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Global Markets Weekly Update: August 11, 2023
U.S.
Stocks mixed in light trading
The major benchmarks ended mixed for the week, as investors weighed inflation data against worries over the recent rise in long-term interest rates. Value stocks handily outperformed growth stocks, and the narrowly focused Dow Jones Industrial Average managed a modest gain. T. Rowe Price traders noted that volumes were generally light, reflecting both the summer vacation season and a seeming lull as the quarterly earnings reporting season wound down.
Health care shares got a boost at midweek from further evidence of the efficacy of diabetes drugs in treating obesity and related ailments, while information technology stocks underperformed on worries that rising rates would reduce the value of future profits. Industrials stocks were also weak on growing fears over a strike by the United Auto Workers union.
Financials stocks sold off briefly on Tuesday morning after Moody’s Investors Service lowered its credit ratings for 10 small- and mid-cap banks and placed six other entities on downgrade watch. Moody’s cited funding costs as well as the banks’ exposure to the troubled commercial real estate sector. Shares in the sector recovered to some degree as the week progressed, however.
Conflicting inflation signals and Fed-speak
The week’s economic calendar was relatively light overall but included some closely watched inflation data. On Thursday, stocks jumped at the start of trading on news that the Labor Department’s consumer price index (CPI) rose 0.2% in July, bringing its year-over-year increase to 3.2%, a tick below expectations. A sharp drop in airline fares helped compensate for continuing pressure from shelter costs.
Enthusiasm over the CPI data appeared to wane as the day wore on, however, and stocks were mixed on Friday, following news that producer prices rose 0.3% in the month, a tick above expectations. On a year-over-year basis, producer prices rose 0.8%, well below the Federal Reserve’s overall consumer inflation target of 2%. July marked the first annual increase in the rate of producer price inflation in over a year, however.
The week also brought a somewhat mixed inflation outlook from Federal Reserve officials. Over the previous weekend, Fed Governor Michelle Bowman warned that further hikes might be needed, while New York Fed President John Williams suggested that rate hikes were nearing their end and that rate cuts might be coming as soon as 2024. On Tuesday, Philadelphia Fed President Patrick Harker stated that he was comfortable keeping rates steady for now, while Richmond Fed President Thomas Barkin suggested he was also in favor of a pause in the hiking cycle.
Bonds see active new issue market
The producer price report pushed the yield on the benchmark 10-year Treasury note higher to end the week. (Bond prices and yields move in opposite directions.) According to our traders, August reinvestment cash provided a tailwind to the municipal bond market. The muni primary calendar was active, and new deals were generally oversubscribed. Issuance was also heavy throughout the week in the investment-grade corporate bond market. The high yield bond market also saw active trading in new issues, although volumes were generally somewhat light given the time of year.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,281.40 |
215.78 |
6.44% |
S&P 500 |
4,464.05 |
-13.98 |
16.27% |
Nasdaq Composite |
13,644.85 |
-264.39 |
30.37% |
S&P MidCap 400 |
2,660.55 |
-21.03 |
9.47% |
Russell 2000 |
1,925.13 |
-32.05 |
9.30% |
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 little changed. The Italian government’s decision to seek a windfall tax on bank profits and increasing concerns about a potential economic slowdown in China weighed on sentiment. Major stock indexes were mixed. Germany’s DAX fell 0.75%, Italy’s FTSE MIB tumbled 1.09%, and the UK’s FTSE 100 Index lost 0.53%. France’s CAC 40 Index, on the other hand, gained 0.34%.
European government bond yields rebounded from intraweek lows as investors weighed the possibility that inflationary pressures might remain elevated. The yield on the benchmark 10-year German government bond climbed above 2.50%. Swiss and French bond yields moved in tight ranges. In the UK, the benchmark 10-year government bond yield ticked higher, as strong economic growth data raised expectations that the Bank of England would continue to tighten monetary policy.
Italy’s government spooks markets with windfall tax on banks
The Italian government announced at the start of the week that it would tax 40% of net interest margins earned by banks in either 2022 or 2023, saying lenders had failed to pass on enough of their profits to depositors. The unexpected move triggered the largest drop in banking stocks since March, when two U.S. regional lenders collapsed, and UBS stepped in to buy ailing Credit Suisse. The reaction prompted the Italian government to issue a clarification the next day, saying it would cap any levy at 0.1% of risk-free assets.
UK economic growth stronger than expected; housing market weakens further
UK gross domestic product (GDP) grew 0.5% sequentially in June, exceeding a consensus forecast for a 0.2% expansion. Strong increases in manufacturing and construction were important drivers. Second-quarter GDP surprised to the upside, growing 0.2% versus the previous three months, thanks, in part, to better-than-expected private consumption. Business investment rose strongly as well, defying forecasts for a modest contraction.
A closely watched index of house prices compiled by mortgage lender Halifax fell for a fourth month running in July, easing 0.3% sequentially.
ECB highlights weak eurozone economy, uncertainty
The European Central Bank (ECB) said in its latest Economic Bulletin that, since the June interest rate hike, developments have supported the expectation that inflation should moderate in 2023 but still stay above the 2% target for an extended period. The publication indicated that the near-term economic outlook for the euro area had deteriorated due to weaker domestic demand. Even so, the ECB believes the outlook for inflation and economic growth remains highly uncertain. The comments raised expectations that policymakers could press pause on monetary tightening in September.
Japan
Japan’s stock markets rose over a holiday-shortened week, with the Nikkei 225 Index gaining around 0.9% and the broader TOPIX Index up about 1.3%. Optimistic earnings forecasts from some major Japanese companies provided a favorable backdrop, while tourism-related shares received a boost from news that China would approve the resumption of Japan-bound group tours for its citizens.
The yield on the 10-year Japanese government bond (JGB) fell to 0.58%, from a nine-year high of 0.65% at the end of the previous week. Yields across the curve were affected by a stronger-than-expected outcome of a 30-year bond auction during the week. The Bank of Japan (BoJ) tweaked its monetary policy in July to allow yields to rise more freely but has indicated that it will not tolerate a rapid move in yields. The yen weakened, to around JPY 144.6 against the U.S. dollar, from about JPY 141.7 the prior week, as it continued to be weighed down by the country’s interest rate differential with the U.S.
Economic data appear to support BoJ maintaining ultra-accommodative stance
Economic data developments, including signs of easing inflationary pressure and slowing wage growth, boosted the case for the BoJ to maintain its ultra-accommodative stance. The consumer goods price index, an indicator of inter-company pricing for goods and services, rose 3.6% year on year (y/y) in July, marking the seventh straight month of slowing wholesale inflation. The slowdown was due largely to weaker energy utility costs, while government utility fees subsidies for households also moderated price escalation. There were signs that the labor market may be losing some steam, as wage growth unexpectedly slowed in June. Nominal cash earnings rose 2.3% y/y, short of consensus estimates of 3.0% y/y growth, while real earnings fell 1.6% y/y, more than the expected 0.9% y/y decline.
The Summary of Opinions at the BoJ’s July monetary policy meeting indicated that the board members believe there is a long way to go to achieve inflation accompanied by wage increases. Determining whether wage hikes will continue next year will be a key issue. Until the likelihood of achieving the 2% inflation target rises sufficiently, the BoJ needs to maintain yield curve control while conducting it with greater flexibility.
China
Chinese stocks retreated as mounting evidence that the country’s recovery may have peaked weighed on sentiment. The Shanghai Stock Exchange Index declined 3.01% while the blue chip CSI 300 lost 3.39%. In Hong Kong, the benchmark Hang Seng Index gave up 2.38%.
China’s latest inflation data revealed that consumer and producer prices fell in tandem for the first time since November 2020, underscoring the weak demand throughout the economy. The consumer price index declined 0.3% in July from a year earlier and slipped into contraction for the first time since February 2021. The producer price index fell a worse-than-expected 4.4% from a year ago but slowed from June’s 5.4% decline. The release reinforced concerns that China has entered a deflationary period, which offset optimism about Beijing’s latest efforts to prop up demand after the State Council announced new measures last month to boost consumer spending.
In corporate news, Country Garden, one of China’s largest property developers, missed interest payments on two dollar-denominated bonds as it struggles with liquidity issues. The company expects to record a loss of RMB 45 billion to RMB 55 billion (USD 6.2 billion to USD 7.6 billion) in the first half of the year amid falling sales and rising refinancing costs, according to a statement released on Friday. The news from Country Garden, one of a few big developers that has yet to default, spelled more bad news for China’s property sector, which has been in a downturn for several years as cash-strapped developers have grappled with slowing sales and high debt levels.
Trade data remains weak; lending starts to falter
Trade and lending data for July came in below expectations and underscored the loss of momentum in China’s post-lockdown recovery. Exports fell a larger-than-expected 14.5% in July from a year earlier, marking the weakest reading since the start of the pandemic in early 2020. Imports shrank by a worse-than-expected 12.4%, almost double the drop recorded in the previous month. Separately, new bank loans rose a lower-than-expected RMB 345.9 billion in July, down from June’s 3.05 trillion. Though credit expansion typically slows in July, the weak readings increased expectations that the government would roll out more forceful stimulus measures in the near term.
Other Key Markets
Colombia
On Wednesday, the government reported that inflation in July was measured at 0.5% month over month and 11.8% year over year. While the latter reading was lower than the 12.1% year-over-year reading in June, both data points for July were higher than expected.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the readings for core inflation (0.4% month over month and 10.4% year over year versus 10.5% in June) were encouraging, especially on a sequential basis (the three-month seasonally adjusted annual rate was 8.9%). Gifford also notes that both goods and services inflation are heading in the right direction sequentially. Energy inflation, however, continues to move steadily higher as the government unwinds its fuel subsidies.
While elevated base effects suggest that annual figures across most categories will continue to head lower, Gifford believes that the pace of disinflation (a decline in the rate of inflation) will likely slow as food prices are starting to turn, especially if a moderate to severe El Niño weather phenomenon materializes. With this latest print, Gifford believes that inflation will end the year around 9.0% year over year and that the central bank will remain cautious regarding monetary policy.
Mexico
Mexico’s government reported on Wednesday that inflation in July was 0.5% month over month and 4.8% year over year versus 5.1% in June. The data were essentially in line with market expectations.
According to Aaron Gifford, disinflation continues to be evident in the sequential inflation data, with three-month headline inflation at a seasonally adjusted annual rate of only 2.3% and 4.2% three-month core inflation just outside the central bank’s 2% to 4% inflation target range. Another positive is that there is continuing disinflation in both goods and services. However, Gifford sees a shorter-term uptick in prices across the board, led by food costs. While not yet concerning, he believes this is worth keeping an eye on to the extent we see a series of higher monthly inflation readings.
Based on the latest data, Gifford believes that Mexican inflation will be around 4.3% year over year by the end of 2023 and that, for the time being, the central bank will maintain a cautious stance and keep the overnight interbank interest rate at 11.25%. Indeed, in a unanimous decision, the central bank kept rates unchanged at Thursday’s monetary policy meeting. However, Gifford would not be surprised to see policymakers begin reducing short-term rates by the end of the year.
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