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Global Markets Weekly Update: July 07, 2023
U.S.
Stocks move lower in quiet trading
Stocks closed lower in a generally quiet week, which T. Rowe Price traders attributed to the holiday-shortened week and investors awaiting the release of second-quarter earnings reports. Growth stocks held up modestly better than value shares. Tesla, which has a heavy weighting in the Nasdaq Composite and growth indices, provided a boost after reporting better-than-expected sales, as did its smaller electric vehicle rival, Rivian. Conversely, disappointing trial results for AstraZeneca’s new lung cancer drug weighed on the health care sector. Markets closed early Monday and were shuttered Tuesday in observance of the Independence Day holiday.
Minutes reveal hawkish Fed outlook
The main factor weighing on sentiment during the week appeared to be Wednesday’s release of the minutes from the Federal Reserve’s last policy meeting. The minutes revealed that, while the decision not to raise rates in June was unanimous, some members would have preferred another increase. Expectations that rates would remain “higher for longer” were deepened Thursday, after Dallas Fed President Lorie Logan, one of those who argued for a rate hike in June, told a gathering of the Central Bank Research Association that she anticipated two more rate increases in the remainder of the year. In response, markets began pricing in a roughly 44% chance of two or even three quarter-point hikes by December, according to the CME FedWatch Tool.
That probability fell back to end Friday at around 36%, however, seemingly in response to data indicating a slowdown in the job market. The Labor Department reported that employers added 209,000 nonfarm jobs in June, modestly below expectations and the lowest number since December 2020. The previous two months’ gains were also revised lower by a total of 110,000 jobs. The unemployment rate edged down from 3.7% in May to 3.6% in June. The report also revealed that the number of people employed part time for economic reasons jumped by roughly 11% in June, “partially reflecting an increase in the number of persons whose hours were cut due to slack work or business conditions.”
Manufacturing workers face tougher job market
The week also brought evidence that factory and services workers were facing very different job markets, however. The Institute for Supply Management’s (ISM’s) Manufacturing Purchasing Managers’ Index (PMI), released Monday, seemed to confirm a renewed slowdown in job growth, indicating a contraction in hiring trends in the sector for the first time since March. The Institute’s gauge of services employment painted the opposite picture, however, jumping to its highest level (53.1, with numbers above 50 indicating expansion) since February. The ISM’s overall Services PMI also hit its highest level (53.9) since February, well above estimates.
The yield on the benchmark 10-year U.S. Treasury note fluctuated following the release of Friday’s payroll report but closed higher for the week and firmly above 4% for the first time in eight months. (Bond prices and yields move in opposite directions.) Munis held up better, helped by the reinvestment of July coupon payments and no new supply reaching the market, according to our traders. Credit-sensitive corporate bond markets were also quiet over the holiday-shortened week.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,734.88 |
-672.72 |
1.77% |
S&P 500 |
4,398.95 |
-51.43 |
14.57% |
Nasdaq Composite |
13,660.72 |
-127.20 |
30.52% |
S&P MidCap 400 |
2,603.24 |
-19.10 |
7.11% |
Russell 2000 |
1,864.66 |
-24.07 |
5.87% |
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 3.09% on fears that central banks might need to keep tightening monetary policy. Investors were also disappointed by a lack of specific measures to bolster the Chinese economy despite more pledges of support from government officials. Major stock indexes declined. Germany’s DAX lost 3.37%, France’s CAC 40 Index slid 3.89%, and Italy’s FTSE MIB gave up 1.60%. The UK’s FTSE 100 Index dropped 3.65%.
European government bond yields ticked higher. The yield on the benchmark German 10-year bond ended above 2.6%. French and Italian bond yields also rose. In the UK, yields rose to their highest levels since mid-2008.
Signs of weakness in the German economy
German data for industrial production, factory orders, and exports pointed to continuing economic weakness in the second quarter. Output in May fell 0.2% versus April, disappointing consensus expectations that had called for industrial production to come in flat. New orders surged 6.4% in May on increased demand for ships, spacecraft, and military vehicles. However, on a three-month basis, this metric was still down 6.1% sequentially. Exports continued to be volatile, unexpectedly shrinking 0.1% month over month. Imports increased 1.7% in May.
Eurozone industry price pressures ease; retail sales still weak
Eurozone factory gate prices fell 1.9% sequentially in May, mainly due to a drop in energy costs, according to the European Union's statistics office. Retail sales volumes in the eurozone were flat for a second month in May, as increased spending on non-food items offset declines for food and automotive fuel. On a year-over-year basis, retail sales fell 2.9%, marking an eighth consecutive monthly decline.
Consumer inflation expectations decrease further; ECB’s Lagarde still hawkish
Consumer inflation expectations for the next 12 months moderated further in May, according to the European Central Bank’s (ECB’s) monthly survey. Survey participants see inflation at 3.9% in a year’s time, down from 4.1% in April.
ECB President Christine Lagarde stuck to her hawkish stance, saying in an interview with a French regional newspaper that policymakers “still have work to do” to reduce inflation that is projected to be above the 2% target in 2024 and 2025.
UK house prices fall sharply as mortgage rates rise
Rising mortgage rates continued to take their toll on the UK housing market in June. House prices fell 2.6% year over year, according to home loan provider Halifax. This marked the largest such decline since 2011.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index registering a 2.4% loss and the broader TOPIX Index down 1.5%. Both indexes retreated from 33-year highs as investors locked in profits, particularly in strongly performing technology stocks. Sentiment was dampened by increased anticipation that the U.S. Federal Reserve would raise interest rates in the second half of the year. The Bank of Japan’s (BoJ’s) ultra-accommodative monetary policy and historic yen weakness, which continued to boost Japan’s export-oriented firms, cushioned losses, however.
Amid speculation about change, BoJ says it will maintain yield curve control
The yield on the 10-year Japanese government bond (JGB) rose to 0.44% from 0.39% at the end of the previous week. Speculation that the BoJ could adjust its policy of yield curve control at its July meeting, possibly allowing JGB yields to fluctuate beyond the current range of around plus and minus 0.5 percentage points from zero, exerted some upward pressure on domestic yields. However, according to the Nikkei newspaper, BoJ Deputy Governor Shinichi Uchida said that the central bank will maintain its yield curve policy. While the policy has side effects such as the impact on market functioning, the BoJ must continue to support the economy, Uchida added.
Japanese and U.S. authorities in close contact on currency moves
The yen strengthened to around JPY 143 against the U.S. dollar from about JPY 144 the prior week, amid some lessening in expectations that the BoJ would intervene in the foreign exchange market to prop up the Japanese currency. Finance Minister Shunichi Suzuki said that Japanese and U.S. authorities were in close contact on currency moves. Japan’s monetary authorities have previously asserted that all options are on the table to cope with excess volatility in the foreign exchange markets.
Signs of wage growth coming through
Following the spring “shunto” labor talks, which concluded in March and secured the biggest pay increases in decades, nominal wages in Japan rose 2.5% year on year in May, well ahead of expectations. Households were still worse off in real (inflation-adjusted) terms, which weighed on consumption. The BoJ is closely watching for wage growth to become sustainable, with an eye on next year’s shunto negotiations. The central bank is adamant that the achievement of its 2% inflation target be accompanied by rising wages.
China
Chinese equities retreated as the latest economic data raised concerns about the country’s sputtering post-pandemic recovery. The Shanghai Stock Exchange Index fell 0.17% while the blue chip CSI 300 lost 0.44%. In Hong Kong, the benchmark Hang Seng Index plunged 2.91%.
The private Caixin/S&P Global survey of manufacturing activity eased to 50.5 in June from May’s 50.9 as expansion of manufacturing output and new orders softened. Index readings above 50 indicate growth from the previous month, while those under 50 denote contraction. The Caixin survey of services activity fell to a lower-than-expected 53.9 in June from 57.1 in May, its sixth successive monthly expansion but lowest reading since January. The weak Caixin data were in line with the official Manufacturing Purchasing Managers’ Index, which contracted in June for a third consecutive month.
Premier Li Qiang, the country’s second-highest ranking official, pledged to "spare no time" in implementing a batch of targeted policies to strengthen China’s post-pandemic recovery. Li stated that China is at a critical stage of economic recovery and industrial upgrading and that comprehensive, well-coordinated measures are necessary to stabilize growth and employment, Bloomberg reported, citing state-run media. However, Li did not offer details on any specific measures.
In central bank news, China’s leadership appointed Pan Gongsheng, deputy governor of the People’s Bank of China, as the top Communist Party official at the central bank. The move positions Pan to be the central bank’s next governor, The Wall Street Journal reported, citing unnamed sources. Economists interpreted the move as reinforcing policy stability, consistent with the central bank's current approach of modestly cutting interest rates and encouraging banks to lend more to targeted areas.
Other Key Markets
Chile
On Thursday, the Chilean central bank released the minutes from its June 19 policy meeting, at which the board voted to keep the monetary policy rate (MPR) unchanged at 11.25% in a 3 to 2 decision, with dissenters voting for a 50-basis-point rate cut. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the minutes were dovish and perhaps more balanced than he had previously anticipated.
The board mentioned that the macro adjustment process has advanced significantly, as implied by economic activity coming in line with the central bank’s forecast (i.e., growth being below potential for a few quarters), inflation continuing to fall, and inflation expectations now at the 3% target over policymakers’ two-year horizon. As a result, the board discussed two potential interest rate decisions for this meeting: staying on hold or cutting the MPR by 25 basis points.
While two board members favored a more aggressive 50-basis-point rate cut, at least two others pushed back because inflation is still high, core services are sticky, and the data suggest a more balanced outlook for the disinflation trend. Based on his analysis, Gifford concludes that, despite being on hold in this last meeting, policymakers are on the verge of beginning a rate-cutting cycle.
Mexico
On Thursday, the Mexican central bank released the minutes from its June 22 policy meeting, at which policymakers unanimously decided to keep the overnight interbank interest rate at 11.25%.
According to the minutes, most Governing Board meeting participants noted that “domestic economic activity has shown resilience in a complex external environment” and that “some recent indicators point to a deceleration in the second quarter.” Also, all meeting attendees “pointed out that the labor market remains strong” and that “the unemployment rate is at minimum historical levels.” As for inflation, all meeting participants observed that “annual headline inflation” has “continued decreasing, although it remains at high levels,” and that core inflation has been decreasing “more gradually than headline inflation.”
Most policymakers attending the meeting adhered to their projection that inflation should converge with the central bank’s 3% target in the fourth quarter of 2024. Nevertheless, all participants “agreed that the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside.” Considering that the Mexican inflationary outlook “is still very complex,” the Governing Board decided to leave its key rate unchanged, with policymakers expecting to keep it “at its current level for an extended period.”
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