Global Markets Weekly Update: February 10, 2023
U.S.
Benchmarks give back a part of the previous week’s gains
The major benchmarks ended lower in a week with relatively few important economic releases or other concrete drivers of sentiment, according to T. Rowe Price traders. Sector performance was relatively uniform within the S&P 500 Index, with energy stocks being the notable upside outlier and communication services shares the prominent laggard. Our traders also observed that a recent pattern of short covering—or the buying of certain stocks by hedge funds and others to cover previous bets that the shares would fall—was perceived by many to be coming to an end.
Chatbot demonstration fumble sends Alphabet shares tumbling
The most significant stock-specific event for the broad benchmarks was a plunge in shares of Google parent Alphabet, which lost roughly USD 100 billion in market capitalization on Wednesday and fell roughly 10% for the week. The shares plunged after Reuters reported that Google’s new artificial intelligence (AI)-based chatbot, Bard, mistakenly identified the first satellite to take a picture of an exoplanet in its first public demonstration on Monday.
The recent debuts of rival chatbots, such as ChatGPT and Perplexity, have raised concerns for some investors about Google’s ability to maintain its dominance in internet search and AI. Microsoft has invested heavily in ChatGPT creator OpenAI and unveiled a prototype of the two companies’ combined search engine on Monday.
Fed Chair Jerome Powell still thinks disinflation has begun
Statements from Federal Reserve officials appeared to send stocks in opposite directions on Tuesday and Wednesday. Stocks rallied Tuesday, after Fed Chair Jerome Powell, in a question-and-answer session at the Economic Club of Washington, repeated an earlier reference to the disinflation process having started. Some investors had worried that the major upside surprise in the January payrolls report, released the previous Friday, might cause Powell to change his tone. Our traders noted that a series of apparently hawkish comments from other Fed officials the following day seemed to send stocks back lower, however.
After the previous Friday’s big surprises, the week’s light calendar of economic data came in largely in line with consensus expectations. Weekly jobless claims were slightly higher than expected, at 196,000, but remained near recent nine-month lows. The University of Michigan’s preliminary gauge of February consumer sentiment, released Friday, moderately exceeded expectations and reached its highest level (66.4) since January 2022.
Yield curve inversion hits most extreme level since early 1980s
The yield on the benchmark 10-year U.S. Treasury note increased solidly over the week as investors appeared to continue digesting the previous week’s strong January payrolls report. (Bond prices and yields move in opposite directions.) The yield curve inverted further—Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades—as fears grew that the Fed would need to push the economy into recession in order to tame inflation.
While the tax-exempt market felt the downdraft in Treasuries, our municipal traders noted that technical conditions remained generally favorable. While an uptick in new muni issuance is expected in March, the primary calendar for the next few weeks looked manageable, and funds industrywide continued to receive inflows.
Conversely, investment-grade corporate bonds weakened relative to Treasuries alongside expectations of an active primary calendar. Our traders noted that recent new corporate issues that had begun trading in the secondary market underperformed early in the week but that deals that reached the market during the week were met with adequate demand. New deals in the high yield market were met with solid demand, and our traders noted that steady issuance was expected ahead of the following week’s inflation data. The bank loan market also benefited from a favorable technical backdrop.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,869.27 |
-56.74 |
2.18% |
S&P 500 |
4,090.46 |
-46.02 |
6.54% |
Nasdaq Composite |
11,718.12 |
-288.83 |
11.96% |
S&P MidCap 400 |
2,639.30 |
-68.17 |
8.60% |
Russell 2000 |
1,918.81 |
-66.72 |
8.95% |
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
Shares in Europe weakened on concerns about overly aggressive central bank policy that might prolong an economic downturn. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.62% lower. Major stock indexes were mixed. Italy’s FTSE MIB Index gained 1.18%. However, France’s CAC 40 Index fell 1.44%, Germany’s DAX Index declined 1.09%, and the UK’s FTSE 100 Index eased 0.24%.
ECB hawks stress the need for more rate hikes
Several European Central Bank (ECB) policymakers reasserted their hawkish stance in the wake of the most recent rate-setting meeting, warning against complacency in the fight against inflation. Comments by Executive Board member Isabel Schnabel seized the market’s attention at the start of the week. The recent slowing of inflation wasn’t necessarily due to ECB policy, she argued, while stressing that underlying inflation was still extraordinarily high. German Bundesbank President Joachim Nagel, Latvian central bank Governor Martins Kazaks, and Dutch central bank Governor Klaas Knot all suggested that rates would have to rise further after what is expected to be another half-point increase in March.
German Finance Ministry sees mild slowdown; inflation slows more than forecast
The German Finance Ministry said it expected the winter slowdown to be mild because of strong industrial order books, an improvement in confidence, and easing supply bottlenecks. Earlier, data showed industrial production in December fell 3.1% sequentially, largely due to slowdowns in energy-intensive industries. However, industrial orders rose 3.2% on the month—the biggest increase in more than year—thanks to strong domestic and eurozone demand.
Meanwhile, delayed data showed that inflation in Germany, when adjusted for comparison with other EU countries, slowed by more than expected, hitting a five-month low of 9.2% in January.
UK sidesteps recession; housing market still struggling
The UK avoided a recession last year, despite a sharp economic contraction in December, official data showed. Gross domestic product (GDP) came in flat in the final three months of last year, avoiding a second consecutive quarter of economic contraction. A drop in services output—hit by a series of one-off factors such as strikes, fewer visits to doctors and hospitals, and the lack of Premier League soccer matches during the World Cup—was the biggest drag on growth. Having expanded in October and November, GDP shrank 0.5% sequentially in December, when rail strikes began.
Swedish central bank hikes rates more than forecast
The Riksbank raised interest rates by another half percentage point to 3.0%. The central bank’s latest economic projections pointed to at least another quarter-point rate hike in April.
Japan
Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 0.59% and the broader TOPIX Index up 0.85%. Speculation was rife about the potential nominees to be the next governor and deputy governor of the Bank of Japan (BoJ). After Japanese markets closed on Friday, the Nikkei news agency reported that the government plans to appoint Kazuo Ueda, an economist and former member of the BoJ Board who had not been mentioned as a shortlisted candidate, as the central bank’s next governor. This came as a surprise following a week during which expectations grew that current Deputy Governor Masayoshi Amamiya would be the government’s nominee.
With incumbent BoJ Governor Haruhiko Kuroda’s term ending in April, investors are watching for any potential change in the central bank’s ultra-loose monetary policy stance amid signs of wage growth coming through (the latest data showed real wages turning positive) and particularly if more hawkish candidates are appointed. Against this backdrop, the yen strengthened to about JPY 130.5 against the U.S. dollar, from around JPY 131.2 at the end of the previous week. The yen jumped on Friday on reports of Ueda’s potential appointment and some investor expectations of a monetary policy tweak. The yield on the 10-year Japanese government bond (JGB) was broadly unchanged on the week, hovering around the 0.50% level at which the BoJ strives to cap JGB yields.
Prime minister to carefully consider market impact while choosing new BoJ governor
In considering the selection for the new BoJ governor, Prime Minister Fumio Kishida will pay close attention to the potential impact on financial markets. He noted that an important attribute for Kuroda’s successor would be the ability to closely coordinate with other major central banks and to understand and communicate with market participants at home and abroad. Kishida has not confirmed that the government will nominate Ueda to succeed Kuroda, only that the nominees will be presented to parliament on February 14.
Ueda’s previous comments and actions suggest a more balanced tone with consideration of the risks from excessive easing and also the importance of reaching 2% inflation sustainably (with a focus on wage growth). He recently said that the current rise in Japan’s inflation is largely driven by a negative supply shock from the global increase in food and energy prices. He has also signaled some concern about applying unusual monetary policy frameworks for an extended period and suggested a review was necessary.
China
Chinese stocks retreated as the spy balloon controversy fanned tensions with the U.S. and offset expectations of faster economic growth following China’s exit from pandemic controls. The Shanghai Stock Exchange Index and the CSI 300 Index both recorded slight declines for the second straight week as the diplomatic crisis over the balloon in U.S. airspace reminded investors of the geopolitical risks of investing in the country.
The spy balloon incident raised the prospect of further sanctions on China from the U.S. after the Biden administration announced a sweeping ban on U.S. companies selling advanced semiconductors and certain chip manufacturing equipment to China last October. Relations with China and the U.S. debt ceiling will be the key public policy catalysts moving markets in 2023, and risks for both are skewed to the downside, believes T. Rowe Price’s Washington/regulatory research analyst Michael Pinkerton. Possible U.S. measures that could be enacted in the next two years include outbound investment screening for investments in China as well as further export controls on the country, according to Pinkerton.
Investors appear to have turned more cautious about China’s outlook following a three-month rally driven by reopening optimism that began last November amid speculation that China was preparing to unwind its strict zero-COVID policy, which Beijing rolled back in December. Despite a burst of economic activity during the weeklong Lunar New Year holiday at the end of January, analysts have lately flagged significant growth headwinds for China, including waning export demand and a weak property market.
In economic news, China reported that its consumer price index picked up 2.1% in January from a year ago, in line with estimates, while producer prices fell more than expected due to lower commodity costs. The latest data showed that China isn’t likely to experience runaway inflation similar to the U.S. and Europe and raised expectations that the central bank would keep policy supportive to bolster the economy.
Other Key Markets
Turkey
Turkish stocks, as measured by the BIST-100 Index, returned about -16.2% through the close of business on Wednesday.
A massive earthquake with a magnitude of 7.8 on the Richter scale struck in the early morning hours of Monday, February 6, near the border between Turkey and Syria. The quake was followed by a number of aftershocks, as well as another powerful quake measuring 7.5 on the Richter scale.
As losses in terms of human life—more than 22,000 in both Turkey and Syria as of Friday morning—mounted over the course of the week, and as the extent of infrastructure damage became clearer, President Recep Tayyip Erdogan announced a week of mourning and requested international assistance. He also declared a three-month emergency in 10 provinces, and the stock market suspended trading for several days following a steep sell-off in the first half of the week.
While the immediate economic impact is likely to be relatively limited in terms of economic growth, the widespread impact on human life and infrastructure will likely require large and extended logistic operations. Initial estimates suggest that the fiscal impact on government finances could see the budget deficit widening to 3% of GDP (from currently a 12-month rolling fiscal deficit of 1.2% of GDP) due to reconstruction-related expenditures.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -0.30%.
During the week, the government reported that the month-over-month inflation rate in January was 0.53%, slightly less than expected, and that the year-over-year inflation rate remained at 5.8%. In general, the underlying details of the report were positive and consistent with recent inflation readings. For example, the average of the central bank’s core measures of inflation decelerated from 0.66% month over month in December to 0.55% in January. Services inflation picked up a bit, mostly because of increases in telecommunications and landline costs, though core services decreased slightly. On the other hand, there was an increase in administered prices, especially gasoline following a Petrobras price increase a few weeks ago.
Overall, this latest inflation report shows a continuation of the recent disinflation trend. Incoming activity data continue to be generally weak, which many believe should support core disinflation this year. As for non-core costs, the outlook for food prices seems benign given global prices and what seems to be a very good harvest. Also, while there may not be another gasoline price increase from Petrobras, there could be an increase in gasoline price inflation in March if the government ends the suspension of a certain gasoline tax.
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