Global Markets Weekly Update: December 22, 2023
U.S.
Nasdaq 100 and Dow advance further into record territory
Stocks continued their weekly winning streak—the longest since 2017—as investors appeared to grow more assured that the economy would skirt a recession in the coming months. The S&P 500 Index briefly moved within 84 basis points (0.84 percentage points) of its all-time intraday high at the start of 2022, while the Nasdaq 100 Index and Dow Jones Industrial Average managed new records. Communication services stocks led the gains within the S&P 500, boosted by rises in Google parent Alphabet and Facebook parent Meta Platforms. Energy shares also outperformed as oil prices rose in response to worries over attacks on shipping in the Red Sea.
The week got off to a strong start, thanks seemingly to comments made by San Francisco Federal Reserve Bank President Mary Daly in an interview with The Wall Street Journal, where she stated her view that short-term interest rates “will be quite restrictive even if we [cut the federal funds rate] three times next year.” Daly also highlighted policymakers’ caution over slowing the economy too quickly, resulting in a sharp increase in unemployment. “We have to be forward-looking and make sure that we don’t give people price stability but take away jobs.”
On Tuesday, equities built on their gains after Richmond Fed President Tom Barkin told an interviewer that “inflation has quite rightly been and continues to be our focus, but I think you have to acknowledge the data has come in very nicely.” In a speech before a Harvard Business School alumni group, however, Atlanta Fed President Raphael Bostic cautioned that inflation “is going to come down relatively slowly in the next six months, which means that there’s not going to be urgency for us to start to pull off of our restrictive stance.”
Key gauge indicates falling prices for first time in nearly two years
The week’s economic data arguably provided evidence that the economy was on its way to fulfilling the Fed’s twin goals of low inflation and low unemployment. On Friday, the Commerce Department reported that the core (less food and energy) personal consumption expenditures price (PCE) index, the Fed’s preferred inflation gauge, rose only 0.1% in November, while October’s increase was revised lower to the same level. The headline PCE index fell 0.1% in November, marking its first decline in 21 months, thanks to a sharp decline in goods prices.
The week’s other notable surprises included a surge in new home construction, with housing starts jumping 14.8% in November. Existing home sales also surprised on the upside, although by a smaller margin. Meanwhile, the Conference Board’s index of consumer confidence rose to 110.7 in November, its highest level since July. Two regional manufacturing indexes surprised on the downside and indicated a continuing contraction in factory activity, but durable goods orders jumped 5.4% in November, well above expectations and the biggest increase since July 2020. Orders for non-defense capital goods excluding aircraft, considered a proxy for business investment, rose 4.7%, the biggest increase since 2004, according to Reuters.
Expectations grow for steeper rate cuts in 2024
The reassuring inflation data led to a sharp decline in interest rate expectations over the coming year. According to the CME FedWatch Tool, futures markets ended the week pricing in a 82.1% chance of at least 100 basis points in rate cuts by the end of the year, up from 59.6% the week before.
The drop in rate expectations alongside improved growth prospects was reflected in a decrease in short-term bond yields, resulting in a steepening of the Treasury yield curve. (Bond prices and yields move in opposite directions.) Activity was generally quiet in the bond markets ahead of the holiday weekend, although our traders noted that there were numerous headlines about various high yield issuers, many of which were related to merger and acquisition activity.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
37,385.97 |
80.81 |
12.79% |
S&P 500 |
4,754.63 |
35.44 |
23.83% |
Nasdaq Composite |
14,992.97 |
179.05 |
43.25% |
S&P MidCap 400 |
2,787.53 |
41.93 |
14.70% |
Russell 2000 |
2,033.96 |
48.83 |
15.48% |
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 ticked 0.21% higher and stayed near its almost one-year high. Major Continental stock indexes were softer to little changed. France’s CAC 40 Index lost 0.37%, Germany’s DAX declined 0.27%, and Italy’s FTSE MIB was down modestly. The UK’s FTSE 100 Index gained 1.60%.
UK inflation slows sharply; economy close to recession
UK headline inflation slowed more than expected to 3.9% in the 12 months through November, from an annual rate of 4.6% in October, due to a drop in prices for motor fuels, recreation, culture, and food. Underlying price pressures measured by core and services inflation eased, coming in at 5.1% and 6.3%, respectively, but were still above the Bank of England’s 2% inflation target.
Revisions to gross domestic product (GDP) by the Office for National Statistics indicated that the economy performed worse than previously thought in recent quarters. GDP was lowered from 0.2% to flat in the April to June period, while the final estimate for the third quarter showed that the economy shrank 0.1%.
Bank of England Deputy Governor Ben Broadbent asserted, nevertheless, that interest rates were likely to stay higher for some time. He said the central bank had yet to see evidence that wage growth and the labor market had cooled sufficiently for policymakers to contemplate reducing interest rates.
German companies more pessimistic, Ifo survey shows
A continuing downturn in German manufacturing sentiment stoked recession fears. The Ifo Institute’s business climate index fell to 86.4 in December from 87.2 in November as manufacturers said their current business situation was significantly worse and that their order books were continuing to shrink. They also said they were more pessimistic about the first half of next year.
ECB policymakers continue to douse early rate cut hopes
European Central Bank (ECB) policymaker Yannis Stournaras—a dovish member of the Governing Council—told Reuters that inflation must stabilize below 3% by mid-2024 before the central bank begins to lower rates from record highs. Slovenia’s central bank governor, Bostjan Vasle, also told the news agency that the ECB would need until at least until the European spring to reassess its outlook for rates. Both he, Slovak central bank Governor Peter Kazimir, and Spain’s Luis de Guindos also said it was too early to talk about a cut in rates.
Japan
Japan’s stock markets registered modest gains over the week, with the Nikkei 225 Index rising 0.6% and the broader TOPIX Index up 0.2%, supported by a dovish Bank of Japan (BoJ). As widely anticipated, the central bank retained its ultra-accommodative monetary policy stance, including forward guidance, at its December meeting. It refrained from making comments about possible policy tweaks next year, appearing to push back against market expectations of a near-term interest rate hike.
Against the backdrop of the dovish BoJ, the yield on the 10-year Japanese government bond (JGB) fell to 0.62% from 0.70% at the end of the previous week. While the yen initially weakened, it finished the week broadly unchanged at the low end of the JPY 142 range against the U.S. dollar.
BoJ appears to push back against dovish expectations
In a widely expected move, at its December meeting, the BoJ maintained its key short-term interest rate target at -0.1% and stated it would continue with its yield curve control policy, which regards the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations.
Comments by BoJ officials in early December had been taken by some investors as suggesting that the central bank could be preparing for an earlier-than-expected shift in its ultra-accommodative monetary policy—and that the removal of its negative interest rate policy could come soon after any potential lifting of yield curve control.
However, comments by BoJ Governor Kazuo Ueda appeared to push back against expectations of a near-term interest rate hike, with no mention of potential policy tweaks next year. Ueda reiterated the view that, while the chance of trend inflation accelerating toward the BoJ’s 2% target is gradually heightening, the central bank will still need to scrutinize whether a positive wage-inflation cycle falls into place. He added that determining an exit strategy now would be difficult, with the condition of sustained inflation not yet met.
Data released later in the week showed that Japan’s core consumer price index rose 2.5% year on year in November, down from the previous month’s 2.9% and the softest such inflation print since July 2022.
China
Stocks in China declined after the government announced new restrictions on the gaming sector. The Shanghai Composite Index gave up 0.94% while the blue chip CSI 300 fell 0.13%, its sixth weekly decline and capping its longest losing streak since January 2012, according to Bloomberg. In Hong Kong, the benchmark Hang Seng Index lost 2.69%, according to FactSet.
Chinese regulators announced a draft of new rules aimed at curbing spending and rewards for online video games. The regulations wiped off nearly USD 80 billion in market value from some of China’s largest gaming companies as investors grew concerned about the potential impact on earnings and the likelihood of another crackdown on the sector. In 2021, Beijing kicked off a two-year clampdown on big technology companies by setting strict playtime limits for players younger than 18 and suspended the approvals of new video games. However, the restrictions formally ended last year as the government resumed new game approvals and eased regulations for most of 2023.
In monetary policy news, Chinese banks left their one- and five-year loan prime rates unchanged, as expected, after the People’s Bank of China (PBOC) kept its medium-term lending rate on hold the prior week. While China remains an outlier among global central banks in maintaining a looser monetary policy to spur growth, many analysts believe that the PBOC will ease policy further in 2024 as persistent deflationary pressures weigh on the country’s outlook.
Other Key Markets
S&P upgrades Brazil’s sovereign credit rating
S&P Global Ratings raised its sovereign credit rating for Brazil to BB from BB- after the country approved changes to simplify its tax code, which is known as one of the most complex in the world. S&P said that “the reform is a significant overhaul of the tax system and will likely translate into productivity gains over the long term.” Despite the upgrade, Brazil’s S&P rating is still two notches below investment grade.
The benchmark Ibovespa Brasil Sao Paulo Stock Exchange Index (known as the Bovespa) of Brazilian stocks posted gains, building on its strong year-to-date momentum. The recent tax code simplification is one of several significant economic reforms that have supported Brazilian assets in 2023. Brazil’s currency, the real, has been one of the best-performing currencies against the U.S. dollar this year, gaining more than 20%.
Milei announces measures to privatize state-owned firms in Argentina
Newly elected Argentine President Javier Milei, who campaigned on a populist platform promoting unorthodox economic changes, announced a wide-ranging set of reforms to reduce the role of government in Argentina’s economy. The moves would prepare all state-owned companies to be privatized, eliminate some price controls, and boost exports. While shares of some government-owned companies gained following the announcement, Argentine stocks broadly finished the week little changed.
Milei’s reforms are likely to face opposition in the Argentine legislature as well as potentially in the country’s courts. His speech announcing the actions triggered some demonstrations, likely in reaction to the removal of price controls. Milei’s government had already made deep budget cuts, endangering social spending programs.
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.