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Global Markets Weekly Update: June 16, 2023
U.S.
Rally continues on calming inflation fears
Favorable inflation and growth signals appeared to help stocks continue a rally that began with only a few interruptions in late May. The S&P 500 Index notched its longest stretch of daily gains since November 2021 and its best weekly performance since the end of March. The market’s advanced narrowed a bit, however, as reflected in the renewed outperformance of growth stocks and large-caps. Markets were scheduled to be closed the following Monday in observance of the Juneteenth holiday.
Consumer inflation measure at lowest level since late 2021
Several signs emerged that the economy was arguably enjoying a “Goldilocks” expansion of continued growth alongside falling inflation. On Tuesday, the Labor Department announced that the consumer price index had increased at a year-over-year pace of 4.0%—still double the Federal Reserve’s target, but down from the prior month’s 4.9% and the slowest pace since March 2021. On Thursday, the Labor Department revealed that producer prices had declined 0.3% in May, marking four declines over the past six months.
While falling producer prices partly reflected an ongoing contraction in the manufacturing sector (as well as a substantial drop in food and gasoline prices), investors received some good news on the consumer side of the economy. On an overall basis, retail sales rose 0.3% for the month and 1.6% over the past 12 months, marking the first year-over-year increase since January. Excluding the volatile auto and gasoline segments, sales rose 0.4% in May. Meanwhile, the University of Michigan’s gauge of consumer sentiment rose more than expected and hit its highest level in four months. Weekly jobless claims were unchanged, however, defying consensus expectations for a decline from the previous week’s 20-month high.
More of a skip than a pause?
The hopeful inflation data may have helped investors absorb a somewhat hawkish outlook from Fed policymakers. On Wednesday, officials announced that they were holding the official federal funds target rate steady in the 5.00% to 5.25% range. However, the “dot plot” summarizing each policymaker’s rate expectations suggested that this was more of a “skip” than a durable “pause” in their rate-hiking schedule, as the median rate projection suggested two more quarter-point hikes by the end of the year.
The major benchmarks pulled back on the release of the data, but our traders noted that the hawkish dot plot seemed to be offset by Chair Jerome Powell’s following press conference, which was interpreted as a bit more dovish. Powell stressed repeatedly that the policy committee had not made any decision about raising rates and that any further moves would depend on incoming growth and inflation data. “We've moved much closer to our destination,” Powell also allowed, “which is that sufficiently restrictive rate, and I think that means by almost by definition that the risks of sort of overdoing it and…underdoing it are getting closer to being in balance.”
Bond markets take Fed decision in stride
Despite the Fed’s policy announcement, our traders noted that fixed income markets were calm overall, with limited issuance and credit spread movements in most sectors, which may have reflected light activity in advance of the upcoming holiday weekend. Our traders noted an active secondary market in bank loans, however, amid steady demand for discounted loans and as some investors sought to take profits following recent strong performance.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,299.12 |
422.34 |
3.48% |
S&P 500 |
4,409.59 |
110.73 |
14.85% |
Nasdaq Composite |
13,689.57 |
430.43 |
30.79% |
S&P MidCap 400 |
2,580.07 |
37.70 |
6.16% |
Russell 2000 |
1,875.47 |
9.76 |
6.49% |
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 rallied 1.47% as the U.S. Federal Reserve refrained from raising rates this month. Hopes that China might implement stimulus measures likewise appeared to lift stocks. Major equity indexes also advanced. Germany’s DAX gained 2.56%, France’s CAC 40 Index tacked on 2.43%, and Italy’s FTSE MIB climbed 2.58%. The UK’s FTSE 100 Index added 1.06%.
The 10-year German government bond yield climbed above 2.5% after the European Central Bank (ECB) raised interest rates and signaled more tightening was likely. Swiss and French yields also headed higher. Short-end UK gilt yields surged to their highest levels since 2008 after data showed UK wages increased more than expected in April, fueling expectations of a further increase in borrowing costs.
ECB raises interest rates as expected and still has “ground to cover”
The ECB raised its key deposit rate by a quarter-point to 3.5%—the highest level in 22 years. ECB President Christine Lagarde said after the meeting that policymakers “still have ground to cover” and that they would probably tighten borrowing costs again in July, unless there was a “material change in the baseline outlook.”
The ECB also raised its forecasts for headline and core inflation across the three-year time horizon, strengthening the case for continued monetary tightening. The central bank also pared its estimates for economic growth. As part of an effort to shrink its balance sheet, the ECB confirmed that it would stop reinvesting the proceeds of its asset purchase program from July.
Eurozone industry output rebounds; German investor morale improves
Industrial production in the eurozone rebounded by a greater-than-expected 1.0% in April due to a strong increase in capital goods output.
Meanwhile, investors in Germany were slightly less pessimistic in June. An economic sentiment index compiled by the ZEW research institute came in at -8.5 points, up from -10.7 points in May.
UK economy expands; BoE’s Bailey says labor market still “very tight”
A rebound in UK economic growth and stronger-than-forecast labor market data supported market expectations that the Bank of England (BoE) would continue raising interest rates in July. The economy grew 0.2% sequentially in April, after contracting 0.3% in March. Increased output in consumer-facing services, car sales, and education drove the gains. Separately, annual average wage growth, excluding bonuses, climbed to 7.2% in the three months through April, while the unemployment rate receded to 3.8% after rising to 3.9% in the three months through March.
BoE Governor Andrew Bailey told the House of Lords Economic Affairs Committee after the figures were released that the labor market was “very tight.” He added: “We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.”
Japan
Japan’s stock markets registered strong gains for the week, with the Nikkei 225 Index rising 4.5% and the broader TOPIX Index finishing 3.4% higher. The markets’ rally to their highest levels in over three decades was supported by the Bank of Japan’s (BoJ’s) decision to leave its ultra-loose monetary policy unchanged, which had been widely anticipated. Stronger-than-expected Japanese export and machinery order data also boosted sentiment. Investors exercised some caution, however, after the U.S. Federal Reserve refrained from raising rates but hinted at more hikes to come.
Against this backdrop, the yield on the 10-year Japanese government bond (JGB) fell to 0.41%, from 0.43% at the end of the previous week. The yen weakened to around JPY 141.0 against the U.S. dollar, from a prior 139.4, depreciating to its lowest point in about seven months on expectations of continued divergence in the monetary policies of the BoJ and the Fed.
BoJ leaves ultra-loose monetary policy unchanged
At its June meeting, the Bank of Japan left its ultra-loose policy settings unchanged, meeting investor expectations. By a unanimous vote, the central bank kept its short-term interest rate at -0.1% and that of JGB yields at around 0%. It also made no tweaks to its yield curve control (YCC) program, which allows JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from zero. However, BoJ Governor Kazuo Ueda hinted that when it comes to its YCC program, a certain degree of surprise may be unavoidable, in order to deal with the changing economic environment.
Building inflationary pressure has heaped pressure on the BoJ to pivot from its easing stance. However, the BoJ stuck to its projection that the year-on-year rate of increase in the consumer price index (CPI) is likely to decelerate toward the middle of fiscal 2023. Ueda said that, while there is very high uncertainty on the economic and price outlook, the central bank expects consumer inflation to slow as cost-push factors dissipate, although inflation is still in the early stages of moderating.
Chance of snap election diminished as no-confidence motion is voted down
There was speculation during the week that Japan’s Prime Minister Fumio Kishida could dissolve the lower house of the Diet by the end of the current parliamentary session if a no-confidence motion against his Cabinet was submitted by the main opposition party, the Constitutional Democratic Party of Japan (CDPJ). The CDPJ did submit a no-confidence motion, having criticized Kishida for failing to explain how key policies would be funded, but this was voted down in Parliament. Such motions are not uncommon and have little chance of being carried as the lower house is controlled by the ruling Liberal Democratic Party and Komeito, its junior partner.
China
Chinese stocks soared after the central bank cut several interest rates, raising hopes for more stimulus to industries that are slowing amid the fading post-pandemic recovery. The Shanghai Stock Exchange Index gained 1.3% while the blue chip CSI 300 added 3.3%. In Hong Kong, the benchmark Hang Seng Index rallied 3.35%.
The People’s Bank of China (PBOC) cut its medium-term lending facility rate by 10 basis points to 2.65% on Thursday, marking the first reduction since last August. The move was largely anticipated after the PBOC unexpectedly lowered the seven-day reverse repurchase rate, a short-term policy rate, by the same amount earlier in the week. The central also bank rolled over RMB 237 billion into the banking system compared with RMB 200 billion in maturing loans. Analysts predict that the central bank’s pivot toward stimulus may lead to targeted support for some industries as Beijing steps up measures to bolster the recovery.
A trio of indicators showed that China’s economic activity weakened last month. Industrial output, retail sales, and fixed asset investment grew at a slower-than-expected pace in May from a year earlier, according to official data. Unemployment remained unchanged at 5.2%, but youth unemployment jumped to a record 20.8% in May. The lackluster data in recent weeks have led economists at several key banks to lower their 2023 growth forecasts for China, which is dealing with slowing export demand, a yearslong housing market slump, and weak business and consumer confidence.
Property sector rebound slows
New home prices in 70 of China’s largest cities rose 0.1% in May in its fifth successive monthly expansion but slower than April’s 0.3% growth, according to the statistics bureau. The month-on-month decline came after data earlier in the week showed property investment and sales fell sharply in May. China’s property sector showed signs of stabilizing earlier this year after the government rolled out a rescue package to help cash-strapped developers last November. But recent weeks’ evidence has suggested that the recovery momentum in the property sector is slowing, which has fueled calls for more stimulus.
Other Key Markets
Czech Republic
Early in the week, the Czech government reported that inflation in May was 11.1%; while lower than April’s 12.7% reading, it was higher than expected. However, according to T. Rowe Price analyst Ivan Morozov, both core inflation—which decelerated to a year-over-year rate of 8.6%—and headline inflation were below the central bank’s forecast. He concludes that inflation momentum is still relatively mild, and while he does not expect the central bank to make an imminent change to its monetary policy outlook, Morozov does believe that policymakers could decide to make cautious rate cuts toward the end of the year.
Turkey
Late the previous week, the recently reelected President Recep Tayyip Erdogan appointed more individuals to take key positions in Turkey’s new government. T. Rowe Price sovereign analyst Peter Botoucharov has identified four individuals in particular whose appointments suggest the potential for the government to make adjustments to the current economic policy framework and return to some more orthodox policy approach. Erdogan often refers to this framework as the “new economic program,” which is based on a highly stimulative monetary policy and an exchange rate that increases the competitiveness of Turkish exporters in world markets. The downside of these policies has been higher inflation and a drawdown in foreign exchange reserves.
Botoucharov points to four key appointments:
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Mehmet Simsek, a former minister of finance and former banking executive, is returning to lead the Ministry of Treasury and Finance.
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Cevdet Yilmaz was appointed to the position of vice president. Yilmaz had been the minister of development, as well as deputy prime minister in previous Turkish governments.
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Hafize Gaye Erkan is the new governor of the central bank. According to Botoucharov, Erkan has strong experience in commercial banking and risk management, but limited experience in central banking and monetary policy.
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Perhaps the most controversial of these appointments is that former Central Bank Governor Sahap Kavcioglu will be the chairman of the Banking Regulation and Supervision Board. Botoucharov believes that Kavcioglu, who shares many of Erdogan’s unorthodox views about economics and monetary policy, is likely to keep Simsek’s team policy direction in check.
Botoucharov believes that some of the most pressing economic challenges and imbalances that the new Erdogan government will need to address include unsustainable external account dynamics, such as a 5% to 6% of gross domestic product current account deficit and a low level of foreign exchange reserves; unanchored monetary policy with deeply negative real interest rates amid elevated inflation; and a widening budget deficit driven by sharp increases in public sector wages and pension contributions, as well as earthquake reconstruction costs.
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