Global Markets Weekly Update: August 25, 2023
U.S.
Stocks end mixed on mixed signals
Benchmark returns varied for the week as investors seemed to react to mixed signals on the economy and the course of monetary policy. Growth stocks handily outperformed value shares, helped by another substantial earnings and revenue beat by artificial intelligence chipmaker NVIDIA. Financials pulled back early in the week after S&P Global downgraded its credit ratings of five regional banks, citing, in part, stresses in the commercial real estate lending market.
Several retailers reported second-quarter results, which arguably offered a generally cautious picture on the health of the U.S. consumer. Shares of department store operator Macy’s fell sharply after the company reported falling earnings and warned of growing consumer caution, along with rising credit card delinquencies. Macy’s competitor Nordstrom, while beating earnings and revenue estimates, also cited rising late payments on its credit cards in issuing a cautious outlook. Nordstrom, discount chain Dollar Tree, and specialty retailer Dick’s Sporting Goods noted that earnings suffered from exceptionally high levels of theft from their stores.
The University of Michigan’s final reading of August’s consumer sentiment, released Friday, fell a bit from July’s nearly two-year high, seemingly due to higher inflation expectations following the recent increase in gas prices. However, the study’s chief researcher noted that “consumers remain supported by strong income expectations,” with hopes for higher wages strongest among lower-income consumers. The continued health of the labor market appeared to be confirmed by the weekly jobless claims report, which came in at 320,000, the lowest level in three weeks.
New home sales defy high mortgage rates
Durable goods orders data released Thursday indicated a somewhat higher degree of business caution, at least in certain areas. While durable goods orders, excluding defense and transportation—commonly accepted as a proxy for business investment—rose 0.1% in July; this was more than offset by a downwardly revised 0.4% contraction in June. S&P Global’s index of manufacturing activity also fell more than expected in August, reversing most of July’s strong gain and moving further back into contraction territory.
The housing sector appeared more robust, with new home sales reaching their highest level in July since early 2022, despite the highest mortgage rates in years. Freddie Mac reported on Thursday that the 30-year fixed rate mortgage had reached its highest level since 2001. Existing home sales fell back and missed expectations, however.
On Friday, Federal Reserve Chair Jerome Powell gave some indication of how he was interpreting these mixed signals at his speech before the central bank’s annual symposium in Jackson Hole, Wyoming. Powell acknowledged that higher rates had slowed growth in industrial production and wages, while tightening bank lending standards were also cooling the economy. On the other hand, he noted that economic growth remained above its longer-term trend and that the housing sector appeared to be “picking back up” after slowing sharply over the past year and a half. “As is often the case,” he concluded, “we are navigating by the stars under cloudy skies.”
Long-term yields back off nearly 16-year highs
The same could be said of both equity and bond investors in the wake of his speech, with both the stock benchmarks and bond yields fluctuating considerably to end the week. After hitting its highest intraday level (4.36%) since late 2007 on Tuesday, the yield on the benchmark 10-year U.S. Treasury note fell back to end relatively unchanged for the week at 4.24%. The ratio of tax-free to Treasury increased over much of the week—indicating underperformance of munis relative to Treasuries—with the 10- and 30-year ratios moving to the highest levels seen in months.
Issuance was light throughout the week in the investment-grade corporate bond market ahead of Powell’s speech, but the three issues that came to market were oversubscribed. Similarly, our traders noted that the high yield and bank loan markets appeared to be largely on hold in advance of the Jackson Hole conference.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,346.90 |
-153.76 |
3.62% |
S&P 500 |
4,405.71 |
36.00 |
14.75% |
Nasdaq Composite |
13,590.65 |
299.87 |
29.85% |
S&P MidCap 400 |
2,579.20 |
0.34 |
6.12% |
Russell 2000 |
1,853.63 |
-5.79 |
5.25% |
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 0.66% higher as European natural gas prices dropped and expectations grew that interest rates may soon peak. Major stock indexes advanced. Italy’s FTSE MIB tacked on 1.61%, France’s CAC 40 Index gained 0.91%, and Germany’s DAX added 0.37%. The UK’s FTSE 100 Index rallied 1.05%.
Eurozone bond yields fell, with 10-year German sovereign yields ending lower. Economic data pointed to a weakening European economy, prompting financial markets to pare expectations on future interest rate increases.
Eurozone business activity likely contracted in August
Initial results from a survey of purchasing managers compiled by S&P Global indicated that business activity in the eurozone likely shrank for a third consecutive month. The Purchasing Managers’ Index (PMI) for manufacturing came in at 43.7—a slight improvement from July but still well below 50, the level that indicates a contraction in activity. Meanwhile, the PMI reading for the services sector dipped below 50. The HCOB Flash Eurozone Composite PMI Output Index, which combines data from both sectors, fell to a 33-month low of 47.0 from 48.6 in July.
Bundesbank says German economy likely to stagnate again in third quarter
The Bundesbank said in its monthly report that it expects German economic output to remain “largely unchanged” in the three months ending September 30. If this scenario were to transpire, the economy would have posted zero growth for two consecutive quarters. A recovery in private consumption should continue, according to the central bank, but it also asserted that weak foreign demand could translate into anemic industrial production.
German companies appeared to become more pessimistic in August. The Ifo Institute’s business confidence index fell for a fourth consecutive month to 85.7, its lowest level since October 2022.
UK business activity turns negative
UK business activity recorded its weakest month in August since January 2021, according to S&P Global/CIPS. The Flash UK PMI Composite Output Index fell to 47.9 from 50.8 in July, the first contraction since January. New orders shrank for a second consecutive month.
Japan
Equities rally but falter at the close
Japanese equities rallied following the previous week’s declines, posting four consecutive positive sessions, before giving up much of the gains in a disappointing Friday close. The benchmark Nikkei 225 finished the week 0.6% higher and the broader TOPIX up 1.3%.
Upbeat data support gains
Japanese investors appeared undeterred by a softer-than-hoped-for policy response from China in the face of slowing growth and a building property crunch. Markets were further buoyed by encouraging domestic data announcements. Flash composite PMI data, combining both manufacturing and services sector activity, rose to 52.6 in August, up from 52.2 in July. And while Japan factory activity shrank for a third consecutive month in August, data showed the pace of decline was slowing.
Various inflation readings during the week provided mixed messages. However, a 3.1% rise in Japan core consumer prices in July was generally well received.
Mixed impacts from the global stage
On the global front, Japan markets also seemed to respond positively to weaker August U.S. PMI numbers during the week, notably manufacturing data—seen as potentially undermining the Fed’s case for holding rates higher for longer. On Friday, however, Japanese stocks tumbled on renewed concerns about China’s slowdown, while trade relations also took a turn for the worse following Japan’s decision to dump contaminated water from the Fukushima nuclear plant into the Pacific Ocean.
Yields rally after policy tweak
The yield on 10-year Japanese government bonds rose sharply during the week, moving as high as 0.68% at one point, the highest level in almost a decade. The recent shift in the Bank of Japan’s yield curve control strategy, favoring more flexibility and less direct intervention, prompted selling of Japanese debt. Yields retreated by the week’s end, settling around 0.65%, after global PMI data suggested weakening economic activity.
Currency weakness bears monitoring
The yen continued its weaker trend of recent months, finishing the period in the low JPY 146 range against the U.S. dollar. The value of the yen has tumbled to levels approaching those reached in September/October 2022—lows that prompted the Bank of Japan to step in to support the flagging currency.
China
Chinese stocks fell as investors grew more pessimistic about the country’s economic outlook. The blue chip CSI 300 Index and Shanghai Composite Index both recorded weekly declines and added to their year-to-date losses. The CSI 300 Index is trading at its lowest level since November 2022, while the Shanghai Composite Index is at its lowest level since last December. In Hong Kong, the Hang Seng Index, which entered a bear market the previous Friday, rose slightly for the week, though it too is at its lowest level since November.
Disappointing data, signs of deflation, record youth unemployment, and continued liquidity problems in the debt-laden property sector have contributed to an erosion of confidence in China’s economy. Signs of deteriorating growth—and a sense that China’s government has relatively few good options to arrest the downturn—have raised the prospect of accelerated capital outflows. Overseas funds sold the equivalent of USD 10.7 billion from the mainland market over the 13 trading days through Wednesday, according to Bloomberg, the longest stretch since it began tracking the data in 2016.
On Friday, state media reported that China has proposed that local governments can scrap a rule that disqualifies people who have ever had a mortgage—even those who have fully repaid them—from being considered a first-time homebuyer in major cities. The proposal was Beijing’s latest effort to shore up the property sector, which is under pressure from falling home prices and a rising number of developers defaulting on their debt.
T. Rowe Price analysts believe that downside risks are growing in China’s economy. Moreover, the recent spate of negative news coming from China’s property and trust sectors threaten to create a negative feedback loop about the economy, which could result in further weakness ahead.
However, the risks of a systemic crisis emanating from China’s property sector appear low. Moreover, the riskier “shadow” banking system, which includes trusts, is smaller today than it has been in recent years thanks to increased regulation. As a result, our analysts believe that the key risks are at the periphery of its financial system and potentially resolvable through regulatory intervention. Nevertheless, they are carefully monitoring property sector developments and possible spillovers to other sectors.
Other Key Markets
Turkey
The previous weekend, Turkey’s central bank announced a number of measures aiming to discourage and reverse the unsustainable accumulation of, and costs associated with, bank deposits protected from losses stemming from foreign exchange (FX) fluctuations. Such FX-protected deposits now exceed 3 trillion Turkish lira (USD 125 billion) and have cost the government more than 550 billion lira (USD 20 billion).
For example, the central bank adjusted key “lira-zation” ratios and now requires banks to convert 50% of the initial lira deposits (before their switch into FX-protected instruments) back into plain vanilla lira deposits and 5% of the initial FX deposits back into plain vanilla FX deposits. Banks that are unable to meet these ratios will be required to buy government bonds. In addition, the central bank raised the FX required reserve ratio from 25% to 29%, aiming to discourage FX deposits.
According to T. Rowe Price sovereign analyst Peter Botoucharov, these measures represent a positive policy step toward resolving a large and growing imbalance and costs to the government’s budget and to the central bank. This will allow the government and the central bank to start reducing macro-prudential regulations that have distorted both the FX and local interest rate markets.
Botoucharov cautions, however, that the process is likely to be slow and that it could take at least three to six months before the level of FX-protected deposits is reduced to more manageable levels. In the meantime, he expects lira deposit rates will need to rise materially in order to convince depositors to switch to plain vanilla lira deposits that are not protected from currency fluctuations.
Brazil
Since the end of 2016, a mandatory spending cap enforced by a constitutional amendment had largely contained the growth rate of Brazil’s government spending to keep it from exceeding the country’s inflation rate. Earlier in the week, however, the lower chamber of Brazil’s legislature voted by a wide margin in favor of new fiscal rules intended to keep the growth of government debt in check.
As reported by Reuters, the new rules will prevent government spending from exceeding 70% of any government revenue increase. Also, spending growth will be limited to a range of 0.6% to 2.5% in excess of inflation. In addition, if the government does not meet its budget targets, the new rules will force any increased expenditures to be capped at 50% of government revenue increases.
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.