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Global Markets Weekly Update: August 04 2023
U.S.
The major U.S. equity benchmarks started August with a down week after closing out a strong July. Stocks declined amid rising Treasury yields and an unexpected downgrade to the U.S. government’s credit rating. The technology-heavy Nasdaq Composite suffered the largest losses for the week.
In a busy week for corporate earnings releases, investors were especially focused on results from mega-cap names Amazon and Apple, which reported earnings after markets closed on Thursday. Amazon significantly beat expectations, helped by strength in its core retail business, and the company’s stock rallied more than 9% at Friday’s open. Apple, meanwhile, traded down about 3% after a mixed report that showed strength in its services business, although iPhone sales disappointed.
U.S. government’s credit rating downgraded
Fitch Ratings on Tuesday downgraded the credit rating of U.S. government debt from the highest level, AAA, to AA+, with the ratings agency saying its decision “reflects governance and medium-term fiscal challenges.” T. Rowe Price traders noted that it was the first negative surprise that markets have had to deal with in some time, and some investors seemed to use the news as a good excuse to reduce riskier positions. S&P also has a AA+ rating on the U.S., following a downgrade in 2011.
Hiring slows from faster pace at start of year
The Labor Department’s closely watched monthly nonfarm payroll report showed that employers added 187,000 jobs in July, about the same as June’s downwardly revised 185,000. The past two months’ data, while still showing health in the labor market, point to a notable slowing from the first five months of the year when the economy added an average of 287,000 jobs a month. The unemployment rate ticked down to 3.5% from 3.6% the prior month, while wages grew 4.4% over the 12-month period, unchanged from June.
Earlier in the week, the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics showed a modest drop in the number of job openings in June, although layoffs declined for a third straight month. ADP’s private employment survey was better than expected but did show hiring eased to 324,000 from 455,000 in June. In non-labor market news, the Institute for Supply Management manufacturing Purchasing Managers’ Index came in at 46.4, a bit lower than the 46.9 consensus and the ninth straight month under 50, the level that indicates contraction.
Treasury yields jump higher
The yield on the benchmark 10-year U.S. Treasury note increased from 3.95% at the end of the previous week to almost 4.20% by early Friday but decreased to about 4.05% following the release of the jobs report. Expectations for higher levels of issuance by the Treasury Department seemed to help push yields higher earlier in the week. The tax-exempt municipal bond market started August on weaker footing alongside the sell-off in Treasuries. Our muni traders noted that the interest rate volatility and weaker macro tone countered the technical tailwind of August reinvestment cash and negative net supply. In the primary market, some deals did not receive adequate demand and needed to be adjusted.
In the investment-grade corporate bond sector, our traders noted that issuance was oversubscribed throughout the week. Meanwhile, the high yield corporate bond market traded lower as Fitch’s downgrade of U.S. debt fostered broad risk-off sentiment. The primary market remained active with several new deals announced. Our traders noted, however, that investors were somewhat selective as there was tepid demand for a few issues while other higher-quality deals continued to trade well.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,065.62 |
-393.67 |
5.79% |
S&P 500 |
4,478.03 |
-104.20 |
16.63% |
Nasdaq Composite |
13,909.24 |
-407.42 |
32.89% |
S&P MidCap 400 |
2,681.58 |
-35.29 |
10.34% |
Russell 2000 |
1,957.18 |
-24.36 |
11.12% |
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 ended 2.44% lower. Higher U.S. bond yields and some disappointing European earnings reports deflated investor enthusiasm for riskier assets. Major country stock indexes also declined. Germany’s DAX dropped 3.14%, France’s CAC 40 Index lost 2.16%, and Italy’s FTSE MIB slid 3.10%. The UK’s FTSE 100 Index fell 1.69%.
European government bond yields broadly climbed as resilient economic data suggested a global recession might be avoided. The yield on the benchmark 10-year German government bond rose toward its highest levels since March. In the UK, the yield on the benchmark 10-year government bond stabilized below 4.5% after the Bank of England (BoE) raised borrowing costs for a 14th consecutive time.
BoE hikes interest rates, likely to keep borrowing costs higher for much longer
The BoE raised its key interest rate by a quarter of a percentage point to a 15-year high of 5.25%. It warned that rates were likely to stay high for some time, saying "the MPC [Monetary Policy Committee] will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target." The central bank predicted the inflation rate would fall to 4.9% by the end of this year, a faster pace than in its May forecast. BoE estimates for economic growth were little changed at 0.5% this year and next.
UK house prices fall most since 2009; mortgage lending contracts
The UK housing market remained weak amid the highest mortgage rates since 2008. House prices fell 3.8% year over year in July, worse than June’s drop of 3.5% and the fastest decline since July 2009, according to a closely watched index published by the Nationwide Building Society. In addition, BoE mortgage data for the second quarter showed the first quarterly decline in the value of net mortgage lending since records began in 1987.
Eurozone inflation slows but economy rebounds
Annual inflation in the euro area slowed further to 5.3% in July from 5.5% in June but remained well above the European Central Bank’s 2% target. Inflation also declined in Germany and France, the bloc’s two largest economies.
However, the eurozone economy expanded 0.3% sequentially in the second quarter, after gross domestic product (GDP) shrank or stagnated in the previous two quarters. Germany’s GDP was unchanged, while Italy’s economy contracted by 0.3%.
Even so, forward-looking purchasing managers’ surveys indicated a weaker start to the third quarter. The final reading of the composite index of business activity in services and manufacturing was revised slightly lower to 48.6 in July. For this indicator, readings below 50 signal contraction.
Japan
With global investor risk appetite dampened by a U.S. sovereign credit rating downgrade, Japan’s stock markets fell over the week. The Nikkei 225 Index registered a 1.7% loss and the broader TOPIX Index was down 0.7%. This was despite the support provided domestically by a strong corporate earnings season, with many companies seeing output recover post-pandemic and benefiting from the weak yen and rising prices.
Bond yield rises following monetary policy adjustment
The yield on the 10-year Japanese government bond (JGB) rose to 0.65%, around a nine-year high, from 0.55% at the end of the previous week. This followed the Bank of Japan’s (BoJ’s) July monetary policy tweak to effectively allow interest rates to rise more freely, by increasing the flexibility around its yield curve control target, as well as its offer to buy 10-year JGBs at 1.0% (up from 0.5%) each day. During the week, the BoJ announced two unscheduled bond-purchase operations, aimed at slowing the speed of yield gains. BoJ Governor Kazuo Ueda has said that under current circumstances, he does not expect yields to rise to 1%.
Given the BoJ’s continued commitment to its accommodative stance and Japan’s wide interest rate differential with the U.S., the yen weakened to about JPY 142.6 against the U.S. dollar, from around 141.1 the prior week. Speculation was ongoing that Japan’s Ministry of Finance could intervene in the foreign exchange markets to shore up the yen’s value.
Ongoing divergence between expanding services sector and sluggish manufacturing
Japan’s services sector expansion slowed in July, according to the latest Purchasing Managers’ Index (PMI) data compiled by au Jibun Bank. The headline services index fell to 53.8 in July, from 54.0 in June. Although the rates of growth in business activity and new business softened on the previous month, they remained solid overall. Notably, foreign demand for Japanese services surged amid strong demand for travel and tourism from abroad. Meanwhile, the manufacturing PMI slipped further into contraction territory, to 49.6 in July from 49.8 the prior month. Both output and new orders fell modestly, due primarily to weak demand for manufactured goods in both domestic and international markets.
China
Chinese stocks rose as Beijing’s supportive stance offset concerns about the latest batch of disappointing economic data. The Shanghai Stock Exchange Index gained 0.37% while the blue chip CSI 300 advanced 0.7%.
China's cabinet, the State Council, announced new measures to revive consumption. The wide-ranging policies focused on removing restrictions on consumption in sectors including autos, real estate, and services, Reuters reported. Local regions were also encouraged to provide subsidies for home appliance purchases and home renovation materials in rural areas. However, the measures contained no mention of direct cash support to consumers to bolster spending, which some analysts have called for.
In central bank news, the People’s Bank of China (PBOC) pledged to support the development of China's real estate market during its biannual work conference, which was chaired by the newly appointed governor, Pan Gongsheng. The PBOC said it would continue to reduce housing loan interest rates and down payment ratios and guide commercial lenders to adjust rates on existing mortgages. The PBOC’s pronouncements raised speculation that the central bank may cut the reserve requirement ratio for domestic lenders in the near term as the government ratchets up efforts to bolster China’s flagging recovery.
China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 49.3 in July as expected, from June’s 49. However, it stayed below the 50-point threshold separating growth from contraction for the fourth consecutive month. The nonmanufacturing PMI declined to a weaker-than-expected 51.5 from 53.2 in June. Separately, the private Caixin/S&P Global survey of manufacturing activity eased to a below-forecast 49.2 in July from June’s 50.5 and marked a return to contraction after expanding for two months. Meanwhile, the Caixin survey of services activity unexpectedly rose for the seventh straight month as new business and operating conditions improved.
Property sector extended declines for second month
New home sales by China’s top 100 developers slumped 33.1% in July from a year earlier, extending declines for a second month. The latest data from the China Real Estate Information Corp. spelled more trouble for China’s developers despite efforts from the central and local governments to shore up the debt-laden property sector starting in December.
Other Key Markets
Brazil’s central bank kicks off easing cycle
The Central Bank of Brazil lowered its benchmark Selic lending rate by a larger-than-expected 50 basis points at its August policy meeting. While the Monetary Policy Committee’s decision was not unanimous, its post-meeting statement indicated that it expects to make rate cuts of the same magnitude going forward if expected inflation continues to moderate.
With the rate reduction, Brazil became one of the first global central banks to ease monetary policy after aggressively tightening to fight the post-pandemic inflationary surge, following Peru’s rate cut in late July. Before this week’s move, the Central Bank of Brazil’s most recent rate reduction was in August 2020. The central bank had tightened its benchmark rate by almost 1,200 basis points in 2021 and 2022 before keeping rates steady until this week.
Encouraging inflation data in Peru
Peru’s government reported that the consumer price index for July increased 0.39% month-over-month and 5.88% year-over-year, sharply lower than the year-over-year pace of 6.46% in June. The data were essentially in line with market expectations.
T. Rowe Price emerging markets sovereign analyst Aaron Gifford was encouraged that core inflation was well behaved at a month-over-month rate of 0.29%. Gifford also noticed that, on a sequential basis, both headline and core inflation were just under 2%, well within the central bank’s 1% to 3% inflation target range. Given weak economic growth and well-behaved inflation, he believes that Peru’s central bank could introduce an easing bias or begin cutting rates in the months ahead.
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