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Global Markets Weekly Update: July 28, 2023
U.S.
Dow notches longest winning streak since 1987
Stocks ended higher over a week notable for the Dow Jones Industrial Average’s notching its 13th consecutive daily gain on Wednesday, which marked its longest winning streak since 1987. However, T. Rowe Price traders noted that trading was relatively subdued, as the summer vacation season diverted some of the focus on a slew of important data releases, a Federal Reserve (Fed) policy meeting, and some high-profile corporate earnings reports. Growth stocks handily outpaced their value counterparts, and the gains were led by the technology-heavy Nasdaq Composite.
Sentiment appeared to get a boost from a series of generally positive economic readings, particularly on inflation. Stocks opened sharply higher on Friday, following news that the Fed’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index had risen 0.2% in June, down from 0.3% in May, making for a year-over-year increase of 4.1%, a tick lower than expectations and the slowest increase since September 2021. In addition, the employment cost index—closely watched because of policymakers’ continued concern about wage inflation—rose 1.0% in the second quarter, also below consensus and the smallest increase in two years.
Hopes grow for a soft landing
Moreover, the week’s data suggested that the economy might manage a soft landing and skirt a recession even as borrowing costs increased. On Wednesday, the Commerce Department reported that the economy had expanded at a year-over-year pace of 2.4% in the quarter, well above both the previous quarter’s growth rate of 2.0% and consensus expectations of around 1.8%. Both businesses and consumers appeared to remain in good shape and spending freely. Durable goods orders jumped 4.7% in June, while personal spending rose 0.5%. Pending home sales also rose unexpectedly.
Plummeting expectations for further rate hikes in 2023
The Fed announced a 0.25% increase in the federal funds target rate following the conclusion of its two-day policy meeting on Wednesday, as expected. Our traders noted that the tone of the Fed’s official statement was received as relatively benign, however, and expectations grew that the Fed was done raising rates, at least for the year. In his post-meeting press conference, Fed Chair Jerome Powell acknowledged that “restrictive” monetary policy was now “putting downward pressure on economic growth and inflation,” but he stressed that further changes to interest rates would be guided by incoming data. According to the CME FedWatch Tool, futures markets ended the week pricing in only a 27.4% chance of further rate hikes by the end of the year compared with a 90.8% chance the week before.
Friday’s reassuring inflation data helped push down U.S. Treasury yields somewhat, but the yield on the benchmark 10-year note still ended the week sharply higher on the strong growth signals. (Bond prices and yields move in opposite directions.) According to our traders, the tax-exempt municipal bond market had a relatively quiet week, but recent new issues performed well, led by higher-yielding bonds.
Spreads tightened throughout the week in the investment-grade corporate bond market, led by mid-tier banks. Investment-grade securitized credit, including asset- and commercial mortgage-backed securities also outperformed, thanks to light new supply and a very active market in collateralized loan obligations.
Riskier bonds fall on Japan rate move
According to T. Rowe Price traders, high yield securities felt some pressure as risk assets turned lower on news that the Bank of Japan (BoJ) had announced a potential change to its yield curve control policy (see below). Although a few new deals were announced, early August is expected to be busier in terms of primary issuance. Meanwhile, loan investors mostly seemed to be focused on the primary calendar and single-name headlines amid earnings season.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,459.29 |
231.60 |
6.98% |
S&P 500 |
4,582.23 |
45.89 |
19.34% |
Nasdaq Composite |
14,316.66 |
283.85 |
36.79% |
S&P MidCap 400 |
2,716.87 |
11.05 |
11.79% |
Russell 2000 |
1,981.54 |
21.28 |
12.51% |
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 what was a busy week of economic news and data, the pan-European STOXX Europe 600 Index, Italy’s FTSE MIB, France’s CAC 40 Index, Germany’s DAX, and the UK’s FTSE 100 Index advanced. Despite the Federal Reserve and the European Central Bank (ECB) announcing interest rate increases, investor sentiment appeared to receive a lift from the dovish tone struck by policymakers. Reports from China early in the week, which suggested that authorities are considering further support to boost the world's second-largest economy, also encouraged investors.
European yields move higher in volatile week
Eurozone bond yields climbed on concerns that the prospect of higher Japanese yields (see Japan section for details) could prompt an exodus of Japanese investors from that market, but yields steadied as the week wound down. The yield on Germany's 10-year sovereign bond, for example, rose above 2.56% before finishing the week around 2.49%. Swiss and French bonds experienced similar volatility. UK government bond yields also ended higher.
Spain faces political uncertainty, and eurozone business activity slows
The week started on a cautious note, following an inconclusive election outcome in Spain. The country now faces a period of near-term uncertainty as parties at each end of the political spectrum jockey to form a majority coalition government or else face another election.
Data released in the week showed a slowdown in regional business activity. The Flash Eurozone Composite PMI Index, an initial gauge of activity in the manufacturing and services sectors, fell to an eight-month low of 48.9 in July from 49.9 in June. At a country level, Purchasing Managers’ Index (PMI) readings in France and Germany were both weaker for the month.
In Germany, the IFO business climate index fell for the third straight month to 87.3 in July from 88.6 the previous month. On an encouraging note, the UK business sentiment index recorded a positive score for the three months to July.
ECB raises rates but hints at pause in monetary tightening
The ECB increased interest rates to a record-equaling high of 3.75% in a largely expected move. The bank cited the prospect of euro area inflation staying too high for too long as a key reason for the 0.25-percentage-point hike. However, it also suggested that it was keeping an open mind about future rate decisions and hinted that a pause in monetary tightening could be on the horizon.
Annual inflation in the euro area came in at 5.5% in June, down from 6.1% in May but still well above the ECB’s 2% target. Preliminary July inflation readings at a country level provided mixed messages. Data showed that price growth in France cooled more than expected to 5% in July from 5.3% in June. However, adjusted Spanish inflation came in at 2.1% in July, up from 1.6% in June and against expectations of another flat 1.6% print.
Japan
Japan’s stock markets rose over the week, with the Nikkei 225 Index up 1.4% and the broader TOPIX Index gaining 1.3%. The Bank of Japan surprised investors by tweaking its monetary policy, announcing that it would increase flexibility around its yield curve control (YCC) target. As widely expected, the BoJ also revised up its forecast for consumer price inflation in fiscal 2023.
The yield on the 10-year Japanese government bond (JGB) rose to 0.55%, from 0.48% at the end of the previous week, to its highest level in around nine years on the BoJ’s monetary policy tweak and in anticipation of further normalization. The yen strengthened to around JPY 139.8 against the U.S. dollar from the prior week’s JPY 141.8.
BoJ tweaks monetary policy, revises up inflation forecast
Following its July 28–29 monetary policy meeting, the BoJ decided to keep its key short-term interest rate unchanged at -0.1% and that of 10-year JGB yields around zero percent. It judged that a sustainable and stable achievement of its 2% price stability target had not yet come in sight.
However, the central bank surprised investors with the announcement that it would conduct YCC with greater flexibility to enhance the sustainability of monetary easing under the current framework. While it will continue to allow 10-year JGB yields to fluctuate in a range of around plus and minus 0.5% from the zero percent target level, greater flexibility means that it will regard the upper and lower bounds of the range as references, not as rigid limits, in its market operations. The BoJ will also offer to buy 10-year JGBs at 1.0% (changed from 0.5%) every business day through fixed rate purchase operations.
In its Outlook for Economic Activity and Prices, the BoJ left its projected real economic growth rates more or less unchanged, anticipating that gross domestic product will expand 1.3% year on year (y/y) in fiscal 2023. The central bank revised up its forecast for the consumer price index (CPI) in fiscal 2023 to 2.5% y/y from 1.8%. The significant upward revision is mainly due to the fact that cost increases, led by the past rise in import prices, have been passed on to consumer prices to a greater extent than expected. There was not much change to the central bank’s CPI forecasts for fiscal 2024 (+1.9%) and fiscal 2025 (+1.6%).
China
Chinese equities rallied after Beijing signaled it will provide more stimulus to support the economy. The Shanghai Stock Exchange Index gained 3.42%, while the blue chip CSI 300 soared 4.47%. In Hong Kong, the benchmark Hang Seng Index rose 4.41%.
The Communist Party’s Politburo, China’s top decision-making body led by President Xi Jinping, pledged to provide stimulus to boost domestic consumption amid a flagging recovery after the end of pandemic lockdowns in December. Officials also vowed to enhance support for the ailing real estate sector following the Politburo’s latest meeting, during which leaders set economic policy for the rest of 2023. Despite signaling a pro-growth stance, however, the post-meeting statement contained no specific policy measures.
Economists lowered their growth forecasts for China as it continues to grapple with weak demand. China’s gross domestic product is projected to expand 5.2% this year, down from previous estimates of 5.5%, while growth for 2024 is forecast to expand 4.8%, according to economists surveyed by Bloomberg. The revisions came after China recently reported its economy grew at a slower-than-expected pace in the second quarter amid weakening domestic and external demand.
In central bank news, China’s leadership appointed Pan Gongsheng as the governor of the People’s Bank of China. The move was expected after Pan was named the Communist Party's secretary at the central bank earlier in July.
Industrial profits extend declines as demand weakens
Profits at industrial firms declined 8.3% in June from a year earlier, a slower pace than the 12.6% drop recorded in May, according to China’s statistics bureau. Industrial profits fell 16.8% from January to June from a year earlier, better than the 18.8% drop recorded in the first five months of 2023. Despite an overall improvement in manufacturing activity, profits have been under pressure as recent data indicated that China is on the verge of slipping into deflation.
Other Key Markets
Hungary
On Tuesday, as was widely expected, the National Bank of Hungary (NBH) reduced its depo rate—the interest rate paid on optional reserves—by 100 basis points from 16.00% to 15.00%. The NBH also reduced the overnight collateralized lending rate from 18.50% to 17.50%. This interest rate is considered the upper limit of an interest rate “corridor” for the central bank base rate, which remained at 13.00%. The lower limit of the corridor is the overnight deposit rate, which remained at 12.50%.
According to the central bank’s post-meeting statement, a “rapid decline in inflation continued in June,” and policymakers are predicting that, in the coming months, “domestic inflation and core inflation will continue to decrease at a rapid pace.” They also expect inflation, currently around 20%, “to reach single digits by the end of the year, while core inflation may fall at a slightly slower pace.”
T. Rowe Price sovereign analyst Ivan Morozov believes that the NBH plans to continue reducing the depo rate over the next couple of months—assuming the forint remains fairly stable in the foreign exchange market against the euro—until it matches the 13% base rate. From that point onward, he believes central bank interest rate cuts will continue, but at a slower pace.
Brazil
During the week, the government issued its mid-month inflation report for July. According to T. Rowe Price sovereign analyst Richard Hall, the latest inflation data (-0.07% month over month, which was a bit lower than expected) continue a recent streak of modest disinflationary surprises. Hall says that month-over-month deflation was primarily a function of non-core line items, such as lower food prices due to the harvest, lower residential electricity costs due to a tax impact, as well as the temporary impact of the government’s car-buying incentive program.
With more of the service items indicating flat or declining costs, Hall believes that this latest disinflationary surprise could persuade policymakers to consider cutting the Selic rate by 50 basis points rather than 25 basis points when they next meet. The Selic rate, currently at 13.75%, is well above the year-over-year inflation rate, currently around 3%. Hall, however, believes that inflation will creep back up toward 5% in a few months purely due to base effects, as some preelection tax cuts expire.
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