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Global Markets Weekly Update: April 28, 2023
U.S.
Stocks mixed as mega-caps outperform cyclicals and small-caps
Stocks recorded mixed returns as attention focused on the season’s busiest week of quarterly earnings reports. According to T. Rowe Price traders, 35% of S&P 500 Index companies, which together represent 44% of its market capitalization, were scheduled to release results during the week. On Thursday, our traders noted that gains in just four stocks—Microsoft, Apple, Amazon.com, and Facebook parent Meta Platforms—accounted for nearly half of the S&P 500’s strong gain (the biggest since January 6), after Meta jumped 14% on an earnings beat.
Cyclical sectors generally performed poorly, however, as investors weighed several new signs of an economic slowdown, particularly in the manufacturing sector. Early in the week, several measures of regional manufacturing activity came in well below expectations and indicated that factories were cutting back on production in April. Our traders noted that investors also seemed worried by a negative outlook for shipping volumes from United Parcel Service, which tumbled 10% Tuesday on the news.
Business spending slows as retail inventories accumulate
Wednesday’s durable goods data were a surprise on the surface, showing a 3.2% rise in March orders. Orders excluding aircraft and defense—typically considered a better indicator of business spending plans—fell 0.4%, however. Signaling the need for further cutbacks in production and spending, retail inventories rose 0.4% for the month, more than expected and the most since last August. On Thursday, the Commerce Department’s advance estimate of annualized growth in gross domestic product (GDP) in the first quarter came in at 1.1%, well below consensus expectations of around 2%.
Renewed turmoil in the banking industry also heightened fears of a slowdown and possible recession. On Tuesday, U.S. markets ended on session lows following California’s First Republic Bank’s earnings release, which revealed that the bank had suffered more than USD 100 billion in deposit outflows in the first quarter. The news sent the stock down by roughly half and weighed on the overall regional banking space. On Friday morning, First Republic’s stock fell further after CNBC reported that the Federal Deposit Insurance Corporation was planning on taking the bank into receivership that evening.
Renewed banking stresses weigh on corporate bond market
U.S. Treasury yields modestly decreased amid volatility ahead of the following week’s Federal Reserve policy meeting, where an additional quarter-point rate hike is widely expected. Concerns increased about the approaching debt ceiling date and negotiations for raising it.
Our traders observed investment-grade corporate bonds weaken through much of the week alongside the disappointing economic backdrop. Bonds issued by regional banks lagged as news related to First Republic Bank weighed on the banking industry and renewed concerns about the health of regional banks. However, corporate bonds rallied later in the week alongside some encouraging corporate earnings reports and an uptick in secondary trading volumes.
According to our traders, the Fed blackout period and anticipation of earnings releases led to subdued volumes in the high yield market. Sentiment improved as equities rallied following the weaker-than-expected GDP figure. Weak economic data also weighed on the bank loan market, as did the headlines related to First Republic Bank.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,098.16 |
289.20 |
2.87% |
S&P 500 |
4,169.48 |
35.96 |
8.59% |
Nasdaq Composite |
12,226.58 |
154.13 |
16.82% |
S&P MidCap 400 |
2,490.40 |
-8.42 |
2.47% |
Russell 2000 |
1,769.00 |
-22.52 |
0.44% |
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
Shares in Europe fell as fears that interest rate increases might tip the economy into recession intensified. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.50% lower. Major stock indexes were mixed to lower. France’s CAC 40 Index fell 1.13%, and Italy’s FTSE MIB dropped 2.41%. Germany’s DAX advanced 0.26%. The UK’s FTSE 100 Index lost 0.55%.
Core eurozone government bonds endured a volatile week. A resurgence of worries about the U.S. banking industry and an unexpected decline in Spanish producer price inflation initially sent the 10-year German bund yield lower. But it rose again around midweek, driven by the upside surprise in U.S. core personal consumption expenditures inflation. Then news of stagnating first-quarter German economic growth and a more dovish-than-expected Bank of Japan (BoJ) policy meeting on Friday contributed to a pullback in yields. Peripheral eurozone and UK government bonds broadly tracked core markets.
Euro bloc economy expands; inflation mixed
The eurozone economy treaded water in the first quarter, expanding less than expected, according to preliminary data. Gross domestic product ticked up 0.1%, a step up from the final quarter of last year, when GDP was flat. Economists polled by FactSet had predicted growth of 0.15%. The German economy stagnated—an improvement on the 0.5% contraction registered in the final quarter of last year but weaker than the 0.2% growth rate forecast by economists.
Annual inflation in Germany, adjusted for comparison with other European Union (EU) countries, slowed to 7.6% in April from 7.8% in March, as energy price increases eased. In France, consumer prices increased by 6.9%, an acceleration from the 6.7% uptick recorded in March. Spain’s headline inflation rate came in at 3.8%, up from 3.1% in the preceding month.
EU sentiment steady, rises in Germany, France, and Italy
Economic sentiment in the eurozone held steady in April amid more optimism in the consumer and retail and services sectors, according to the European Commission. However, manufacturers were still pessimistic about production and order books. The sentiment index reached 99.3 in April versus a downwardly revised 99.2 in March.
UK budget deficit widens to record level; business confidence rises
The UK budget deficit grew to GBP 139 billion in the year to March, up more than GBP 18 billion from a year earlier and the highest level on record, official data showed. However, the deficit is smaller than the GBP 152 billion forecast made by the Office for Budget Responsibility last month. Meanwhile, Lloyds Bank said that business confidence rose to its highest level in almost a year in April amid more optimism about the economy. The lender’s Business Barometer gauge of confidence rose to 33% from 32% in March, above its long-run average of 28%.
Sweden hikes interest rates
The Riksbank, Sweden’s central bank, raised its key interest rate by a half percentage point to 3.5%, as expected, and signaled that a quarter-point increase could be forthcoming in June or September.
Japan
Japan’s stock markets gained over the week, with the Nikkei 225 Index rising 1.02% and the broader TOPIX Index up 1.10%. Markets were supported by a dovish BoJ, which signaled a continued commitment to its ultra-loose stance by leaving monetary policy, including its yield curve control framework, unchanged. The government’s easing of Japan’s border controls ahead of an anticipated increase in arrivals, particularly from China, due to the Golden Week holidays (observed at the end of April and the beginning of May) also boosted sentiment.
The yield on the 10-year Japanese government bond (JGB) fell to 0.41% from 0.46% at the end of the previous week, largely on the dovish BoJ. The yen weakened, to about JPY 135 against the U.S. dollar, from around JPY 134 the prior week, also on the signaling of policy continuity.
BoJ pursues policy continuity under new Governor Kazuo Ueda, announces review
The BoJ’s April 27–28 meeting, the first under new Governor Kazuo Ueda, signaled policy continuity. The central bank kept its short-term policy interest rate at -0.1% and left unchanged its yield curve control framework, under which 10-year JGB yields are allowed to fluctuate in the range of around plus and minus 0.5% from the zero percent target level.
However, given challenges around achieving its price stability target over the past 25-year period, the BoJ announced that it would conduct a broad review of monetary policy, with a planned time frame of around one and a half years. Ueda emphasized that policy change can take place while the review is being conducted. In its statement, the BoJ removed the forward guidance on interest rates and the mention of the need to closely monitor the impact of COVID, while reiterating a continued commitment to easing.
Inflation forecasts upgraded, but price growth expected to slow down through fiscal year 2025
In its separate Outlook report, the BoJ upgraded its forecasts for Japan’s core inflation slightly, to 1.8% in this 2023 fiscal year (FY), from the 1.6% it anticipated in January, and to 2.0% in FY2024, from 1.8%. The FY2025 forecast is at 1.6%. In the post-meeting press conference, Ueda said that while a positive price trend is emerging, it has not reached a level where the BoJ could confidently declare that it had met its 2% inflation target.
Data released during the week showed that Tokyo-area inflation, a leading indicator of nationwide trends, accelerated in April: The core consumer price index rose 3.5% year on year, ahead of expectations and well above the BoJ’s inflation target.
China
Chinese stocks ended mixed ahead of a five-day holiday as Beijing reaffirmed its supportive policy stance, assuaging concerns about an uneven economic recovery. The Shanghai Stock Exchange Index rose 0.67%, while the blue chip CSI 300 pulled back 0.09% in local currency terms. China’s stock markets are closed Monday through Wednesday for the Labor Day holiday and will resume trading on Thursday, May 4.
China’s Politburo, the country’s top decision-making body, vowed to continue its “forceful” fiscal and monetary policy stance to support the economy as it faces obstacles in economic transformation and insufficient domestic demand, state media reported following a meeting of top officials. While China’s economy expanded at its fastest pace in a year in this year’s first quarter, policymakers remain cautious on headwinds ranging from high youth unemployment and slowing global growth. Earlier in the week, China’s cabinet, the State Council, announced measures to encourage growth in the trade sector amid weakening global demand. The reforms include consolidating the shipment of vehicles and issuing visas for overseas businesspeople.
The People’s Bank of China extended its short-term cash injections into the banking system via seven-day reverse repurchase agreements for the 11th straight day on Friday, marking the longest streak this year. The net total injection reached RMB 637 billion for the current cycle as the central bank attempted to ensure ample liquidity at month-end.
Industrial profits fall in first quarter
Profits at industrial firms in China fell 21.4% from January to March from a year earlier, slightly better than the 22.9% drop recorded in the first two months of 2023, according to the National Bureau of Statistics. Despite an increase in exports and factory production, manufactured goods demand remained weak as companies struggled to recover from last year’s pandemic-induced slump. Producer deflation also persisted as factories were unable to boost prices, which further weighed on profits.
Other Key Markets
Turkey/Türkiye
Turkey’s central bank held its scheduled monetary policy meeting earlier this week and kept its key interest rate—the one-week repo auction rate—at 8.50%. This was in line with expectations.
T. Rowe Price sovereign analyst Peter Botoucharov notes that year-over-year Turkish headline inflation, which was around 80% for most of the second half of 2022, has declined to about 50% as of March 2023. He believes that inflation could fall closer to 40% during the second half of 2023. Although the central bank has held the repo auction rate steady since the latter part of February, Botoucharov observes that there has been some monetary tightening via other liquidity channels since March. Specifically, he notes that three-month Turkish sovereign debt yields have climbed to nearly 18% versus 9% to 10% in the first two months of the year.
Botoucharov believes that the market is beginning to reflect the possibility of a return to a more orthodox monetary policy following the election. While President Recep Tayyip Erdogan—who currently holds the unorthodox view that high interest rates cause high inflation—could exert less pressure on the central bank post-reelection to keep monetary policy stimulative, Botoucharov believes that an opposition victory would likely see a more substantive policy pivot and further increase in interest rates and costs of funding as part of the macroeconomic adjustment program.
Colombia
Colombian assets were volatile during the week, as President Gustavo Petro called for his entire cabinet to step down even as he announced a formal rupture in his ruling coalition. Petro has been frustrated that the leadership from the more moderate parties in the coalition have stymied his reform efforts, the latest involving health care. Petro also complained about the removal of text within his National Development Plan related to the purchase and redistribution of land to peasant farmers.
T. Rowe Price emerging markets sovereign analyst Aaron Gifford’s initial reaction is that Petro’s decision to reshuffle his cabinet and part ways with the moderate bloc will manifest itself in greater policy uncertainty, at least where the president can have a direct influence (such as minimum wage setting, regulations, and trade policy). Also, without the support of moderate parties, he won’t have enough votes to pass the likes of health, labor, political, and potentially pension reform, or at least not without significant dilution.
With the new cabinet ministers expected to take office on Monday, May 1, which is a holiday across most of Latin America, Gifford will be assessing the policy direction of the new cabinet in the days ahead, as well as their initial policy actions. One surprise was that Ricardo Bonilla—one of Petro’s trusted economic advisors and his former finance minister in Bogota when Petro was mayor there—is replacing outgoing Finance Minister Jose Antonio Ocampo. While Bonilla is seen as a moderate figure, he has fewer credentials than Ocampo and may struggle to push back against the president’s demands even as Petro appears to be growing more emboldened. Overall, Gifford is not convinced that the cabinet shakeup will strengthen Petro; in fact, he believes that Petro is losing political capital, as evidenced by his lower approval ratings among voters and periodic protests against him and his government.
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