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Global Markets Weekly Update: June 23, 2023
U.S.
Stocks break winning streak
The major benchmarks closed lower in a holiday-shortened trading week. The Nasdaq Composite suffered its first weekly decline in two months, while the S&P 500 Index recorded its first drop in six weeks. Growth stocks outperformed value shares, while large-caps fared better than small-caps. T. Rowe Price traders noted that the annual rebalance of the Russell indexes on Friday appeared to keep volumes muted earlier in the week, as some investors prepared to shift the allocations of their portfolios in response. Markets were shuttered on Monday in observance of the Juneteenth holiday.
Signs that further Federal Reserve rate hikes lay ahead seemed to weigh on sentiment for much of the week. In prepared testimony before Congress on Wednesday and Thursday, Fed Chair Jerome Powell stated that “nearly all [policymakers] expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” Indeed, the Fed’s latest Summary of Economic Predictions revealed that a majority of those on the policy committee expect at least two more quarter-point rate hikes in the coming year—although futures markets continued to predict that was unlikely. News on Thursday that the Bank of England and Norges Bank, Norway’s central bank, had accelerated their pace of rate hikes also seemed to intensify rate fears (see below).
Manufacturing output falls as suppliers slash prices
Much of the week’s economic data seemed to deepen worries that tight monetary policy was pushing the U.S. into recession. On Friday, S&P Global reported that its gauge of U.S. manufacturing activity had fallen back to its lowest level since December and well below consensus estimates. The report also showed that suppliers were cutting prices at the fastest pace since the heart of the pandemic lockdown in May 2020, presumably in response to weak demand.
Although Fed Chair Powell insisted to Congress that the labor market remained tight, weekly jobless claims hit 264,000, matching the previous week’s upwardly revised number, the highest level since October 2021. The housing sector showed some surprising strength, however, with housing starts coming in at their highest level in over a year and well above forecasts. Sales of existing homes also surprised modestly on the upside.
FDIC continues to unload munis acquired from distressed banks
Longer-term U.S. Treasury yields ended roughly unchanged and traded in a narrow band over the week. Municipal bonds outperformed over much of the week, helped by strong demand for higher-yielding new issues. Sales from the Federal Deposit Insurance Corporation (FDIC) of recently acquired assets from distressed banks were also strongly bid.
The investment-grade and high yield corporate bond markets were relatively subdued over the holiday-shortened trading week, according to our traders. The bank loan market was also calm, but our traders noted that portfolio managers of collateralized loan obligations were a source of demand in the secondary market.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,727.43 |
-571.69 |
1.75% |
S&P 500 |
4,348.33 |
-61.26 |
13.25% |
Nasdaq Composite |
13,492.52 |
-197.05 |
28.91% |
S&P MidCap 400 |
2,514.94 |
-65.13 |
3.48% |
Russell 2000 |
1,821.64 |
-53.83 |
3.43% |
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 2.93% on worries that further interest rate increases might cause a recession in Britain and the eurozone. A disappointing economic recovery in China and hawkish comments by U.S. Federal Reserve Chair Jerome Powell contributed to the gloom as well. Major stock indexes struggled, with Germany’s DAX dropping 3.23%, France’s CAC 40 Index sliding 3.05%, and Italy’s FTSE MIB losing 2.34%. The UK’s FTSE 100 Index declined 2.37%.
Recession fears pushed European government bond yields lower. Purchasing manager surveys showed private sector business activity has slowed significantly, weighing on 10-year German bond yields. French and Swiss yields also declined. In the UK, the 10-year government bond yield weakened as the economic outlook darkened after the Bank of England (BoE) stepped up the pace of interest rate increases.
BoE quickens pace of rate hikes after inflation fails to slow
The BoE unexpectedly raised its key interest rate by half a percentage point to 5.0%—the highest level since 2008. The Monetary Policy Committee (MPC) voted 7–2 to step up the pace of policy tightening after the latest inflation data came in unexpectedly strong. “There has been significant upside news in recent data that indicates more persistence in the inflation process,” the MPC said.
Headline annual consumer price growth failed to slow down for a fourth month running in May, sticking at 8.7%. Core inflation, which excludes volatile food and energy prices, accelerated to a 31-year high of 7.1% from the 6.8% registered in April.
Swiss, Norwegian central banks hike borrowing costs to beat inflation
Norway’s central bank increased its key interest rate by 0.5 percentage point to 3.75%—the highest level since 2008—and indicated that it “will most likely” hike again in August to curb inflation that is “markedly above target.” The Swiss National Bank raised its benchmark interest rate by a quarter percentage point to 1.75%, the fifth consecutive increase, and did not rule out additional rate increases.
Eurozone PMI almost flat; German producer prices slow, Ifo sees deeper contraction
Eurozone business output grew for a sixth month in June but almost stalled, pointing to renewed weakness in the economy after the recovery in the early part of the year, according to a purchasing managers’ survey data provided by S&P Global. The HCOB Flash Eurozone Composite Purchasing Managers’ Output Index fell to a five-month low of 50.3 from 52.8 in May. A level above 50 denotes expansion.
German producer prices rose in May at their slowest pace since July 2021, a sign that inflation may be easing. Annual producer prices climbed 1.0%, down from 4.1% in April. Meanwhile, the Ifo Institute predicted the German economy would contract 0.4% in 2023, more than the 0.1% forecast in March.
Japan
Japan’s stock markets retreated from their 33-year highs, with the Nikkei 225 Index falling 2.7% and the broader TOPIX Index finishing the week 1.6% lower. Some of the declines were attributable to profit-taking following the markets’ strong year-to-date performance. Japan’s hot May core consumer inflation print weighed on sentiment, and fueled speculation that the Bank of Japan (BoJ) would revise upward its inflation forecasts in July. Comments by BoJ board member Seiji Adachi appeared to rule out the chance of a tweak to the central bank’s yield curve control policy at its meeting next month—although the BoJ has previously suggested that a certain degree of surprise may be unavoidable.
The yield on the 10-year Japanese government bond fell to 0.36% from 0.41% at the end of the prior week. Domestic yields remained under pressure as the BoJ continued to signal its commitment to ultra-loose monetary policy, marking a divergence from the tightening stance of the other major central banks, which appear poised to raise rates further in the second half of the year.
The yen weakened to about JPY 143.1 against the U.S. dollar from about JPY 141.8 previously. The currency slumped toward the levels that prompted Japanese policymakers to intervene in the foreign-exchange market late last year to halt its decline. Finance Minister Shunichi Suzuki said he was closely watching foreign exchange rates and that sharp currency moves were undesirable. USD-JPY levels are determined by markets and based on fundamentals—but they should move stably, Suzuki added.
Consumer inflation remains above target
Japan’s core consumer price index (CPI) rose by 3.2% year on year in May, more than forecast; the number slowed from the previous month but remained well above the BoJ’s 2.0% inflation target. While the target has been surpassed every month for more than a year, the central bank has stuck to its projection that the year-on-year rate of increase in the CPI is likely to decelerate toward the middle of fiscal 2023.
June flash Purchasing Managers’ Index (PMI) data showed a fresh fall in manufacturing output, as relatively muted demand conditions at home and abroad posed a headwind. Growth in services sector activity slowed but was still strong overall, as customer numbers and spending continued to rebound amid the waning impacts of the coronavirus pandemic.
China
Chinese stocks retreated after a holiday-shortened week as investor confidence waned over a lack of stimulus measures amid the flagging post-pandemic recovery. The Shanghai Stock Exchange Index fell 2.3%, while the blue chip CSI 300 gave up 2.51%. In Hong Kong, the benchmark Hang Seng Index declined 5.74%, its biggest drop in three months. Financial markets in mainland China were closed Thursday through Friday for the Dragon Boat Festival holiday, while the Hong Kong Exchange was closed on Thursday and reopened for trading on Friday.
No major indicators were released in China during the week. However, mounting evidence that the country’s recovery is losing steam raised fresh concerns about the economic outlook. The lackluster results in recent weeks have led economists at several key banks to lower their 2023 growth forecasts for China, which is struggling with slowing export demand, a yearslong housing market slump, and weak business and consumer confidence.
Chinese banks lowered their one- and five-year loan prime rates by 10 basis points for the first time since August 2022 as expected, after the People’s Bank of China (PBOC) cut its medium-term lending facility rate last week. While the drop was in line with the PBOC’s rate cut, some analysts predicted a larger reduction of 15 basis points in the five-year rate, according to Bloomberg.
Beijing unveiled a four-year tax break package for consumers purchasing new electric vehicles (EVs) to lift sales and production in one of the world’s largest EV markets. The announcement was widely expected after the State Council called for an extension and optimization of tax breaks on EV purchases earlier in the month as it attempts to restore demand in the flagging sector.
Other Key Markets
Turkey
On Thursday, the Turkish central bank—now led by Governor Hafize Gaye Erkan—decided to raise the one-week repo auction rate by 650 basis points. This key policy rate increased from 8.5%, where it has been since shortly after the devastating February earthquake, to 15%. As sizable as this rate increase was, it was below market expectations for a much larger increase that would have more significantly narrowed the gap with the current 40% inflation rate.
According to the central bank’s post-meeting statement, policymakers have “decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible” and “to ensure a decline in the underlying trend of inflation and to reach the 5 percent inflation target in the medium term.” As for the pace of monetary tightening, central bank officials plan to raise rates “as much as needed in a timely and gradual manner,” as opposed to an abrupt policy pivot.
T. Rowe Price sovereign analyst Peter Botoucharov expects further increases in interest rates, though he believes that the central bank may still not raise rates as high as needed to slow economic growth and effectively address inflationary pressures. As for fiscal policy, Botoucharov expects the new Treasury and Finance Minister Mehmet Simsek and his team to prepare and announce a broad-based program aimed at a more conservative fiscal stance for the Turkish government.
Chile
In its monetary policy meeting on Monday, Chile’s central bank decided to keep its monetary policy rate (MPR) unchanged at 11.25%, which was widely expected. However, T. Rowe Price emerging markets sovereign analyst Aaron Gifford was surprised that two out of the five board members voted for a 50-basis-point (0.50%) rate cut.
Gifford also noted that the board's forward guidance changed materially. Policymakers had previously said that they would remain on hold until the macro adjustment and disinflation process had consolidated. Now, in their post-meeting statement, they indicated that recent economic data are heading in the right direction and that “if these trends continue, the MPR will start a downward process in the short term” in a magnitude and at a pace congruent with the data.
On Tuesday, the central bank issued its quarterly monetary policy report, in which policymakers acknowledged a softer near-term growth and inflation outlook. Gifford believes that the report supports the central bank’s dovish tilt on Monday, though he considers policymakers’ macro forecast revisions to be relatively limited in terms of magnitude. For example, gross domestic product growth was revised down to -0.25% from 0.0% for this year, though policymakers lifted their 2024 growth expectation to 1.75% from 1.5%. Also, inflation expectations were revised down to 4.2% from 4.6% for this year and to 2.9% from 3.0% in 2024.
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