Global Markets Weekly Update: June 11, 2021
U.S.
Falling Treasury yields boost growth stocks
A sharp decrease in longer-term bond yields appeared to help push the S&P 500 Index to a record high in a week of relatively light summer trading. The decline in yields favored growth stocks by reducing the implied discount on future earnings while weighing on financials by threatening bank lending margins. The technology-heavy Nasdaq Composite Index outperformed and marked its fourth consecutive weekly gain, while the narrowly focused Dow Jones Industrial Average recorded a modest loss. Health care stocks led within the S&P 500, boosted by gains in Biogen. The drugmaker’s shares rose sharply after the Food and Drug Administration surprised some by granting broad authorization to its new Alzheimer’s disease treatment, Aduhelm.
Headline inflation hits 13-year high, but longer-term inflation expectations fall
Interest rates and inflation seemed to continue to dominate sentiment. The yield on the benchmark 10-year U.S. Treasury note decreased throughout most of the week, seemingly pushed lower by recent assurances from Federal Reserve policymakers that they would keep monetary policy highly accommodative for “some time” and that the recent spike in inflation would prove temporary. On Thursday, yields jumped briefly after the Labor Department reported that core (less food and energy) consumer prices had risen 0.7% in May, well above the consensus estimate of 0.4%. The annual headline print reached a 13-year high of 5.0%, while the one-month reading totaled 0.6%, due in large part to a jump in used car prices.
Longer-term inflation expectations appeared to remain contained, however. The University of Michigan’s survey of consumer sentiment, released Friday, showed that Americans expected prices to rise 4% in the current year, versus the previous month’s read of 4.6%. Consumers also grew more confident, with the survey’s overall sentiment gauge reversing much of May’s decline.
Policy developments may have also supported sentiment. On Thursday, a bipartisan group in the Senate reached a deal on an infrastructure plan that would not raise corporate taxes, as the Biden administration had proposed. The plan would also include USD 762 billion in new spending, significantly less than the roughly USD 2 trillion the White House had originally requested. According to reports, Republican leaders indicated they were open to the proposal, but it remained unclear if the president and Democratic leaders in Congress would agree to the scaled-back plan.
Municipals touch historic valuation peak
U.S. Treasuries rallied through most of the week as many investors looked to unwind positions that would benefit from price declines as the yield on the 10-year U.S. Treasury note fell to its lowest level in three months. (Bond prices and yields move in opposite directions.) The broad municipal bond market also generated gains through most of the week. In addition to the tailwind from falling Treasury yields, tax-exempt bond performance was aided by the 14th consecutive week of positive flows into municipal bond funds, according to Lipper data. T. Rowe Price traders noted on Wednesday that the ratio of 30-year tax-exempt AAA bond yields compared with those of 30-year Treasuries—a gauge of relative value in the municipal bond market—reached its lowest level in history.
According to our traders, the primary calendar was active in the investment-grade corporate bond market, and the heavy supply was met with strong demand. Trading volumes in the secondary market were relatively light, and credit spreads—yields relative to Treasuries, and an inverse measure of the sector’s relative appeal—remained largely steady. However, subdued issuance and an increase in demand from Asia led spreads tighter on Thursday.
T. Rowe Price traders reported that the high yield space was fairly quiet for most of the week as broader risk markets weighed the inflation versus growth debate, monitored infrastructure spending talks in Washington, and awaited inflation data. Although price increases in May were higher than expected, our traders noted that investors appeared to continue embracing the transitory inflation thesis for the time being.
Index |
Friday's Close |
Week’s Change |
% Change YTD |
---|---|---|---|
DJIA |
34,479.60 |
-276.79 |
12.65% |
S&P 500 |
4,247.44 |
17.55 |
13.08% |
Nasdaq Composite |
14,069.42 |
254.93 |
9.16% |
S&P MidCap 400 |
2,752.17 |
23.50 |
19.32% |
Russell 2000 |
2,335.81 |
49.40 |
18.28% |
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 Associates’ presentation thereof.
Europe
Shares in Europe gained ground for a fourth consecutive week, lifted in part by the European Central Bank’s (ECB) pledge to continue its high rate of bond purchases into the coming quarter. In local-currency terms, the pan-European STOXX Europe 600 Index ended 1.09% higher. France’s CAC 40 Index rose 1.30%, while Italy’s FTSE MIB Index advanced 0.57%. Germany’s Xetra DAX Index was little changed. The UK’s FTSE 100 Index gained 0.92%.
Eurozone government bond yields largely fell, reflecting the ECB’s commitment to continue its bond-buying program at the current pace for another quarter. The central bank forecast also called for inflation to subside and come in well below its target in 2023. UK gilt yields broadly tracked yield in core markets.
England set to delay reopening
Fears rose that England’s full reopening of society would be delayed for some weeks beyond the June 21 target date because of the new, faster-spreading “Delta” variant of the novel coronavirus. UK Prime Minister Boris Johnson said infections and hospitalizations were clearly increasing and that a data-driven decision on the best course of action could be announced on June 14. The Financial Times newspaper reported that civil servants had begun drawing up contingency plans to delay the lifting of restrictions.
ECB policy unchanged; BoE’s Haldane warns on inflation
The ECB left its key policy measures unchanged and said that it would maintain emergency bond-buying at a higher pace for the next quarter, even though the central bank’s updated forecasts called for higher rates of inflation and economic growth. ECB President Christine Lagarde said at a press conference that inflation would accelerate this year and then slow in 2022.
The ECB expects eurozone inflation of 1.9% in 2021, up from the previous estimate of 1.5%. The central bank’s revised forecast calls for inflation to slow to 1.4% in 2023. The eurozone economy is expected to grow 4.6% this year and 4.7% next year—in both instances, a 60-basis point increase from the ECB’s previous forecast. The ECB said the risks to growth are now “balanced” rather than skewed to the downside.
In the UK, outgoing Bank of England (BoE) chief economist Andy Haldane warned that the BoE could face an inflationary spiral if it does not act quickly. The economy expanded 2.3% in April, the fastest rate since July, driven by growth in services as lockdown measures eased.
German industry production and factory orders fall
German industrial production and factory orders unexpectedly declined in April, a sign that the economic rebound could be stuttering. Industrial output fell by 1.0% sequentially, confounding expectations for an increase. Auto output weakened for a second month and was 24% below its February 2020 level. Factory orders contracted by 0.2%, whereas one consensus estimate had called for a 1.0% increase.
Japan
Japan’s stock market returns were broadly unchanged for the week, with the Nikkei 225 Index up 0.02% and the broader TOPIX Index falling 0.26%. While the domestic economic recovery remains fragile, sentiment was boosted by the government lifting the coronavirus quasi-states of emergency in three prefectures in the face of steadily declining infection rates and easing pressure on hospitals. The yield on the Japanese 10-year government bond fell to 0.03%, its lowest level since January, as the U.S. Centers for Disease Control and Prevention announced it was easing travel recommendations for more than 110 countries and territories, including Japan just ahead of the Olympics. The yen continued to hover around the JPY 109.5 level against the U.S. dollar.
Japan’s first-quarter GDP revised upward
Sentiment was lifted as the Cabinet Office reported that Japan’s first-quarter gross domestic product (GDP) shrank by less than initially estimated. The economy contracted by an annualized 3.9% from the final quarter of 2020, compared with a preliminary reading of -5.1%. This helped ease concerns about a double-dip recession amid yet another round of coronavirus restrictions and offered some hope that an economic recovery will take off once the states of emergency currently in place are lifted. The narrower contraction came from minor revisions in domestic demand, notably a bigger increase in private inventory, while the contribution from external demand was unrevised.
Sentiment among large Japanese firms falls again
The quarterly business sentiment index for large manufacturers compiled by the Ministry of Finance and the Cabinet Office showed a worsening for the second straight quarter, as a global semiconductor shortage and Japan’s third state of emergency over the coronavirus pandemic weighed on sentiment. The chip shortage has led to cuts in car output, dampening sentiment among auto-related firms. This outweighed optimism among information technology and nonferrous metals companies.
BoJ holds off on buying ETFs in May
The Bank of Japan (BoJ) refrained from exchange-traded fund (ETF) purchases in May—for the first full month since Haruhiko Kuroda became the central bank’s governor in 2013. This signaled a tentative retreat from its stimulus program, following the BoJ’s announcement in March that it would no longer set a numerical target for the pace of its purchases of ETFs and would step into the market only in times of severe market stress. Opposition politicians have put pressure on Kuroda to detail the central bank's exit strategy from the ultra-loose monetary policy it has pursued for years, although investors widely expect it to remain on the same trajectory, for the foreseeable future and longer than other major central banks, in pursuit of its elusive 2% inflation target.
China
Chinese stocks fell for a second week. The CSI 300 Index of large-cap stocks fell 1.1%, while the broader Shanghai Composite Index edged down 0.1%, according to Reuters. News that the authorities in Guangzhou renewed COVID-19 controls in the face of a fresh outbreak in the southern coastal city weighed on sentiment early in the week. In response, Macau banned nonresidents from entering the offshore enclave via neighboring Guangdong province, causing casino shares to weaken.
More positively, state media reported that the U.S. and China agreed to renew talks on improving trade and investment ties, while U.S. President Biden said he would review a Trump administration decision to ban Chinese mobile apps TikTok and WeChat. T. Rowe Price traders noted interest in renewable energy stocks after China’s President Xi Jinping announced plans to develop Qinghai province as a clean energy hub and green agricultural produce supplier.
In China's bond markets, the trend in yields since late May has been gradually higher. The yield on the 10-year Chinese government bond rose four basis points to close at 3.15% following higher producer price inflation. In currency markets, the RMB (renminbi) finished flat against the U.S. dollar in a week marked by near-zero volatility.
New credit growth slows
Many analysts believe that China’s central bank wants to maintain stable financial conditions ahead of the ruling Communist Party’s centennial celebrations on July 1. New local currency bank loans grew by RMB 1.5 trillion, up slightly from April, according to May credit data released by the central bank. Total social financing (TSF), China's broadest measure of new credit, also rose slightly to RMB 1.92 trillion. While the growth in bank credit came in slightly above the consensus forecast, TSF growth slowed to 11.0% year over year from 11.7% in April.
China's slowing credit growth this year is mostly due to the very high base last year when the government unleashed more credit to support the pandemic-hit economy. Companies and state-owned enterprises substituted bank loans for cash flow, while net government bond issuance rose with increased fiscal stimulus. Economists expect that China’s credit growth will level out rather than continue declining.
PPI surges to highest level since 2008
China's inflation data for May were mixed. The producer price index (PPI) rose to 9.0% year over year from 6.8% in April due to higher commodity prices. The bigger-than-expected jump in the PPI marked its highest level since 2008, according to Bloomberg, raising worries that rising factory gate inflation in China would contribute to inflationary pressures globally.
Meanwhile, the consumer price index (CPI) rose a below-forecast 1.3% in May from 0.9% in April, with the increase driven by higher energy prices. Many analysts believe there is little risk of an interest rate hike at this point given that CPI inflation remains well below the central bank’s 3.0% target. Moreover, a rate hike would run counter to Beijing’s other policy goals, including restraining the rate of currency appreciation and spurring household consumption.
Other Key Markets
Mexico
Mexican stocks, as measured by the IPC Index, returned about 1.6%.
Mexican financial assets seem to have responded favorably to the results from Sunday’s midterm elections—one of the largest in the nation’s history. All 500 seats in the Lower House of the legislature were up for grabs (300 by simple majority and 200 by proportional representation). Elections were also held for 15 of the country's 32 governorships, legislators in 30 states, and thousands of local officials.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the election results indicate that President Andrés Manuel López Obrador’s Morena coalition in the Lower House will keep a simple majority, which means that he and his allies will continue to control the legislative agenda, including the budget and that there will be policy continuity in macroeconomic matters. However, the coalition has lost some seats in Congress—possibly a reflection of dissatisfaction with the government’s response to the pandemic and economic weakness—which should result in more checks and balances against questionable policies. More significantly, Morena’s loss of seats means the loss of its qualified, two-thirds majority needed to pass constitutional reforms, which Gifford believes should reduce the coalition’s ability to push through controversial reforms, particularly in matters involving the energy sector and the judiciary.
Brazil
Shares in Brazil, as measured by the Bovespa Index returned about -0.5%.
During the week, the government reported that inflation in the month of May was measured at 0.83% on a month-over-month basis, which was higher than expected. T. Rowe Price sovereign analyst Richard Hall notes that annual inflation has now reached 8.06% year over year and that—contrary to policymakers’ official stance that the pickup in prices is temporary—the inflationary impulse is starting to look pretty generalized. Electricity prices are the main culprit in the May data, and Hall expects another electricity price increase to be reflected in June inflation data due to the low water reservoir surcharge. Nevertheless, Hall sees a broader pickup in goods inflation, as well as an uptick in currently low services inflation.
Given strong economic growth data and this most recent upside inflationary surprise, many believe that the central bank will raise the Selic interest rate again when monetary officials meet on June 15–16. Hall also believes that policymakers will be notably more hawkish in their deliberations and their post-meeting commentary.
IMPORTANT INFORMATION
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision. T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation, or a solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2021 T. Rowe Price. All rights reserved.