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Global Markets Weekly Update: June 30, 2023
U.S.
Favorable macro backdrop helps end solid quarter on solid note
Positive growth and inflation surprises helped the major benchmarks round out a solid quarter on a high note, with the S&P 500 Index recording its best weekly gain since the end of March. The rally also broadened, with small-caps and value shares outperforming, and the equal-weighted S&P 500 Index handily outpacing its market-weighted counterpart. The technology-heavy Nasdaq Composite remained well ahead of the other benchmarks for the year-to-date, however, ending the week with a six-month gain of nearly 32%, its best start to the year since 1983.
Notably, Apple closed trading Friday with a market capitalization above USD 3 trillion, marking a first for a publicly traded company. The Wall Street Journal reported that Apple’s valuation has surpassed that of five of the S&P 500’s 11 sectors in their entirety (materials, real estate, utilities, energy, and consumer staples).
Disinflation signs boost sentiment
Inflation data released Friday appeared to provide the biggest boost to sentiment. The Commerce Department reported that its personal consumption expenditures (PCE) price index had increased by 0.1% in May, bringing its year-over-year increase down to 3.8%, its lowest level since April 2021. The core (excluding food and energy) PCE index, considered the Federal Reserve’s preferred inflation gauge, fell back to 4.6% on a year-over-year basis, still well above the Fed’s 2% target, but seemingly calmed fears of a reacceleration in price pressures after April’s upside surprise.
Among the other signals of strength in the week’s heavy economic calendar:
- Private sector incomes rose 0.5% in May, according to Commerce Department data, well in excess of a 0.1% increase in consumer spending.
- Weekly jobless claims defied expectations and plummeted by 26,000 from a 20-month high to 239,000, marking the sharpest drop since October 2021. Continuing claims also surprised on the downside and fell back to a four-month low.
- The University of Michigan revised its gauge of consumer sentiment higher, pushing it to its best level in four months. The survey’s chief researcher attributed the “striking upswing” to the resolution of the debt ceiling standoff but also to “more positive feelings over softening inflation."
- Durable goods orders rose 1.7% in May, defying consensus expectations for a decline of around 1%. Importantly, orders excluding the volatile defense and aircraft segments—widely considered the best proxy for business investment—rose 0.7% after falling the previous month.
- Similarly, May new home sales easily outpaced estimates, rising 12.2% in May, well above expectations for a modest decline and at the fastest pace since February 2022, when rates for a fixed 30-year mortgage were nearly 300 basis points (three percentage points) lower.
Data push Treasury yields higher, while munis outperform despite Puerto Rico ruling
What was good news for equity investors was bad news for the Treasury market, as the data helped briefly push the yield on the benchmark 10-year note to 3.87 in intraday trading on Friday, its highest level since March 9. (Bond prices and yields move in opposite directions.)
According to our traders, sentiment around tax-exempt municipal bonds deteriorated early in the week after a judge in Puerto Rico delivered a ruling in a bankruptcy case involving utility bonds that was perceived as unfavorable to bondholders. (Munis issued by Puerto Rico are widely held because their income is tax exempt in most states.) However, municipal bonds outperformed Treasuries later in the week, and muni-Treasury ratios ultimately richened. The final sale of municipal bonds held by the FDIC after taking a few regional banks into receivership earlier this year reached the market on Thursday, which bolstered sentiment.
The investment-grade corporate bond market saw low levels of issuance in advance of the holiday. Those that did come to market were met with strong demand, as midweek issuance was oversubscribed, and spreads consistently tightened throughout the week despite the volatility in rates.
Our traders reported that broad risk-on sentiment supported the high yield market’s performance, with investors trying to source paper ahead of quarter-end and manage cash levels given that no issuance was expected until after the Independence Day holiday. In the bank loan market, managers of collateralized loan obligations were mostly focused on loans trading at a discount and drove most of the buying.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,407.60 |
680.17 |
3.80% |
S&P 500 |
4,450.38 |
102.05 |
15.91% |
Nasdaq Composite |
13,787.92 |
295.40 |
31.73% |
S&P MidCap 400 |
2,622.34 |
107.40 |
7.90% |
Russell 2000 |
1,888.73 |
67.09 |
7.24% |
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 1.94% on hopes that China would do more to boost consumption and that lower-than-expected inflation data could mean that interest rates are near their peak. Major stock indexes also posted gains. France’s CAC 40 Index advanced 3.30%, Italy’s FTSE MIB climbed 3.75%, and Germany’s DAX increased 2.01. The UK’s FTSE 100 Index added 0.93%.
European government bond yields held near the week’s highs as inflation eased but remained above the European Central Bank’s (ECB) 2% target. The yield on the benchmark 10-year German government bond approached 2.4%, while the yields on Italian sovereign bonds of the same maturity ended near their weekly highs despite data indicating that confidence among manufacturers had weakened.
Eurozone inflation slows for third month; ECB hints at more interest rate hikes
Annual inflation in the eurozone slowed for a third month in June to 5.5% from 6.1% in May, according to an initial estimate from the European Union’s statistics office. The result was lower than the 5.6% forecast by economists polled by FactSet. Core inflation—which excludes energy, food, alcohol, and tobacco prices—ticked up to 5.4% from 5.3%.
News reports from the ECB’s annual Forum on Central Banking suggested that policymakers are still likely to vote for another interest rate increase in July. ECB President Christine Lagarde acknowledged that the central bank had made “significant progress” in combating high inflation but asserted that policymakers “cannot declare victory yet.” According to Lagarde, uncertainty over how tight labor markets and large wage increases will influence price means "it is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached.” Even so, some Governing Council members, including Vice President Luis de Guindos, opined that another hike in September was less certain, with the decision depending on incoming economic data.
BoE Governor Bailey hints rates likely to stay higher for longer than markets think
Bank of England (BoE) Governor Andrew Bailey said at the ECB’s annual Forum on Central Banking that UK interest rates are likely to stay higher for longer than financial markets expect. Derivative instruments indicate borrowing costs could rise from 5% now to 6.5% by the end of the year, before falling in late spring of 2024. “I’ve always been interested that markets think that the peak will be short-lived, in a world where we’re dealing with more persistent inflation.” Bailey said BoE rate decisions would be “evidence driven” and that the central bank was looking at both the peak level of rates and “how long (the peak) sustains beyond that.”
Swedish central bank raises rates, says another hike is forecast
The Riksbank raised its key interest rate by a quarter percentage point to 3.75%, as expected. The central bank said that “the forecast is for the policy rate to be increased at least one more time this year.” The bank also accelerated the pace of government bond sales.
Japan
Japan’s stock markets gained over the week, with the Nikkei 225 Index rising 1.2% and the broader TOPIX Index up 1.1%. Halfway through 2023, Japanese equities were among the world’s best performers in local currency terms, although yen weakness to a degree moderated returns in U.S. dollar terms.
Japan’s monetary authorities stated that every option is on the table to cope with excess volatility in the foreign exchange markets, as the Japanese currency fell to near a seven-month low of around JPY 144.8 against the U.S. dollar. It briefly hit the JPY 145 level that had prompted the Bank of Japan (BoJ) to undertake a yen-buying intervention in September 2022, leading to investor anticipation that the central bank would again step in. While Japan’s monetary authorities said they were watching currency moves with an extremely high sense of urgency, no concrete action was forthcoming.
The yield on the 10-year Japanese government bond rose to 0.39% from 0.36% at the end of the previous week. Monetary policy divergence between the BoJ and the other major central banks continued to weigh on Japanese yields. Both BoJ Governor Kazuo Ueda and U.S. Federal Reserve Chair Jerome Powell reaffirmed their current policy stance during the week.
Inflation accelerating into 2024 could lead to policy shift
Speaking at the ECB’s monetary policy forum with heads of other major central banks, Ueda said—as reported by Reuters—that, although Japan’s headline inflation is above 3%, underlying inflation remains below target, which is the reason for keeping monetary policy easy. He added that there is still some distance to go in sustainably achieving 2% inflation accompanied by sufficient wage growth. If the BoJ becomes reasonably sure that inflation would accelerate into 2024 after a period of moderation, this would be a good reason to shift monetary policy, Ueda stated.
The core consumer price index for the Tokyo area, a leading indicator for nationwide consumer inflation, rose 3.2% year on year in June. Although the uptick was less than expected, Tokyo consumer price growth has now remained above the BoJ’s 2% target for over a year, adding to pressure on the central bank to tighten its ultra-loose monetary policy.
China
Stocks ended mixed, as weak economic indicators offset optimism that the government might implement additional measures to bolster economic growth. The Shanghai Stock Exchange Index gained 0.13% in local currency terms, but the blue chip CSI 300 lost 0.56%. In Hong Kong, the Hang Seng Index inched up 0.14%.
Mixed economic indicators, but official highlights possibility of supportive measures
China’s official manufacturing Purchasing Managers’ Index (PMI) ticked up to 49.0 in June—in line with expectations and an improvement from the 48.8 registered in May. Nevertheless, PMI readings less than 50 indicate a contraction in activity. The nonmanufacturing PMI eased, slipping to a below-consensus 53.2 in June from 54.5 in May. These numbers suggested that the service and construction industries continued to grow, albeit at a slower pace.
Profits at China’s industrial firms fell 18.8% year over year in the first five months of 2023, according to the National Bureau of Statistics. This contraction was less than the 20.6% decline recorded this year through the end of April.
Premier Li Qiang, the country’s second-ranking official, asserted that China is on track to reach its annual growth target of about 5%. Speaking at the World Economic Forum’s annual meeting, Li pledged that Beijing would roll out more practical and effective measures to strengthen domestic demand, boost markets, and support the country’s development and growth.
Travel remains below pre-pandemic levels during Dragon Boat holiday
Domestic consumption appeared to pick up during the three-day Dragon Boat Festival holiday but fell short of pre-pandemic levels. Overall travel rose 89.1% from the prior-year period but remained 22.8% below the same period in 2019, according to the Ministry of Transport.
Other Key Markets
Turkey
Turkey’s central bank, which last week raised short-term interest rates for the first time in a very long time, has recently taken some additional steps, signaling a return to a less unorthodox policy stance. Specifically, the central bank has begun to gradually ease some of the macroprudential regulations that have forced banks to convert large portions of their non-lira deposits to lira—thus stifling the normal functioning of Turkey’s currency and fixed income markets. According to T. Rowe Price sovereign analyst Peter Botoucharov, these reversals, if they continue, will allow transactions involving lira and Turkish government bonds to clear more smoothly and efficiently. He believes it is crucial for the foreign exchange (FX) and local interest rate markets to have improved price discovery and achieve a more sustainable equilibrium.
Brazil
The previous Thursday, Brazil’s central bank kept its key policy rate, the Selic rate, at 13.75%, as was widely expected. The post-meeting statement had some dovish changes, but T. Rowe Price sovereign analyst Richard Hall noticed some interesting new language: “The current situation, characterized by a stage in which the disinflationary process tends to be slower and in an environment of de-anchored inflation expectations, continues to require caution and parsimony.” Hall initially believed that policymakers were biased to stay on hold at least until their policy meeting in August.
However, after reviewing the central bank’s minutes from its recent policy meeting, Hall believes that there is a group of policymakers who could favor reducing rates at the next policy meeting. He believes that there could be either a 25-basis-point rate cut in August (versus the typical 50-basis-point changes) or that policymakers are planning a limited budget of rate cuts when they decide to begin loosening policy.
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