Global Markets Weekly Update: April 21, 2023
U.S.
Fear gauge hits lowest level since late 2021
The major benchmarks ended mixed following a week in which first-quarter earnings reports seemed to grab the spotlight from a relatively light economic calendar. Despite the week’s losses, T. Rowe Price traders noted that the Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge, fell to its lowest level since late 2021. Our traders also noted that market volumes were especially light early in the week, as investors awaited more earnings news.
According to Refinitiv I/B/E/S, 88 S&P 500 Index companies had reported earnings as of Friday, with firms in the S&P MidCap 400 Index suffering a much larger year-over-year aggregate decline in earnings (almost 18%) than those in the S&P 500 (roughly 7%). Once the remaining reports are in, analysts polled by both Refinitiv I/B/E/S and FactSet expect them to show overall earnings for the S&P 500 to have declined for the second consecutive quarter, although early reports have generally surprised to the upside.
A notable upside report for the week came from Phoenix-based regional bank operator Western Alliance Bancorporation, which surged 24% on Wednesday following news that deposit withdrawals stabilized late in the quarter, while deposits even increased a bit in the two weeks since the end of March. Financials outperformed overall during the week despite a brief plunge in shares of Goldman Sachs after the investment banking giant, which has diversified into wealth and asset management businesses, missed consensus revenue estimates.
Contradictory signals on cooling in the labor market
Thursday’s weekly jobless claims report brought signs of growing weakness in the labor market, but investors appeared divided on whether to treat this as good news—because it might encourage the Federal Reserve to dial back on rate hikes—or worrisome evidence of a coming recession. Weekly claims rose a bit more than expected, but continuing claims jumped by much more than anticipated and reached their highest level (1.87 million) since November 2021. Housing data were also soft, with starts and permits slowing from February’s readings. Existing homes sales fell, and year-over-year home prices dropped 0.9%, the largest decrease in 11 years.
S&P Global’s gauges of current economic activity painted a much different picture on their release Friday, however. According to the firm’s data, private sector employers picked up hiring in early April at the fastest pace in nine months, and work backlogs grew even as businesses added capacity. The S&P Global US Composite Purchasing Managers’ Index (PMI) of both services and manufacturing activity rose to its highest level in almost a year (53.5, with readings over 50 indicating expansion), which S&P Global analysts attributed to stronger demand, improving supply chains, and strength in new orders. Notably, S&P Global’s manufacturing PMI defied expectations and moved back into expansion territory (50.4) for the first time since October.
The yield on the benchmark 10-year U.S. Treasury note jumped following the S&P Global data release, reversing earlier declines and leaving it modestly higher for the week. (Bond prices and yields move in opposite directions.) A spike in supply weighed somewhat on the municipal bond market.
Bond investors welcome signs of easing stress for regional banks
According to our traders, banking sector earnings reports were a primary focus of the investment-grade corporate bond market. Regional bank bonds benefited in the wake of Western Alliance’s earnings release, and U.S. money center bank spreads also rallied despite somewhat mixed earnings results. Demand was very strong for post-earnings new issuance from banks, and some issuers upsized their deals as a result. However, this elevated supply, coupled with weaker macro sentiment alongside comments from Fed officials, led the sector lower late in the week. The high yield and bank loan markets were relatively quiet, T. Rowe Price traders noted.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,808.96 |
-77.51 |
2.00% |
S&P 500 |
4,133.52 |
-4.12 |
7.66% |
Nasdaq Composite |
12,072.46 |
-51.01 |
15.34% |
S&P MidCap 400 |
2,498.82 |
9.35 |
2.82% |
Russell 2000 |
1,791.50 |
10.34 |
1.72% |
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 gained 0.45%, as optimism about the economic outlook outweighed concerns about interest rates staying higher for longer. Major stock indexes were mixed. Germany’s DAX added 0.47%, while France’s CAC 40 Index gained 0.76%. Italy’s FTSE MIB, on the other hand, fell 0.45%. The UK’s FTSE 100 Index tacked on 0.54%.
European government bond yields edged higher as investors weighed the prospect of another interest rate hike from the European Central Bank (ECB) in May. Yields on 10-year German government debt climbed toward 2.5%, while yields on French sovereign bonds of the same maturity also ticked higher. In the UK, yields also rose on benchmark 10-year debt on strong inflation and wages data.
Eurozone pickup continues, PMI surveys show
Eurozone business activity appeared to pick up in April, according to a popular Purchasing Managers' Index (PMI). A preliminary reading of the Hamburg Commercial Bank (HCOB) Flash Eurozone Composite PMI Output Index, which is put together by S&P Global and gauges activity in both the services and manufacturing sectors, rose to a seasonally adjusted 54.4 from 53.7 in March. A revival of demand in the services sector drove this month-over-month increase, which was the sixth consecutive one. Activity in the manufacturing sector, however, shrank, with the index falling to 48.5 from 50.4, likely reflecting protests in France that temporarily dented output. PMI readings less than 50 indicate a contraction. On the inflation front, input and sales prices in services remained at elevated levels, while manufacturing prices continued to fall.
ECB minutes show split over rates but a clear majority of hawks
The minutes of the March meeting of the ECB showed policymakers were split over the decision to raise benchmark interest rates by half a percentage point. A “very large majority” voted in favor of the decision, as “inflation remained far too high and was projected to remain high for too long.” Still, some members of the Governing Council said they would prefer a pause until tensions in the financial market have subsided. Subsequent comments by policymakers have echoed this divergence in views.
UK inflation slows less than forecast; pay growth rises
Annual UK consumer price growth in March slowed by less than expected to 10.1% from 10.4% in February, driven by surging food and drink prices. Separate data from the Office for National Statistics indicated that wage growth showed few signs of moderating in the three months through February. Excluding bonuses, pay increased 6.6% compared with a year ago. The data may prompt the Bank of England to raise interest rates again in May.
The composite PMI rose for a third month running to 53.9 in April from 52.2 in March, S&P Global said. Increased business activity in the services sector drove the strongest rate of output growth since April 2022. However, manufacturing production decreased for a second consecutive month due to a decline in new work. Output prices in both services and manufacturing rose strongly due to increased wage pressures.
Japan
Japan’s stock markets gained over the week, with the Nikkei 225 Index up 0.25% and the broader TOPIX Index rising 0.81%. Core consumer price inflation remained above the Bank of Japan’s (BoJ’s) 2% target in March, adding pressure on the central bank under its new Governor Kazuo Ueda to take steps to normalize monetary policy. However, ahead of his first monetary policy meeting at the helm on April 27–28, Ueda reiterated the BoJ’s commitment to its easing stance until price stability is achieved.
Against this backdrop, the yield on the 10-year Japanese government bond was broadly unchanged at 0.46%. The yen was also little changed against the U.S. dollar, ending the week at around JPY 134.
Above-target inflation adds pressure on BoJ to normalize monetary policy
Japan’s core consumer price index (CPI) rose 3.1% year on year in March, in line with expectations and matching February’s reading. After reaching a 41-year high in January, increases in the core CPI have moderated somewhat, largely due to the effect of government subsidies to curb household utility bills.
Consumer inflation remains well above the BoJ’s 2% target, however, and along with signs of wage growth gaining momentum, these factors could lead the central bank to consider tweaking its policy of yield curve control (YCC) later this year. The BoJ is widely expected to make no changes to its YCC policy in April, with investors largely focused on the quarterly outlook report due after the monetary policy meeting, which includes inflation forecasts that could be revised upward.
Manufacturers continue to lag expanding services sector
April Purchasing Managers’ Index data showed that Japan’s private sector registered solid expansion, as a resurgent services sector, benefiting from the post-COVID reopening, helped offset weakness in manufacturing, which was weighed down by subdued global demand.
Although manufacturing activity contracted, the details were slightly more positive given improvement in the new orders-to-inventories ratio and an easing in supply chain pressures. The April Reuters Tankan sentiment index for manufacturers suggested that the prospects of an export-led recovery were hurt by banking sector turmoil and global growth concerns.
China
Chinese equities fell as mixed economic data and news that the U.S. may introduce fresh investment curbs against China weighed on sentiment. The Shanghai Stock Exchange Index declined 1.11%, while the blue chip CSI 300 gave up 1.45% in local currency terms. In Hong Kong, the benchmark Hang Seng Index lost 1.78%.
China’s gross domestic product (GDP) expanded a better-than-expected 4.5% in the first quarter of 2023 from a year earlier, compared with last year’s growth pace of 3.0%. Robust export growth and infrastructure investment, and a rebound in retail spending and property prices, drove the recovery. The data prompted several banks to raise their annual growth forecasts for China as consumption continues to recover.
In monetary policy news, the People’s Bank of China (PBOC) injected a lower-than-expected RMB 170 billion into the banking system via its one-year medium-term lending facility, compared with RMB 150 billion in maturing loans. The central bank’s latest cash injection was the smallest since November, which markets interpreted as a sign that policymakers were evaluating the impact of March’s easing measures. In a statement following its quarterly monetary policy committee meeting, the PBOC pledged to maintain sufficient credit growth and liquidity as it does not yet see a solid foundation for the domestic economy. The central bank left the medium-term lending rate unchanged, as expected.
Home prices rise at fastest pace in almost two years
China’s new home prices increased for a third consecutive month, rising 0.5% in March after February’s 0.3% gain and marking the fastest increase since June 2021, according to the National Bureau of Statistics. China’s real estate sector has been in a downturn in recent years as Beijing sought to reduce leverage among developers, triggering a wave of defaults and causing many firms to struggle with slowing sales and high debt levels. The sector has shown signs of stabilizing this year, bolstered by a government rescue package last November that included measures such as stepping up financial support for property companies, lowering mortgage rates, and easing homebuyer restrictions in many cities.
Other Key Markets
Turkey
With the May 14 election day approaching rapidly, T. Rowe Price sovereign analyst Peter Botoucharov notes that the latest preelection polls indicate that the ruling AKP-MHP coalition—known as the Peoples’ Alliance—and the six-party opposition coalition called the National Alliance are in a tight race with roughly 39% to 40% of voters’ support for each. The pro-Kurdish HDP party has about 10% of voters’ support. While some believe that the opposition’s presidential candidate Kemal Kilicdaroglu is favored to defeat the incumbent Recep Tayyip Erdogan, Botoucharov has lower conviction in that outcome, as the campaign has yet to ramp up and Erdogan seems unlikely to give up power easily.
The rules for the presidential election indicate that the winner must achieve a valid vote count of at least 50% plus one vote either in the first round on May 14 or, if necessary, in the runoff on May 28. There are four official candidates in the first round: Erdogan, Kilicdaroglu, Homeland Party leader Muharrem Ince, and the candidate of the nationalist, anti-immigration alliance Sinan Ogan. If no one wins at least 50% plus one vote in the first round, the top two qualified candidates will advance to the second round.
Poland
T. Rowe Price credit analyst Ivan Morozov recently attended some International Monetary Fund (IMF) meetings regarding the economic health of several Central European countries—Poland, Hungary, the Czech Republic, and Romania—against a backdrop of elevated regional inflation. While central bank officials in the region are generally trying to sound hawkish, Morozov believes that Poland’s central bank is probably the most dovish. Poland could be the first country in the region to cut short-term interest rates, but Morozov believes it is more likely that Polish policymakers will refrain from reacting with more rate increases even if inflation stays higher for longer. National Bank of Poland officials have argued that they do not want to rush bringing inflation down to the central bank’s target given the associated costs of tighter monetary policy (e.g., slower economic growth).
One factor that could complicate the central bank’s efforts to tame inflation is that the government is working on a bill to subsidize mortgages for the population in an attempt to boost mortgage lending. The bill would effectively cap mortgage interest rates for some categories of borrowers at around 4%, with the government paying the difference between that 4% and potentially much higher market interest rates. While government officials estimate that the total cost of the measure would be only 0.5% of GDP over the next 10 years, Morozov believes that the uptake for the program could be much higher than official estimates and, respectively, the fiscal costs could be much larger. In addition, he believes this new law could significantly diminish the efficacy of tighter monetary policy and thus delay a decline in inflation.
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