![](/sites/default/files/styles/1086x410/public/architecture-buildings-city-316137.jpg?itok=nuzfiWyS)
Global Markets Weekly Update: May 05 2023
U.S.
Despite a rally on Friday, the S&P 500 Index ended the week lower on comments from Federal Reserve Chair Jerome Powell that suggested a pivot to cutting rates might not occur as quickly as the market had hoped. Uneasiness surrounding the need to raise the U.S. debt ceiling may also have weighed on sentiment, as U.S. Treasury Secretary Janet Yellen notified congressional leaders in a letter that the agency might not be able to meet its debt obligations “potentially as early as June 1.” Within the S&P 500, the information technology sector fared the best and ended higher. Energy shares pulled back in sympathy with the price of West Texas Intermediate crude oil.
Yields on 10-year U.S. Treasuries fell early in the week on concerns about regional banks and the debt ceiling but moderated during Friday’s trading session. (Bond prices and yields move in opposite directions.) T. Rowe Price traders reported subdued activity in the high yield space while broader risk markets evaluated regional bank risk and the Fed’s interest rate outlook. They noted that trade volumes were light ahead of the central bank’s decision and did not pick up after the widely anticipated rate increase was announced. It was a busy week in terms of issuance as several new deals were announced.
Renewed volatility in regional banks after another lender fails
Over the weekend, regulators took control of California-based First Republic Bank, which, like Silicon Valley Bank and Signature Bank, had struggled with large deposit outflows. JPMorgan Chase acquired most of the failed bank’s assets, and deposits not covered by federal insurance did not suffer losses. The regional banks subsector in the S&P 500 experienced significant volatility during the week, reflecting concerns about the potential for additional bank failures and the credit pressures that could arise if the economy slows and unemployment increases.
Fed raises rates as expected and hints at a pause in tightening
As expected, on May 3, the Fed increased interest rates by 25 basis points, taking the benchmark fed funds rate to a target range of 5.00% to 5.25%. The statement from the Federal Open Market Committee (FOMC) omitted previous language about anticipating “that some additional policy firming may be appropriate” and emphasized that future actions would hinge on incoming data and economic developments. During the press conference, Fed Chair Powell strongly hinted that the fed funds rate might be near the peak level for this cycle. Nevertheless, Powell also kept the option for further monetary tightening on the table, stating that “a decision to pause was not made today.” Rate cuts, according to Powell, “would not be appropriate” in a world where inflation does not come down quickly.
Blerina Uruçi, chief U.S. economist at T. Rowe Price, believes the monetary policy cycle has reached the point where the Fed must exercise maximum flexibility and data dependence. In her view, the data points under consideration have broadened. “During the past 12 months, we became accustomed to focusing on inflation and the tightness in the labor market. I think data dependency has expanded to include a more intense focus on the evolution of credit conditions. The stress in the banking sector has exposed another channel through which the rapid increase in interest rates is reverberating through the economy.” Even with this wrinkle, she thinks the Fed is unlikely to cut interest rates significantly this year as inflation, while improved, remains above the central bank’s target.
Number of job openings declines, but labor market remains tight
Data from the U.S. Department of Labor showed that the number of job openings shrank for a third consecutive month in March, falling to 9.59 million from 9.97 million. The decline was most pronounced in small business that have up to 49 employees. Still, with 1.6 job openings for every unemployed person, the labor market remains tight. The same report pegged layoffs at 1.8 million, an increase of 248,000 and the highest level since December.
The nonfarm payrolls report that came out May 5 likewise showed strength in the labor market, with the economy adding 253,000 new jobs in April—higher than the consensus estimate of 179,000 and the 165,000 job gains recorded in March. Average hourly earnings increased 0.5% month over month, compared with a sequential uptick of 0.3% in March.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,674.38 |
-423.78 |
1.59% |
S&P 500 |
4,136.25 |
-33.23 |
7.73% |
Nasdaq Composite |
12,235.41 |
8.83 |
16.90% |
S&P MidCap 400 |
2,461.10 |
-29.30 |
1.26% |
Russell 2000 |
1,759.88 |
-9.11 |
-0.08% |
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 0.28% lower over the five trading days ended May 5, as recession fears and banking tremors continued to weigh on sentiment. Major stock indexes were mixed. Germany’s DAX ticked up 0.24%, while France’s CAC 40 Index weakened by 0.78%. The UK’s FTSE 100 Index slid 1.17%.
European government bond yields declined after the European Central Bank (ECB) raised interest rates by a quarter of a percentage point, scaling back from previous half-point increases. The yield on benchmark 10-year German government debt fell near one-month lows. In the UK, yields were broadly unchanged, holding near one-month peaks at around 3.8% as investors braced for more policy tightening from the Bank of England.
ECB slows interest rate increases
The ECB raised its key deposit rate by a quarter of a percentage point to 3.25%, as expected, after three increases of 0.5% this year. The bank also said it would halt its program of reinvesting money from its bond purchases by July. ECB President Christine Lagarde said later that interest rates would rise to “sufficiently restrictive levels” until inflation was reduced to the 2% target. She said some policymakers had argued for an increase of half a percentage point, but the Governing Council was also concerned that turmoil in the banking industry was reducing the amount of credit to the economy. “Everybody agreed that increasing rates was necessary, that we are not pausing, that is very clear,” Lagarde said. “And we know we have more ground to cover.”
Eurozone inflation picks up, jobless rate falls
Inflation in the eurozone accelerated in April to 7.0% year over year from the 6.9% registered in March, official data showed. However, the core rate excluding food, energy, alcohol, and tobacco—a measure of underlying pricing pressures—unexpectedly ticked down from a record level to 5.6%. Separately, the labor market appeared to tighten, with the jobless rate falling to 6.5%. In Germany, the jobless rate fell to 2.8%, the lowest level among bloc members.
UK mortgage approvals rise again but still below average
The UK housing market showed signs of stabilizing in March as mortgage approvals for home purchases rose for a second consecutive month. Lenders approved 52,011 mortgages, up sharply from 44,126 in February and the largest number since October. However, home loans are still below their average of around 70,000 before last September’s calamitous mini-budget proposal under former Prime Minister Liz Truss, which caused long-term interest rates to spike and prompted lenders to withdraw funds from the market.
Norway’s central bank hikes interest rates
Norges Bank raised its key interest rate by a quarter of a percentage point to 3.25% to curb inflation and said it could hike again in June if the currency stayed weak.
Japan
Japan’s stock markets rose over the first two days of the week, remaining closed for the rest of the period due to the Golden Week national holidays. The Nikkei 225 Index returned 1.0%, and the broader TOPIX Index gained 0.9%. The markets rallied on Monday, largely on a sell-off in the yen, boosting the outlook for Japan’s exporters. This followed the Bank of Japan’s (BoJ’s) decision at its April 27–28 meeting to maintain its ultra-easy monetary policy stance for the time being.
The yen strengthened over the full week, however, to around JPY 134.1 against the U.S. dollar, from about JPY 136.3. The Japanese currency was supported by safe-haven demand amid U.S. recession fears and ongoing concerns about the health of certain U.S. regional banks, as well as the U.S. Federal Reserve signaling a pause in its interest rate hiking cycle. Against this backdrop, the yield on the 10-year Japanese government bond was broadly unchanged at 0.42%.
Minister says banking sector problems won’t impact Japan’s financial system
Economy Minister Shigeyuki Goto said in an interview with the Reuters news agency that banking sector problems in the U.S. and Europe won’t impact Japan’s economy and financial system for now. He also said he expects the BoJ to guide monetary policy flexibly and appropriately, taking the economy and financial markets into account.
Japan to downgrade legal status of COVID
To pave the way for the full normalization of social and economic activities, Japan’s government said it will reclassify COVID to a level on par with seasonal influenza from May 8. A panel of infectious disease experts gave the green light to the reclassification based on the current pandemic situation and the preparedness of the health care system for a potential countrywide resurgence in cases. This follows the lifting of remaining coronavirus border control measures ahead of the Golden Week national holidays.
China
Chinese equities ended mixed after a holiday-shortened week as surprisingly weak manufacturing data tempered sentiment. The Shanghai Stock Exchange Index gained 0.34% while the blue chip CSI 300 fell 0.3% in local currency terms. Financial markets in mainland China were closed Monday through Wednesday for the Labor Day holiday.
China’s official manufacturing purchasing managers’ index (PMI) fell to 49.2 in April from March’s 51.9, marking a return to contraction for the first time since December after Beijing abandoned its zero-COVID policy. The nonmanufacturing PMI also softened in April but remained above 50, the level separating growth from contraction. Separately, the private Caixin/S&P Global survey of manufacturing activity eased to 49.5 in April from 50.0 in March amid softening global demand. The Caixin/S&P Global survey of services activity also weakened but remained in expansion territory for a fourth consecutive month. The downturn in factory activity in both surveys raised concerns that China’s post-COVID recovery is losing momentum.
Domestic tourism during the five-day holiday rebounded to pre-pandemic levels. Approximately 274 million trips were taken from Saturday through Wednesday, marking a roughly 71% increase from a year earlier, according to the Ministry of Culture and Tourism. Spending activity over the break surged about 129% over the year-earlier period. The latest figures fueled optimism that a sustained recovery in the services sector could help offset manufacturing sector weakness and a fragile property market recovery.
Other Key Markets
Czech Republic
The Czech National Bank held its scheduled monetary policy meeting on Wednesday and made no changes to interest rates. Policymakers on the rate-setting committee known as the Bank Board voted 4 to 3 to keep the main policy rate, the two-week repo rate, at 7%. They also kept the discount rate, which acts as a floor for short-term rates, at 6% and the Lombard rate, which acts as a ceiling for short-term rates, at 8%. For perspective, headline inflation in the Czech Republic was measured in March at 15% versus a recent peak of 18% in September 2022.
According to the Bank Board’s post-meeting statement, policymakers believe interest rates “are at a level that is dampening domestic demand pressures.” Also, when taking into account the inflation outlook one year from now, they consider “real” interest rates (calculated by subtracting the inflation rate from the nominal interest rate) to be “distinctly positive for the first time in many years.” In fact, they deemed monetary conditions to be “the tightest in 20 years.”
T. Rowe Price credit analyst Ivan Morozov did not expect the central bank to raise interest rates. However, he does consider the fact that three policymakers voted for a 25-basis-point (0.25%) increase in rates to be a hawkish surprise. This suggests that investors’ expectations for rate cuts might be premature.
Brazil
Earlier this week, Brazil’s central bank held its scheduled monetary policy meeting and, as was widely expected, kept the benchmark Selic rate at 13.75%. While T. Rowe Price sovereign analyst Richard Hall perceived a modest dovish shift in policymakers’ forward-looking observations, he believes that they are still far from thinking about interest rate cuts. Hall would not be surprised to hear rhetoric from politicians about the central bank keeping rates too high, though he believes investors have become at least partially immunized to that type of criticism.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
This material is provided for general informational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.
© 2023 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. All other trademarks shown are the property of their respective owners. Use does not imply endorsement, sponsorship, or affiliation of T. Rowe Price with any of the trademark owners.
T. Rowe Price Investment Services, Inc., Distributor.