americans fueled the increase, but this was partly offset by worsening attitudes among those with higher incomes.
Investors expect at least one further rate hike
Bond investors seemed to interpret Friday’s data as giving the Fed room to lift rates further, resulting in a rise in longer-term U.S. Treasury yields. According to our traders, technical conditions characterized by relatively light dealer inventories and below-average supply continued to support the municipal market. Trading and new issuance remained generally subdued in both the investment-grade and high yield corporate bond markets.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,886.47 |
401.18 |
2.23% |
S&P 500 |
4,137.64 |
32.62 |
7.77% |
Nasdaq Composite |
12,123.47 |
35.51 |
15.83% |
S&P MidCap 400 |
2,489.47 |
42.38 |
2.43% |
Russell 2000 |
1,781.16 |
26.69 |
1.13% |
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
Stocks in Europe rose as recession fears waned. In local currency terms, the pan-European STOXX Europe 600 Index advanced 1.74% over the five trading days ended April 14. Major stock indexes also posted gains. Germany’s DAX added 1.34%, Italy’s FTSE MIB tacked on 2.42%, and France’s CAC 40 Index gained 2.66%. The UK’s FTSE 100 Index climbed 1.68%.
European government bonds rose as investors weighed the prospects of more policy tightening by the European Central Bank. Yields on 10-year German government debt advanced, with some policymakers supporting a half-percentage-point rate hike if warranted by inflation data. Yields on 10-year UK and French sovereign bonds also moved higher.
Eurozone industrial output rises and investor morale improves, but retail sales weaken
On a seasonally adjusted basis, eurozone industrial production in February rose 1.5% sequentially and 2.0% year over year, which was stronger than expected. Higher output of capital goods and nondurable consumer goods were key drivers. However, in March, retail sales volumes fell 0.8% sequentially, matching forecasts, official data showed. Meanwhile, a Sentix index of investor morale rose in April, resuming an upward trend that was interrupted in March.
UK economy may avoid first quarter recession predicted by BoE
The UK economy appeared to be on course to defy a Bank of England (BoE) forecast for a recession in the first quarter, official data indicated. Gross domestic product (GDP) remained flat month over month in February. This result was slightly below expectations, as strikes weighed on public services. However, the revision to January’s GDP figure indicated that the economy expanded 0.4% that month. Even so, the International Monetary Fund (IMF) still predicted that the UK’s economy would shrink 0.3% in 2023, a projection that was less than its previous forecast.
More French pension protests likely after Constitutional Council backs reform law
France’s Constitutional Council, the equivalent of the U.S. Supreme Court, ruled that a law to increase the pension age was valid, raising the prospect of more public protests.
Japan
Japanese equities gained over the week, with the Nikkei 225 Index rising 3.54% and the broader TOPIX Index up 2.71%. Sentiment was boosted by prominent investor Warren Buffett saying that his company, Berkshire Hathaway, would increase its investments in Japan. Dovish comments from new Bank of Japan (BoJ) Governor Kazuo Ueda and subsequent yen weakness also supported risk assets. Ueda dampened expectations of a sudden major monetary policy change but signaled that a revision of the central bank’s large-scale easing stance could be considered in the near future. The yen weakened to around JPY 132.5 against the U.S. dollar, from about JPY 132.2 at the end of the previous week. The yield on the 10-year Japanese government bond was broadly unchanged at 0.46%, on anticipated monetary policy continuity under Ueda.
Ueda sounds dovish, but signals that ultra-easy policy could be reviewed
Kazuo Ueda was sworn in as the new BoJ governor on April 9. At his first press conference, Ueda issued a series of dovish remarks that supported market sentiment. He said that, because a policy of negative interest rates has been the basis of current strong monetary easing, it is appropriate to continue it on the assessment that the central bank’s 2% inflation target has not been achieved. Once the BoJ sees the target as truly achievable, policy normalization can be pursued. He added that, given the economic, price, and financial environment, it is also appropriate to continue with the current yield curve control framework.
However, sounding more hawkish, Ueda asserted that the side effects need to be considered and the impact of ultra-easy policy from a long-term perspective may need to be reviewed. Whether the BoJ conducts a comprehensive review will be discussed and decided at future policy board meetings. Finally, he cautioned against behind-the-curve policy decisions.
IMF revises downward its growth projection
The IMF revised downward its projection for Japan’s 2023 economic growth to 1.3% from 1.8% in January. It attributed this to weak economic performance over the final quarter of last year, with sluggish business investment having a knock-on effect. Currency volatility also played a role.
China
Chinese stocks were mixed after a volatile week as softer-than-expected inflation dampened investor sentiment. While new loans and trade data surprised to the upside, it was not enough to offset broader concerns about the strength of the economic recovery. The Shanghai Stock Exchange Index advanced 0.32% while the blue chip CSI 300 fell 0.76% in local currency terms. In Hong Kong, the benchmark Hang Seng Index gained 0.53%.
Inflation eased for the second straight month in March. China’s consumer price index rose 0.7% in March from a year earlier, down from a 1% rise the previous month. Core inflation, which excludes volatile food and energy prices, rose to 0.7% in March from 0.6% in February. The producer price index slid 2.5%, the lowest since June 2020 and its sixth straight monthly decline, according to Reuters.
The latest data trailed the government’s consumer price index target of around 3% growth this year and raised expectations that the People’s Bank of China (PBOC) would step up stimulus measures to support the economy. The yield on China’s 10-year government bond dropped to the lowest level since last November as traders priced in the possibility of further monetary easing. Many economists predict that the PBOC may cut the policy rate for its short- and medium-term lending facilities to boost loan growth and spur investment, Bloomberg reported.
New bank loans totaled RMB 3.89 trillion in March, more than double February’s RMB 1.81 trillion, according to PBOC data, reflecting higher credit demand after Beijing’s unwinding of COVID restrictions led to a pickup in economic activity. New loans totaled an all-time high of RMB 10.6 trillion in the year’s first quarter.
On the trade front, China’s exports unexpectedly rose 14.8% in March from a year ago, surprising analysts who had forecast a decline and marking the first increase since September. Imports fell a less-than-expected 1.4%.
Other Key Markets
Turkey/Türkiye
President Recep Tayyip Erdogan and the ruling AK Party recently published their official Election Declaration ahead of the May 14 general and presidential elections. According to T. Rowe Price sovereign analyst Peter Botoucharov, the majority of their high-level, long-term, socio-political, and growth-oriented economic targets are similar to the plans announced by the opposition, National Alliance, including a commitment to seek consensus on comprehensive legislative reforms.
However, there are three main differences. First, Erdogan pledged to keep the current presidential government system based on the current constitution. In contrast, the opposition is looking to remove some of the presidential powers. Second, the ruling AK Party wants to build its foreign policy on the so-called Axis of Türkiye based on “peace, stability, multilateralism, and humanitarian diplomacy.” This would be an extension of the “Blue Homeland” doctrine, whereby Türkiye aspires to be a dominant maritime power in the eastern Mediterranean Sea. Third, the top domestic priority of the incumbent government would be to secure a “safe environment” for the country where each citizen lives peacefully. Botoucharov believes this implies that the AK Party’s election campaign is likely to target areas where the National Alliance is vulnerable, such as opposition candidates who are under investigation or who may have alleged links to militant organizations.
Hungary
Earlier in the week, Hungary’s government reported that inflation in March was 25.2%, which was slightly stronger than expected. According to T. Rowe Price sovereign analyst Ivan Morozov, the upside surprise was driven by an increase in core prices.
Morozov, however, believes that the underlying price trend suggests that there is disinflation (a slowing in the rate of rising prices) in the economy, albeit at a modest pace, and that disinflation should start to accelerate in a few months. However, given stubbornly high inflation and the central bank’s goal of bringing it back down to its 3% target, Morozov believes that policymakers are unlikely to reduce the central bank’s key interest rate—currently at 13%—this year.
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