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Global Markets Weekly Update: August 18, 2023
U.S.
Stocks retreat for third consecutive week
Stocks were broadly lower as sentiment appeared to take a blow from a sharp increase in longer-term bond yields and fears of a sharp slowdown in China (see below). The S&P 500 Index ended the week down 5.15% from its July 26 intraday peak. Growth shares should theoretically suffer the most as rising rates place a greater discount on future earnings, but the Russell 1000 Growth Index held up modestly better than its value counterpart. Small-cap stocks performed the worst. T. Rowe Price traders noted that program trading, technical factors, and thin summer trading volumes may have accentuated the market’s swings.
Consumers’ wallets remain open
The notable economic release of the week appeared to be Tuesday’s report from the Commerce Department on July retail sales, which jumped 0.7% over the month, roughly double consensus estimates. Excluding the volatile auto segment, sales rose 1.0%, bringing their year-over-year gain to 3.2%. While retail sales were essentially flat over the past year given the equivalent rise in the consumer price index, sales in specific categories indicated a sharp rise in discretionary spending. Sales at restaurants and bars jumped 11.9%, for example, while online purchases surged 10.3%. Meanwhile, gas station sales plunged 20.8%.
Some of the week’s other data seemed to raise the prospect of a “no landing” scenario—the possibility that the economy would continue to expand without experiencing a “soft landing” slowdown or a “hard landing” recession. Industrial production grew by 1.0% in July, roughly triple consensus estimates and its biggest gain since January, although part of the increase came from utilities boosting output to cope with July’s extremely high temperatures. A gauge of manufacturing activity in the mid-Atlantic region indicated expanding factory activity, orders, and shipments for the first time in 14 months. Nationwide housing starts also rose more than expected.
The Wednesday release of the minutes from the Federal Reserve’s July policy meeting seemed to raise worries about how policymakers would respond to continued growth signals. Investors appeared to interpret the tone of the minutes as generally hawkish, even as Fed officials expressed hopes that “a continued gradual slowing in real gross domestic product (GDP) growth would help reduce demand-supply imbalances in the economy.”
Rising growth forecasts
Whether the economy was slowing and by how much may arguably have become less clear since the Fed’s meeting, however. The Atlanta Fed’s GDPNow forecast for growth in the current quarter, which is continually revised based on incoming data, jumped to 5.8% as of Wednesday, well above the official second-quarter growth rate of 2.4%. While most expect the actual growth rate in the third quarter to come in substantially lower, the Atlanta Fed’s “Blue Chip” survey of economists indicated that most are also steadily revising higher their growth forecasts. Nevertheless, rate hike expectations as measured by the CME FedWatch tool remained roughly stable over the week, with futures markets pricing in the likelihood of rates staying at their current level through the end of the year.
Benchmark 10-year U.S. Treasury yield reaches highest level since October
The positive economic surprises pushed the yield on the benchmark 10-year U.S. Treasury yield to its highest level since at least October 2022, although heavy issuance and, thus, supply worries may have also played a role. According to our traders, tax-exempt municipal bonds were initially resilient to the heightened volatility in Treasuries, but muni yields jumped on Thursday. Nevertheless, new deals were well subscribed, as attractive new issue concessions appeared to bolster demand.
Investment-grade corporate bonds underperformed Treasuries throughout the week, led by the auto sector. Roughly half of the week’s issuance was oversubscribed, however. Meanwhile, market volumes in the high yield bond and bank loan segments were somewhat below average, and our traders noted that much new issuance may be delayed until after the Labor Day holiday.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,500.66 |
-780.74 |
4.08% |
S&P 500 |
4,369.71 |
-94.34 |
13.81% |
Nasdaq Composite |
13,290.78 |
-354.07 |
26.98% |
S&P MidCap 400 |
2,578.86 |
-81.69 |
6.11% |
Russell 2000 |
1,859.42 |
-65.71 |
5.57% |
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 fell 2.34% on intensifying concerns about the outlook for China’s economy and the prospect of a prolonged period of higher European interest rates. Major stock indexes also weakened. France’s CAC 40 Index slid 2.40%, Germany’s DAX lost 1.62%, and Italy’s FTSE MIB gave up 1.81%. The UK’s FTSE 100 Index dropped 3.48%.
UK wage growth surprisingly strong, and core inflation quickens
UK wage growth accelerated, increasing the pressure on the Bank of England (BoE) to raise interest rates further. Average weekly earnings (excluding bonuses) climbed 7.8% in the three months through June—up from 7.4% in the three months through May. Signs of cooling in the labor market also emerged. The unemployment rate rose more than expected to 4.2% sequentially from 3.9% in the previous three months.
Annual UK inflation slowed in July to 6.8% from 7.9% in June, driven lower by falling energy and food prices. But underlying price pressures remained strong, with the core rate, which excludes food, energy, alcohol and tobacco, staying at 6.9%. Services prices—seen by the BoE as the best predictor of underlying domestic inflation—quickened to 7.4%, the highest level since March 1992.
Eurozone industry output rebounds; German confidence remains low
Industrial production in the eurozone rebounded in June, rising 0.5% sequentially and beating expectations for a 0.2% increase. The expansion helped bolster economic growth, with a second estimate of the second-quarter increase in gross domestic product coming in unchanged at 0.3%.
The ZEW institute’s economic sentiment indicator remained negative for a fourth consecutive month in August, although there was a slight improvement due to hopes that the German economy might improve by the end of the year.
Norway’s central bank increases rates
The Norwegian central bank raised its benchmark interest rate by a quarter percentage point to 4.0%, as expected. Norges Bank Governor Ida Wolden Bache signaled after the decision that there could be another increase in September.
Japan
Amid concerns about the broader impact of China’s macroeconomic weakness and its troubled property sector, Japan’s stock markets declined over the week, with the Nikkei 225 Index down 3.2% and the broader TOPIX Index falling 2.9%. Share price weakness was notable among tourism-related names.
The yield on the 10-year Japanese government bond (JGB) rose to 0.64% from 0.58% at the end of the previous week. This follows the Bank of Japan’s (BoJ’s) monetary policy tweak in July to effectively allow JGB yields to rise more freely by turning its 0.5% yield ceiling from a rigid limit into a reference point.
The yen weakened to about JPY 145.5 against the U.S. dollar, from around JPY 144.9 the prior week, trading around the nine-month low levels that prompted Japanese authorities to intervene in the foreign exchange market in September 2022 to stem the yen’s decline. Japan’s Finance Minister Shunichi Suzuki continued to assert that authorities are watching market moves with a strong sense of urgency and will respond appropriately, in particular to speculative moves that have the potential to affect companies’ future planning and households’ prospects.
Japan’s second-quarter economic growth far exceeds forecasts
Japan’s GDP grew by an annualized 6.0% quarter on quarter in the three months to the end of June 2023, far exceeding the 2.9% expansion forecast by economists. The growth surge was driven largely by external demand, with net export growth ahead of estimates. Historic yen weakness continued to boost exports, particularly of cars. This offset weakness in domestic demand, notably a drop in private consumption due in part to the impact of rising prices.
Japan’s consumer price inflation slowed from the previous month in July but remained elevated at 3.1% year on year (y/y), above the BoJ’s 2% target for the 16th straight month. Meanwhile, customs exports declined 0.3% y/y in July, the first drop in more than two years, due primarily to weak demand from Asia, while growth in Western markets was more robust. Imports fell 13.5% y/y amid easing commodity prices.
China
Chinese stocks lost ground amid pessimism about the country’s flagging economic recovery. The Shanghai Stock Exchange Index gave up 1.80%, while the blue chip CSI 300 fell 2.58%. In Hong Kong, the benchmark Hang Seng Index plummeted 5.89%, its biggest weekly drop in five months, according to Reuters.
Official data for July revealed that China’s economic activity continued to weaken. Industrial output and retail sales grew at a slower-than-expected pace in July from a year earlier. Fixed asset investment growth in the first seven months of 2023 also missed forecasts. Urban unemployment edged up to 5.3% from June’s 5.2%, according to China’s statistics bureau. The bureau did not release the youth unemployment rate, which rose every month in 2023 and hit a record 21.3% in June. The decision to suspend the closely watched indicator raised concerns that Beijing was suppressing information that it deemed politically sensitive.
Home prices fall for first time in 2023
More evidence of a property market downturn weighed on the outlook for a key sector of China’s economy. New home prices in 70 of China’s largest cities fell 0.23% in July from June, when they declined for the first time this year. China’s property sector showed signs of stabilizing earlier this year, but recent developments have renewed concerns about the strength of the recovery. Country Garden, one of China’s largest property developers, suspended trading on several onshore bonds after the company missed interest payments on two dollar-denominated bonds the prior week. Meanwhile, China Evergrande, another leading developer that defaulted in 2021, filed for bankruptcy protection in New York, a move that protects the company from U.S. creditors as it works on debt restructuring deals in Hong Kong and the Cayman Islands, Bloomberg reported.
In monetary policy news, the People’s Bank of China unexpectedly cut its medium-term lending facility rate by 15 basis points to 2.5%, its largest reduction since 2020, as the country grapples with weak demand. The central bank also lowered the seven-day reverse repurchase rate, a short-term policy rate, by 10 basis points.
Other Key Markets
Peru
Late last week, Peru’s central bank kept its key policy rate, the reference rate, at 7.75%, as was widely expected. However, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement no longer included language indicating that being on hold does not necessarily imply an end to the hiking cycle.
Gifford also notes that other parts of the statement have been watered down, suggesting that policymakers have become increasingly dovish. For example, they mentioned the "significant" drop in both headline and core inflation for a second consecutive month and another improvement in inflation expectations. They also affirmed their view that inflation will be close to the central bank’s 1% to 3% target range by the end of the year.
With high real (inflation-adjusted) rates by Peruvian standards, weak growth, and rapidly improving inflation, Gifford believes that the beginning of a rate-cutting cycle is near. However, he expects that the central bank, when it acts, will reduce the reference rate at a gradual pace until it reaches a neutral stance—neither stimulative nor restrictive.
Argentina
On Monday, Argentina—which is struggling with elevated inflation and has been receiving financial assistance from the International Monetary Fund (IMF)—allowed its currency to devalue approximately 20% versus the U.S. dollar. The central bank also raised its key interest rate from 97% to 118%.
Observers note that Argentina’s authorities may have acted because they recognized the foreign exchange pressures on the peso, or perhaps because they promised the IMF a devaluation before another possible disbursement of IMF funds later this month. Some believe, however, that the timing of the devaluation may reflect the strong showing of right-wing libertarian candidate Javier Milei’s in a primary election on Sunday. Milei’s stated priorities include replacing the peso with the U.S. dollar, abolishing Argentina’s central bank, rejecting further IMF financial assistance, and slashing the number of government ministries.
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