Global Markets Weekly Update: June 09, 2023
U.S.
S&P 500 enters bull market
Stocks closed modestly higher in a week of relatively subdued trading ahead of the Federal Reserve’s policy meeting and rate announcement on the following Wednesday. The week was notable for the S&P 500 Index moving into bull market territory, or up more than 20% off its mid-October lows. It was also notable for broadening market gains, with small-caps outperforming large-caps, and value shares outperforming growth stocks. An equally weighted S&P 500 Index also rose more than its capitalization-weighted counterpart for the first time in eight weeks and by the largest margin since late March.
T. Rowe Price traders noted that several prominent investment conferences and events took place during the week, including the Paris Air Show and conferences on energy and consumer stocks, which seemed to drive sentiment. Apple’s annual developer’s conference also made headlines as the world’s most valuable public company unveiled its first major new product in several years, a virtual reality headset. Investors seemed to react negatively to the USD 3,500 price of the device, but the stock recovered some of its losses later in the week. Oil prices rose Monday morning after Saudi Arabia announced a unilateral production cut over the previous weekend but fell back to end the week lower.
Jobless claims hit highest level since October 2021
The week’s relatively light economic calendar seemed to support investor sentiment—if not necessarily hopes that the economy would avoid a recession. On Thursday, the Labor Department reported that weekly jobless claims had jumped to 261,000, well above expectations and the highest level since October 2021. Continuing claims fell back unexpectedly and hit their lowest level in nearly four months, however. An overall index of economic optimism published by TechnoMetrica Market Intelligence and Investor's Business Daily remained roughly steady, but the index’s gauge of Americans’ outlook for the next six months fell to its lowest level since November.
Data released on Tuesday showed a surprisingly large contraction in the services sector, but the silver lining for investors was evidence of a continuing decline in services prices, which have remained “sticky” in relation to moderating prices for goods, food, and energy. The Institute for Supply Management’s gauge of prices paid for services moderated to its lowest level since May 2020, while its gauge of overall activity in the services sector fell to 50.3, indicating virtually stalled growth (levels over 50 indicate expansion).
FDIC continues to offload munis
Longer-term Treasury yields rose modestly over the week, although some speculation mounted about how the market would accompany a flood of issuance of short-term bills now that the federal debt ceiling has been raised. According to our traders, strong summer technicals continued to support tax-exempt municipal bonds. Our traders noted that new issues and municipal bond sales by the Federal Deposit Insurance Corporation (FDIC) saw adequate demand. The FDIC is liquidating the muni bonds it obtained after taking three large regional banks into receivership.
Our traders noted that the investment-grade corporate bond market had a front-loaded supply of issuance, followed by a steady influx throughout the week. Total weekly issuance more than doubled expectations but was met with adequate demand. Meanwhile, our traders reported that many high yield investors reduced exposure to BB rated bonds while looking to add lower-rated securities with lower dollar prices and higher yields.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,876.78 |
114.02 |
2.20% |
S&P 500 |
4,298.86 |
16.49 |
11.96% |
Nasdaq Composite |
13,259.14 |
18.38 |
26.68% |
S&P MidCap 400 |
2,542.37 |
36.82 |
4.61% |
Russell 2000 |
1,865.71 |
34.80 |
5.93% |
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 0.46% lower amid caution ahead of central bank meetings in Europe and the U.S. Major stock indexes were mixed. Germany’s DAX eased 0.63% and France’s CAC 40 Index fell 0.79%, while Italy’s FTSE MIB gained 0.35%. The UK’s FTSE 100 Index lost 0.59%.
ECB officials acknowledge ease in inflation but indicate rates still need to rise
European Central Bank (ECB) officials signaled that borrowing costs are likely to rise again in June, although there appeared to be less unanimity on implementing rate increases in subsequent months.
ECB President Christine Lagarde and Bundesbank chief Joachim Nagel reiterated their hawkish stance for more rate increases, pointing out that there were few signs of easing in underlying price pressures. However, Dutch central bank Governor Klaas Knot appeared to have joined the less hawkish policymakers. While acknowledging that rates would still have to rise, Knot dropped his previous insistence on increases in June and July. He said rate decisions must be taken step by step as there was more evidence that tighter monetary policy was working.
Median consumer expectations for eurozone inflation in the year ahead fell in April to 4.1% from 5.0% in March, according to an ECB survey.
Eurozone falls into mild recession; retail sales falter; German industry worsens
Revised data showed that the eurozone economy shrank by 0.1% sequentially in both the first quarter of this year and the final three months of 2022, meeting the technical definition of a recession.
Meanwhile, flat eurozone retail sales in April indicated that consumption remained weak. Germany’s industrial sector also continued to deteriorate. Factory orders unexpectedly fell 0.4% compared with March, while industrial output grew 0.3% sequentially—less than the 0.5% uptick expected by economists polled by FactSet.
UK housing market weakens
The UK’s two largest mortgage lenders, Halifax and Nationwide Building Society, reported that house prices fell significantly in April, a sign that the market recovery may be faltering. Even so, the Royal Institution of Chartered Surveyors said its May housing market survey showed the main measures for house prices, new inquiries, and sales agreements improved month over month but remained in negative territory.
Japan
Japan’s stock markets rose over the week, reaching fresh 33-year highs, with the Nikkei 225 Index gaining 2.4% and the broader TOPIX Index up 1.9%. Sentiment was supported by an upward revision to Japan’s first-quarter economic growth, on account of stronger corporate investment, as well as hopes that the services sector—which could benefit from rebounding foreign inbound tourism—will drive further expansion.
The yen remained close to a six-month low against the U.S. dollar, trading in the higher JPY 139 range, as the ongoing monetary policy divergence between the dovish Bank of Japan (BoJ) and the other major central banks, which largely remain in tightening mode, weighed on the Japanese currency. The weak yen continued to benefit Japan’s exporters as well as boosting the attractiveness of local assets to foreign investors. Japan’s financial authorities recently stated that they are closely watching currency market moves and will respond appropriately as needed, not ruling out any option available if necessary.
Uncertainty ahead of BoJ June monetary policy meeting
The yield on the 10-year Japanese government bond rose to 0.43% from 0.41% at the end of the previous week. The yield was broadly range-bound ahead of the BoJ’s June 15–16 monetary policy meeting. Expectations that the central bank will again tweak its yield curve control framework have fallen to some degree as BoJ Governor Kazuo Ueda has repeatedly stated that the central bank will patiently continue with monetary easing until it achieves its 2% price stability target in a sustainable and stable manner, accompanied by wage increases. He said during the week that there is still some distance to achieving that target and that there is uncertainty surrounding the inflation outlook.
Upward revision to Q1 GDP boosts sentiment
Japan’s economy grew by more than initially estimated over the first quarter of 2023, according to revised figures released by the Cabinet Office. Gross domestic product (GDP) expanded by an annualized 2.7% quarter on quarter, ahead of the initial 1.6% reading and more than forecast by economists. Much of the upward revision to first-quarter GDP was due to stronger corporate investment, with businesses increasing their spending as sentiment remained resilient despite concerns about slowing global and particularly Chinese growth.
China
Chinese equities were mixed after the latest inflation data increased concerns about the country’s faltering post-pandemic recovery. The Shanghai Stock Exchange Index rose 0.04% while the blue chip CSI 300 declined 0.65% in local currency terms. In Hong Kong, the benchmark Hang Seng Index gained 2.32%, extending the previous week’s gains.
May inflation figures pointed to rising deflation risks weighing on China’s economy, which is dealing with weak domestic and overseas demand, a sluggish property market, and high youth unemployment. China’s consumer price index rose 0.2% in May from a year earlier, compared with April’s 0.1% expansion, a 26-month low. Core inflation, which excludes volatile food and energy prices, slowed to 0.6% from the previous month’s 0.7%. The producer price index fell a worse-than-expected 4.6%, accelerating from a 3.6% decline in April, and marked the weakest reading since May 2020.
Services sector enjoying solid growth
However, the private Caixin/S&P Global survey of services activity rose to 57.1 in May, up from April’s 56.4, its fifth successive monthly expansion since Beijing lifted pandemic restrictions in December. The Caixin survey of manufacturing activity, released the prior week, also unexpectedly rose to 50.9 in May. The bullish Caixin data countered the official manufacturing Purchasing Managers’ Index (PMI), which contracted in May for a second consecutive month. Index readings above 50 indicate growth from the previous month.
On the trade front, China’s exports fell 7.5% in May from a year ago, trailing estimates and marking the first decline in three months as global demand weakens. Imports shrank 4.5%, above forecasts.
The latest data raised expectations that the People’s Bank of China (PBOC) would introduce further support measures to bolster growth. Economists predict that the PBOC may reduce the reserve requirement ratio and interest rates later this year to boost demand amid growing evidence that the post-pandemic recovery is losing momentum.
Other Key Markets
Australia, Canada surprise with rate hikes
The central banks of Australia and Canada surprised many observers by raising their benchmark interest rates during the week, a sign that policymakers believe that high inflation has not yet been completely corralled.
The Reserve Bank of Australia (RBA) defied expectations for the second straight month that a pause was coming and lifted its policy rate by a quarter percentage point to an 11-year-high of 4.10%. According to T. Rowe Price analysts, the decision to hike appeared to be driven by the risk of persistently high inflation, with the RBA’s post-meeting statement emphasizing that “services inflation is still very high” while also noting the costs associated with higher inflation expectations.
Higher frequency measures of price pressures, such as PMIs, and some forward-looking measures suggest that inflation could be easing in coming quarters. In addition, there are also signs that the labor market has been loosening. However, despite the weaker data, our analysts believe that, because of its focus on spot inflation, another hike is likely in July or August.
The Bank of Canada’s (BoC’s) decision to end its four-month pause and resume hiking was less of a surprise as forecasts had been more mixed. The quarter-point hike raised the BoC policy rate to 4.75%, a 22-year high. The move came after inflation ticked up to 4.4% in April from 4.3% the previous month.
Saudi Arabia cuts oil production
The price of oil initially rose at the start of the week after Saudi Arabia announced that it was cutting 1 billion barrels per day of production in July, which represents about 10% of the country’s production capacity, with an option to extend the cut in coming months. The move followed an OPEC meeting where other members, while not offering additional cuts, agreed to extend their existing production limits from the end of this year to the end of 2024.
The oil market also reacted to reports that the U.S. and Iran had resumed talks on nuclear enrichment and oil exports, which briefly sent prices lower, although the White House later denied the story. Despite the headlines, oil prices on Friday looked to be little changed from the previous week’s close.
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