China Drags Down Global Equities, to Report More Economic Indicators this Week
Last Week Review
Emerging markets’ 1.8% loss last week led the decline in global equities as China’s economy struggles, while developed-market stocks were slightly negative. U.S. interest rates rose, with the two-year Treasury yield up 0.13% to 4.89% and the 10-year yield up 0.12% to 4.15%. Credit conditions remained stable, with investment grade spreads up slightly to 1.11% and high yield spreads falling 0.17% to 3.75%. Investment grade spreads are sitting at about 0.4% below the year-to-date peak hit around March’s regional bank issues and high yield spreads are about 1.4% lower.
U.S. Inflation Rose Month-to-Month but the Trend Appears Favorable
U.S. inflation and core inflation, which excludes energy and food prices, rose in line with expectations by 0.2% in July from June, based on the Consumer Price Index. Core goods prices declined 0.3% month-to-month while services rose 0.4%, supported by a continued increase in shelter prices. While the mild inflation trends appear favorable enough for the Federal Reserve to choose not to hike its policy rate in September, on a year-over-year basis inflation still is 3.2% and core inflation is 4.7%. Further, the U.S. Producer Price Index released later in the week was hotter-than-expected with a 0.3% month-to-month rise. Cooling inflation has supported investors’ appetite to take risk, but near-term pressures remain and Fed rate cuts appear off the table for now.
China’s Equities Fall on Weak Trade and Deflation
China’s equities fell 3.6% on deflationary shocks and declining trade. Prices are deflationary with a decline of 0.3% year-over-year while the Producer Price Index declined 4.4%. Exports dropped 14.5% year-over-year while imports slid 12.4%. U.S. President Joe Biden announced an executive order to restrict new U.S. investment into sensitive sectors in China, including those related to quantum computing, artificial intelligence and advanced semiconductors. The move reminded investors of the increasing risks of a deteriorating relationship between the countries. The direct market impact may be limited for now, but we think the move sets the framework for expanded future restrictions.
Moody’s Downgrades Banks
Moody’s downgraded the credit ratings of 10 small- to mid-sized U.S. banks, citing profitability pressures from higher interest rates, commercial real estate exposure and a weakening economy. Regional banks declined but in a contained manner on the week, given investors had already priced in a lot of risk in those banks after the Silicon Valley Bank collapse earlier this year. Regional banks have fallen 14% versus an 18% gain for U.S. equities this year.
This Week Preview
U.K. and Japan to Report Inflation
The U.K. Consumer Price Index is scheduled for release on Wednesday while Japan’s is scheduled for Friday. The U.K.’s year-over-year inflation may decelerate to 6.8% in July from 7.9% in June, with core inflation projected to barely budge to 6.8% from 6.9%. Japan’s inflation is expected to remain unchanged at 3.3%, with core inflation expected to bump up a notch to 4.3% from 4.2%. Hotter-than-expected inflation could entice the Bank of Japan to give up attempts to keep interest rates low through its yield curve control program, potentially increasing global yields.
More Updates on China’s Economy
Investors expect to receive more insight into China’s economy from reports on fixed assets investment, retail sales, industrial production, money supply and total social financing. Policymakers may implement more stimulus. However, investors expect them to refrain from substantial broad-based aid that would support a near-term recovery but jeopardize longer term goals.
Walmart and Home Depot to Report Earnings
Home Depot (HD) is scheduled to report earnings on Tuesday, followed by Target (TGT) on Wednesday and Walmart (WMT) on Thursday. U.S. retail sales are scheduled for release on Tuesday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of August 13, 2023.
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