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Global Markets Weekly Update: May 12, 2023
U.S.
Benchmarks end mixed as investors weigh inflation data
The major indexes ended mixed for the week as the flow of first-quarter earnings reports neared its end. The technology-heavy Nasdaq Composite outperformed, helped by a surge in Google parent Alphabet following the unveiling of its new artificial intelligence-based search platform. The narrowly focused Dow Jones Industrial Average lagged, weighed down by Disney, following its report of a decline in subscribers to its streaming platform, Disney+. Financials stocks underperformed, dragged lower by ongoing concerns over the strains facing certain regional banks. T. Rowe Price traders noted that trading volumes were thin and approached their lowest level of the year so far to start the week.
The week’s economic calendar was relatively light overall but included highly anticipated inflation data. On Wednesday, the S&P 500 Index jumped 1% in premarket trading after the Labor Department reported that headline consumer prices had risen 4.9% over the year ended in April, a tick below consensus expectations and the slowest pace in two years.
“Supercore” inflation falls to lowest level since early in the pandemic
Core inflation, which excludes volatile food and energy prices, was in line with expectations over the period, rising 5.5%. However, “supercore” inflation, which, depending on the definition, measures services inflation less housing costs and is rumored to currently be the Federal Reserve’s preferred gauge, rose only 0.1% for the month—the lowest reading in nearly three years, according to Reuters. Fed officials have acknowledged that the Labor Department’s methodology for calculating “owner’s equivalent rent” (OER) means that the cooldown in the housing sector is not fully reflected in current inflation data.
Fed officials did not seem to moderate their inflation and interest rate expectations in reaction to the data, however. In stark contrast to the three rate cuts priced into futures markets by January 2024, New York Fed President John Williams repeated on Wednesday that he did not expect a rate cut later this year. According to the CME FedWatch Tool, as of the end of the week, investors were pricing in only a 0.7% chance that the Fed would keep rates steady through the end of 2023—although this was up a bit from the 0.1% chance the week before.
Along with banking stresses and tightening credit conditions, another factor weighing on sentiment seemed to the upcoming deadline to increase the debt ceiling—the statutory limit on federal government borrowing—before the U.S. Treasury Department has exhausted its “extraordinary measures” to pay the government’s obligations. U.S. Treasury Secretary Janet Yellen has warned that the deadline could come as early as June 1.
Pinkerton: Debt ceiling extension possible, but only with strings attached
T. Rowe Price Washington analyst Michael Pinkerton still believes that the most likely outcome is a compromise deal with spending caps, modest near-term budget concessions from Democrats, and an 18- to 24-month debt ceiling extension. However, he sees an increasing likelihood of an agreement on a topline budget cut, followed by a short-term debt ceiling extension to allow further negotiations on where the specific cuts will come. Pinkerton stresses that a simple extension with no conditions attached is highly unlikely, and both President Joe Biden and House Speaker Kevin McCarthy disavowed any intention for one following their meeting on Wednesday.
News on Friday of a jump in consumers’ inflation expectations seemed to drive stocks lower and bond yields higher, reversing a decline through much of the week. Americans polled by the University of Michigan expected annual inflation to run at 3.2% over the next five years, the highest level since 2011. Investment-grade corporate bonds received some support over the week from an uptick in demand from Asia, according to our traders, while the consumer price data supported the high yield market.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,300.62 |
-373.76 |
0.46% |
S&P 500 |
4,124.08 |
-12.17 |
7.41% |
Nasdaq Composite |
12,284.74 |
49.33 |
17.37% |
S&P MidCap 400 |
2,432.74 |
-28.36 |
0.10% |
Russell 2000 |
1,740.85 |
-19.03 |
-1.16% |
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 roughly flat, with gains earlier in the week dissipating as the market digested the likelihood of further rate increases from the European Central Bank (ECB). Major stock indexes posted mixed results. France’s CAC 40 Index slipped 0.24%, while Germany’s DAX eased 0.30%. The UK’s FTSE 100 Index slipped 0.31%.
ECB’s Lagarde hints at more rate increases
ECB President Christine Lagarde said in an interview with the Nikkei newspaper that the central bank “has moved in a very deliberate and decisive way in order to fight inflation," adding, however, that "we still have more ground to cover." She said that “there are factors that can induce significant upside risks to the inflation outlook” and that “we are still in a situation where uncertainty about the path of inflation is high, so we have to be extremely attentive to those potential risks.” Lagarde’s comments echoed the views hawkish policymakers have expressed since last week's quarter-point rate increase.
Economist Wieladek says ECB deposit rate could exceed forecast peak
Tomasz Wieladek, T. Rowe Price’s chief European economist, asserted that the ECB could raise its deposit rate beyond the peak 3.50% level currently expected by the market. Persistently strong inflationary pressures support hiking rates in the short term, in his view. Wieladek believes services inflation, a key focus for the Governing Council, is likely to stay elevated due to fundamental factors. However, he also suggested that the ECB may stay its hand if the U.S. is unable to make progress in debt ceiling talks.
German industry output slumps
German manufacturing orders shrank more than expected in March, declining 10.7% sequentially on a seasonally and calendar-adjusted basis—a sign that the economy might be heading for a recession.
Bank of England hikes key interest rate to highest level since 2008; UK avoids recession
The Bank of England (BoE) raised its key interest rate by a quarter point to 4.25%, with policymakers voting 7–2 to increase borrowing costs to the highest level since 2008. The central bank also raised its inflation forecast, admitting it had underestimated the strength and persistence of food price increases. The updated projections call for inflation to slow to 5.1% by year-end, instead of the 3.9% that the central bank had forecast in February. The BoE also revised its economic growth forecast, projecting zero growth in the second quarter, as opposed to a 0.7% contraction.
The UK economy grew 0.1% in the first quarter, skirting a forecast recession, official data showed. However, gross domestic product in March unexpectedly fell 0.3% sequentially amid widespread decreases across the services sector, the statistics office said.
Japan
Signs of strength in corporate earnings supported Japan’s stock markets over the week, with the Nikkei 225 Index rising 0.8% and the broader TOPIX Index up 1.0%. Some concerns about China’s economic growth, as well as the U.S. debt ceiling and potential default, dented sentiment, however. Data released during the week showed that wage growth remained sluggish in March, supporting the Bank of Japan’s (BoJ’s) dovish stance. Against this backdrop, the yield on the 10-year Japanese government bond fell to 0.39% from 0.42% at the end of the previous week. The yen strengthened modestly, to around JPY 134.75 against the U.S. dollar, from the prior week’s JPY 134.85.
Price developments will be key to determining future monetary policy
Investors continued to watch for any indication that the Bank of Japan could move away from its ultra-accommodative monetary policy stance. BoJ Governor Kazuo Ueda stated during the week that once the outlook indicates that sustainable and stable 2% inflation will be achieved, the central bank would like to end yield curve control and proceed to shrinking its balance sheet.
Ueda also said that Japan’s economy is picking up and inflation expectations remain at a high level but expressed some concerns about whether wage growth would be sustained—indeed, data released during the week showed that Japanese workers’ nominal wages grew a mere 0.8% year on year in March, while real (inflation-adjusted) wages fell 2.9% from a year earlier. The BoJ is adamant that its price stability target be achieved accompanied by wage increases.
The summary of opinions at the BoJ’s April meeting concluded that the spring “shunto” labor-management wage negotiations had seen favorable developments, but the issue remains whether these would take hold next year, such as whether wages would continue to rise sufficiently relative to prices. A news agency Nikkei survey of more than 300 companies released during the week suggested that average wages in 2023 are set to rise by the largest amount in over 30 years. Concerns remain, however, about whether wage increases will be broad-based and include smaller firms.
China
Chinese equities retreated in the first full week of trading after the five-day Labor Day holiday as investors grew concerned about the strength of the country’s recovery. The Shanghai Stock Exchange Index gave up 1.86% while the blue chip CSI 300 fell 1.97% in local currency terms. In Hong Kong, the benchmark Hang Seng Index declined 2.11%.
China’s consumer price index (CPI) edged up 0.1% in April from a year earlier, down from a 0.7% rise in March. The latest CPI marked the lowest rate since February 2021 and missed economists’ forecasts, according to Reuters. Core inflation, which excludes volatile food and energy prices, was unchanged from the previous month, suggesting little demand-driven inflation in the economy. The producer price index fell a worse-than-expected 3.6% and marked the weakest reading since May 2020. April’s CPI reading trailed the government’s 2023 consumer inflation target of around 3% growth and raised concerns that China may have entered a deflationary period. New bank loans fell to RMB 719 billion in April from March's RMB 3.89 trillion, central bank data showed, reflecting lower credit demand.
The latest data appeared to support expectations that China’s central bank will ease policy in the near term to support an economy that has lately showed signs of losing momentum following a post-pandemic rebound. The yield on China’s 10-year government bond fell to the lowest level since last November as traders priced in the possibility of further monetary easing.
On the trade front, China’s exports rose 8.5% in April from a year ago, easing from 14.8% growth in March. Imports fell a greater-than-expected 7.9%, from a 1.4% decline the previous month, reinforcing growth concerns following disappointing manufacturing and services activity readings in the prior week. China’s official manufacturing Purchasing Managers’ Index unexpectedly contracted in April for the first time since December, when Beijing abandoned its zero-COVID policy.
Other Key Markets
Turkey
On Thursday, just days away from the country’s general and presidential elections on Sunday, May 14, Homeland Party leader Muharrem Ince announced that he is withdrawing from the presidential race. With polls showing only about 2% of the population supporting him, and with National Alliance candidate Kemal Kilicdaroglu in a fairly tight race against the incumbent Recep Tayyip Erdogan, Ince had virtually no chance of winning the first round of the presidential election.
Although Ince did not endorse any of the three remaining candidates, his departure from the race could increase the chances that Kilicdaroglu—who has been rising in the polls in the last few days—could gain enough additional support that enables him to win either the first round of the presidential election on May 14 or the second round on May 28. To win the first round, a candidate must achieve a valid vote count of at least 50% plus 1 vote. If no one does, the top two qualified candidates will advance to the second round.
Hungary
During the week, the government reported that year-over-year inflation in April was 24.0%, in line with expectations and slightly lower than March’s 25.2% reading. T. Rowe Price credit analyst Ivan Morozov notes that inflation momentum slowed to 0.7% month over month—an important development—and that core inflation momentum also slowed to an annualized rate of about 15%. Overall, he believes that the latest inflation data are consistent with the central bank’s expectation for high-single-digit inflation by the end of 2023. In addition, he believes that disinflation (a slowing in the rate of rising prices) in Hungary will show signs of accelerating in the third quarter of the year.
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