Global Markets Weekly Update: February 16, 2024
U.S.
Benchmarks mixed as small-caps and value shares outperform
Some favorable earnings surprises balanced against discouraging inflation data left the major benchmarks mixed, with the S&P 500 Index recording its first weekly decline since the start of the year. The declines were concentrated in large-cap growth stocks, however, with an equally weighted version of the S&P 500 reaching a record intraday high on Thursday. After suffering its biggest daily drop since June on Tuesday, the small-cap Russell 2000 Index rebounded to lead the gains for the week. T. Rowe Price traders noted that trading volumes also picked up later in the week, after a very quiet start on Monday following the football weekend and with multiple markets shut for holidays, including the Chinese New Year and Carnival celebrations on the eve of the start of Lent on Wednesday.
Upside inflation signals weigh on sentiment
Investors digested several upside inflation surprises during the week. On Tuesday, the major indexes sold off after the Labor Department reported that consumer prices had risen 0.3% in January, a tick above consensus expectations of around 0.2%. More concerning may have been the 0.4% rise in core consumer prices, keeping the year-over-year rise at 3.9%, nearly double the Federal Reserve’s 2.0% target.
Stocks regained some momentum on Wednesday, after Chicago Fed President Austan Goolsbee told conferencegoers in New York that slightly higher inflation over the coming months was still consistent with the path back to the Fed’s 2% inflation target. He noted that the upside surprises were driven largely by shelter costs (as measured by owners’ equivalent rent), which he termed a “puzzle,” according to Bloomberg. He also cautioned the impact of overtightening on the Fed’s employment mandate.
Stock futures fell again after some more substantial upside inflation surprises arrived Friday morning, however. The Labor Department reported that producer prices, which are typically more volatile, had increased 0.3% in January—the most in five months—after falling 0.1% in December. Core prices rose 0.5%, well above expectations of around 0.1%. A 2.2% jump in the cost of hospital outpatient care appeared partly to blame.
Consumers pull back
Much of the rest of the week’s economic data were also arguably disappointing—although signs of weaker growth seemed to help calm inflation concerns. On Thursday, the Commerce Department reported that retail sales had plummeted 0.8% in January. While many economists pointed to seasonal factors and harsher weather in January as a reason for the weakness, typically weather-sensitive sales at restaurants and bars rose 0.7%. Initial jobless claims also came in below consensus, while continuing claims were slightly above. While housing starts, reported Friday, came in lower than expected, a gauge of homebuilder confidence surprised on the upside.
The inflation data caused investors to lower their expectations for potential rate cuts considerably. According to the CME FedWatch Tool, the futures market ended the week pricing in only a 10.5% chance of a rate cut in March compared with a 65.1% chance a month earlier. The yield on the benchmark 10-year U.S. Treasury note also surged to an intraday high of 4.33% on Friday, its highest level since December 1.
After trading lower initially alongside weakness in Treasuries, municipal bonds rallied on low primary issuance volume. Our traders noted that issuance was widely expected to remain subdued over the following week given the Monday holiday, which also seemed to aid demand.
In the investment-grade corporate bond market, a large amount of new issuance pushed spreads wider on Monday, but increased demand, especially from yield-based buyers, helped spreads tighten throughout the rest of the week. According to our traders, high yield bonds struggled from broad risk-off sentiment, but elevated cash levels due to calls, coupon payments, and tenders combined with modest issuance provided a supportive technical backdrop.
U.S. Stocks
Index |
Friday’s Close |
Week’sChange |
% Change YTD |
DJIA |
38,627.99 |
-43.70 |
2.49% |
S&P 500 |
5,005.57 |
-21.04 |
4.94% |
Nasdaq Composite |
15,775.65 |
-215.01 |
5.09% |
S&P MidCap 400 |
2,828.30 |
19.83 |
1.68% |
Russell 2000 |
2,032.74 |
22.75 |
0.28% |
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 the week 1.39% higher as signs of cooling inflation and a better outlook for interest rate cuts cheered investors. Germany’s DAX gained 1.13%, and France’s CAC 40 Index advanced 1.58% on upbeat corporate earnings, hitting new highs during the week. Italy’s FTSE MIB climbed 1.85%. The UK’s FTSE 100 Index added 1.84%.
Core eurozone government bond yields rose modestly after the higher-than-expected U.S. inflation print. European Central Bank President Christine Lagarde expressed concern over “making a hasty decision” to ease policy in case inflation rebounds, adding to the upward pressure on short-dated bond yields. Peripheral eurozone bond yields fell, however, particularly those of longer-dated Italian debt.
UK in recession; inflation steadies
Official data showed that the UK economy fell into recession in the final three months of last year and that inflation held steady in January, reviving market expectations that the Bank of England (BoE) could cut interest rates as soon as June.
A preliminary estimate of gross domestic product (GDP) showed a greater-than-expected contraction of 0.3% in the three months through December. The economy shrank 0.1% between July and September.
Meanwhile, annual consumer price growth undershot consensus forecasts, coming in at 4.0%, the same as in December. Core inflation, excluding volatile food and energy prices, was also unchanged at 5.1%. But services inflation accelerated to 6.5%.
BoE’s Bailey downplays recession; inflation still too high
BoE Governor Andrew Bailey sought to downplay the GDP data before the figures had been released, asserting that a recession would be “very shallow” and that more emphasis should be placed on recent indicators, which “have shown some signs of an upturn.” He later told a parliamentary committee that the inflation data were “good news,” with the caveat that services inflation was still too high and more clear evidence was required that wage growth was slowing. Wages, excluding bonuses, grew 6.2% in the three months through December, down from 6.7% in September to November, the slowest pace in over a year.
EC cuts growth forecast; eurozone economy stagnates
The European Commission (EC) cut its forecast for eurozone economic growth in 2024 to 0.8% from the 1.2% predicted in November. This downward revision reflected inflation, which has eroded purchasing power, and higher interest rates, which curbed credit. The EC projected that economic growth would accelerate to 1.5% in 2025, slightly less than the previous estimate of 1.6%, it said. Separately, the second GDP estimate confirmed that the economy stagnated in the fourth quarter of last year, after shrinking 0.1% in the previous three months.
Japan
Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 4.3% and the broader TOPIX Index up 2.6%. The Nikkei hovered around its highest level in 34 years, continuing its strong performance in the year-to-date period and in 2023. Yen weakness and positive corporate earnings releases lent support. On the economic front, weak fourth-quarter growth data added to uncertainty about the future path of the Bank of Japan’s monetary policy, which the central bank deems dependent on sustainably achieving its 2% inflation target.
The yield on the 10-year Japanese government bond finished the week broadly unchanged at 0.73%, as investors digested the latest U.S. economic data, including inflation prints, and their likely impact on the timing of any potential Federal Reserve rate cuts.
The yen weakened to the low-JPY 150 range against the U.S. dollar, from the low-JPY149 range at the end of the previous week. The currency’s persistent weakness prompted fresh verbal intervention by Japan’s finance minister, but he refrained from commenting on the prospect of actual intervention in the foreign exchange market. Japan’s Ministry of Finance last stepped into the market to prop up the yen in September 2022. The weak yen has been a boon for Japanese exporters, as it boosts the value of their revenues earned overseas.
Japan’s economy slips into fourth place, behind Germany
The Japanese economy contracted 0.4% quarter on quarter over the final three months of last year, a worse-than-expected slump and marking an entry into a technical recession (defined as two consecutive quarters of negative growth). The main cause was sluggish domestic demand, while export growth was helped by a revival of inbound tourism. The country’s economy is now the world’s fourth largest, slipping behind Germany in gross domestic product terms. Japan faces structural headwinds in the form of weak growth and capital outflows as locals increase overseas investments.
China
Financial markets in mainland China were closed, and no official indicators were released due to the weeklong Lunar New Year holiday, which began Saturday, February 10. Early data showed a pickup in consumer spending over the Lunar New Year, China’s most important holiday. More than 61 million rail trips were made in the first six days of the national holiday, a 61% increase over last year’s holiday, according to official media reported by Bloomberg. Travel by road and airplane also improved, while hotel sales on Chinese e-commerce platforms increased more than 60%, according to state media.
However, analysts cautioned that the year-over-year consumption surge was less impressive considering that China was battling nationwide coronavirus outbreaks in early 2023 after Beijing rolled back pandemic restrictions in December 2022. Box office receipts in the first four days of the holiday declined from last year, according to Bloomberg using data from online movie ticket platform Maoyan Entertainment, suggesting that consumers may have reduced their spending per trip. Nevertheless, evidence of strong holiday spending will likely be welcome news for China’s government, which is grappling with deflation and a yearslong property sector crisis that has dampened consumer confidence. China’s stock markets resume trading on Monday, February 19.
Other Key Markets
Hungarian disinflation could support additional rate cuts...
The Hungarian government recently reported that headline inflation in January was at a year-over-year rate of 3.8%. This was lower than expected, thanks to reduced pricing pressures among non-core items, and it was lower than the 5.5% rate measured in December. Also, core inflation in January was measured at a year-over-year rate of 6.1% versus 7.6% in December.
T. Rowe Price credit analyst Ivan Morozov believes that both year-over-year inflation and inflation momentum are now at the central bank’s target, and he expects inflation to hover around 3% this year. As a result, he expects the central bank to continue cutting interest rates during the year, though he believes policymakers will continue watching the forint closely and could decide to pause rate cuts if the currency weakens materially.
...But elevated core inflation momentum in Poland could discourage rate cuts
On Thursday, the Polish government reported that headline inflation in January was at a year-over-year rate of 3.9%. This was below expectations for a 4.1% reading, and it was well below the 6.2% rate measured in December. While Morozov is encouraged by the general disinflation trend, he is skeptical that the central bank will pursue interest rate cuts in the near term. With core inflation momentum currently exceeding 5.0%, he believes that policymakers will likely keep the benchmark reference rate at 5.75% for the time being.
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