Global Markets Weekly Update: February 17, 2023
U.S.
Stocks end mixed on data surprises
The major indexes ended mixed as investors weighed some healthy growth and profit signals against worries that inflation trends might be taking an unfavorable turn. Fears that the Federal Reserve would need to raise short-term interest rates more than previously expected caused U.S. Treasury yields to increase and fostered a rise in the U.S. dollar, taking an especially large toll on oil prices and energy stocks. (Oil is priced in U.S. dollars on international markets, resulting in pressure on demand when the dollar appreciates.) T. Rowe Price traders noted that trading volumes were especially subdued at the start of the week following Sunday’s Super Bowl celebrations, and markets were scheduled to be closed on Monday, February 20, in observance of the Presidents’ Day holiday.
Longer-term trends remain intact, but monthly inflation surprises on upside
The week’s highly anticipated inflation data offered a mixed picture. On Tuesday, the Labor Department reported that consumer prices rose 0.5% in January, as expected, versus a revised 0.1% increase in December. A “sticky” increase in shelter prices accounted for nearly half of the gain and compensated for another sharp drop in used car prices. On a year-over-year basis, the inflation rate came in at 6.4%, higher than expected but the slowest pace since October 2021. Annual core (less food and energy costs) inflation was 5.6%, also modestly above expectations but its slowest pace since December 2021.
Stocks fell on Thursday, however, after producer prices surprised on the upside. The producer price index rose 0.7% in January, its biggest gain since June, while core producer prices rose 0.5%, the most since May. Nevertheless, producer prices continued their steady and steep decline since June on a year-over-year basis, falling almost in half, from 11.2% to 6.0%
Uruçi: Recovery in consumer spending may stall inflation progress
In an interview with Yahoo! Finance, T. Rowe Price Chief U.S. Economist Blerina Uruçi highlighted the importance of Wednesday’s retail sales report. In her view, the data raised the possibility that a strong recovery in consumer spending may stall the progress the Fed has made in cooling inflation. Retail sales jumped 3.0% in the month, the biggest increase in 10 months and well above consensus expectations of around 1.8%. Uruçi thinks the strength in goods spending is particularly notable given the widespread expectation that reducing services inflation (heavily driven by shelter costs) is the main challenge moving forward. Spending at department stores jumped 17.5% in January, which she acknowledges may have been due to consumers having waited for post-holiday sales.
Growing (if still small) chance that Fed will accelerate rate hikes
Bonds generated negative returns for the week as economic data seemed to confirm recent hawkish comments from Fed officials that there was more work to do to tame inflation. As of the close of trading Friday, futures markets as tracked by CME Group began to price in an 18.1%% probability that the Fed would hike rates by a half point (0.50%) at its March policy meeting, almost double the chance priced in the week before. The Fed slowed its rate increase increment to a quarter point (0.25%) at its meeting early in the month.
The yield on the benchmark 10-year Treasury note rose to a three-month high on Friday morning before decreasing a bit to end the week. (Bond prices and yields move in opposite directions.) Our traders noted that municipal bonds declined across most maturities amid rising Treasury yields and an uptick in new issuance. Primary muni issuance decreased as the week progressed, but T. Rowe Price traders reported that outflows began to emerge, which weakened the technical backdrop through the end of the week.
According to our traders, investment-grade corporate bonds tracked U.S. equities lower later in the week as economic sentiment weakened. The primary calendar was active, with the level of new issuance firmly exceeding weekly expectations. Despite the uptick in supply, our traders noted that the new investment-grade corporate deals were met with adequate demand.
Our traders noted that no new high yield securities came to market as issuers seemed to be waiting for a better market tone to launch. In the loan market, investors appeared to remain focused on the primary issuance calendar amid mixed sentiment toward risk assets.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,826.69 |
-42.58 |
2.05% |
S&P 500 |
4,079.09 |
-11.37 |
6.24% |
Nasdaq Composite |
11,787.27 |
69.15 |
12.62% |
S&P MidCap 400 |
2,666.12 |
26.82 |
9.70% |
Russell 2000 |
1,946.35 |
27.54 |
10.51% |
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 rebounded as better-than-expected corporate results helped markets shrug off fears about additional interest rate hikes. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.40% higher. France’s CAC 40, which reached a record level earlier in the week, climbed 3.06%. Italy’s FTSE MIB Index advanced 1.77%, and Germany’s DAX Index added 1.14%. The UK’s FTSE 100 gained 1.55%, hitting an all-time high. A weaker British pound versus the U.S. dollar helped support the index, which includes many companies that are multinationals with overseas revenues.
European government bond yields headed toward recent multiyear highs due in part to hawkish comments from European Central Bank (ECB) policymakers. Yields on benchmark 10-year German government debt climbed, as did bond yields in Switzerland and France, after ECB President Christine Lagarde reiterated that interest rates would need to increase to control inflation. Yields on 10-year UK government bonds held near one-month highs.
UK inflation slows for third month in a row, retail sales rise
Annualized consumer price growth fell for a third consecutive month in January to 10.1% due mainly to easing services and fuel costs. Core inflation (excluding energy, food, alcohol, and tobacco) eased to a much lower-than-forecast rate of 5.8%. The slowdown in inflation stoked hopes that the Bank of England might opt for a smaller interest rate hike in March or skip one altogether. However, the jobs market remained tight in the three months through December, with the unemployment rate remaining just off an all-time low at 3.7%. Pay, excluding bonuses, rose by 6.7%.
Meanwhile, the volume of retail sales rose in January by 0.5% sequentially; the consensus estimate had called for a decline. Online sales, driven by holiday discounts, and falling average fuel prices boosted the monthly number. The annual measure, however, dropped 5.1%, declining for a 10th month running.
Mixed eurozone data show underlying inflation pressure, but economic weakness
Eurozone employment rose to a record high in the final quarter of last year, which could exacerbate ECB policymakers’ worries about second-round effects on inflation. Employment rose by 0.4% to 165.07 million, the most since early 2021 and more than double the consensus forecast. On a year-over-year basis, employment grew 1.5% after rising 1.8% in the third quarter.
Separately, industrial production in the eurozone fell in December by 1.1% sequentially, which was more than expected. Energy-intensive industries posted the sharpest falls in output. The euro area recorded a deficit of EUR 314.7 billion in 2022, compared with a surplus of EUR 116.4 billion the year before, as sharp increases in energy prices caused the value of imports to exceed the value of exports.
Japan
Japanese equity markets generated mixed returns for the week, with the Nikkei 225 Index down 0.57% and the broader TOPIX Index registering a 0.25% gain. Solid U.S. economic data prompted hawkish remarks from U.S. Federal Reserve (Fed) officials, weighing on risk assets. Sentiment was also dampened by Japan’s economy rebounding less than expected over the final quarter of last year. The nomination during the week of Kazuo Ueda as the next Bank of Japan (BoJ) governor prompted further speculation about the future trajectory of the central bank’s monetary policy. The yield on the 10-year Japanese government bond (JGB) hovered around the 0.50% level at which the BoJ attempts to cap JGB yields. The yen weakened, to around JPY 134.2 against the U.S. dollar, from about JPY 131.3 at the end of the previous week, mainly on expectations that there would be no change to BoJ monetary policy in the short term.
Japan’s economy rebounded less than expected in the final quarter of last year
Gross domestic product (GDP) expanded 0.6% quarter on quarter on an annualized basis in the three months to the end of December 2022, below consensus expectations and following a contraction in the third quarter. Private consumption was the main driver of growth, primarily due to the lifting of tough border controls in October, while accelerating government spending and positive net trade also provided a boost. Business investment contracted, serving as a drag on growth. Uncertainty about the global economic outlook is likely to weigh on Japan’s recovery from the coronavirus pandemic.
Government nominates Kazuo Ueda as next BoJ Governor
The government presented to Parliament Kazuo Ueda, an economist and former member of the BoJ Board, as its nominee for Japan’s central bank’s next governor and Ryozo Himino and Shinichi Uchida as deputy governors. Himino is a former commissioner of the Financial Services Agency, and Uchida is an executive director at the BoJ.
Market watchers are focused on any hints of monetary policy tweaks as Ueda prepares to take the helm in April, when incumbent BoJ Governor Haruhiko Kuroda’s term finishes. While Ueda has downplayed changes to BoJ’s ultra-loose stance anytime soon, his previous comments and actions suggest a more balanced tone, with consideration of the risks from excessive easing as well as the importance of reaching the 2% inflation target sustainably (with a focus on wage growth).
China
Chinese equities fell for a third consecutive week as concerns over escalating geopolitical tensions with the U.S. hampered prospects of faster economic growth. The Shanghai Stock Exchange Index pulled back 1.12%, and the blue chip CSI 300 eased 1.75%. In Hong Kong, the benchmark Hang Seng Index retreated 2.22%, according to Reuters.
Housing’s slide may have come to an end
Bloomberg reported that prices for new homes in China remained roughly steady in January, breaking a 16-month slide, as demand received a boost from the government lifting of its zero-COVID regime. In recent months, Chinese authorities have rolled out a slew of support measures for the struggling sector as it focuses on restoring economic growth in China. Economists now predict that the government will announce additional policies during or after the highly anticipated annual Parliament meeting, which starts in early March.
Meanwhile, the People’s Bank of China (PBOC) injected a further CNY 199 billion into China’s fiscal system via its one-year medium-term lending facility. The move was largely anticipated by investors, as the bank strives to meet the sharp rebound in economic activity after the government abruptly removed all pandemic-related restrictions in December. The PBOC issued a statement pledging to offer precise measures to strengthen financial support for key areas and weak links in the economy, including steady loan growth, targeted housing credit policies to individual cities, and providing financial services to meet housing demand.
China vows countermeasures in balloon controversy
In other news, China’s foreign ministry spokesman Wang Wenbin announced that Beijing will enact countermeasures against the U.S. after it shot down a suspected Chinese spy balloon in U.S. territory the previous week, stoking fears of rising geopolitical risks. The warning came after the U.S. added Chinese firms to an export blacklist amid alleged links to a military-backed global balloon espionage program.
Other Key Markets
Central Eastern Europe
Several central Eastern European countries recently issued fourth-quarter GDP data. According to T. Rowe Price credit analyst Ivan Morozov, the Czech Republic and Hungary are now in a technical recession, defined by having two consecutive negative quarter-over-quarter GDP readings. On the other hand, growth in Poland turned negative in the fourth quarter after experiencing a strong third-quarter economic rebound, while Romania maintained a relatively solid positive growth rate.
Overall, Morozov believes that the data confirm that the region is in a period of stagnation, at best. The data are even more striking given recent upside surprises to economic growth in the eurozone. The key explanation, in his opinion, is a more aggressive degree of monetary tightening in central Eastern Europe versus the eurozone.
Morozov expects regional economies to remain weak until at least the second half of 2023, with perhaps only a marginal pickup in growth. More meaningful growth in the region will likely require monetary easing, which he believes central banks will eventually deliver—but not in the near term, as inflation remains elevated. Year-over-year inflation in the Czech Republic (17.5%) and Hungary (25.7%) recently surprised to the upside, while inflation in Romania (15.1%) and Poland (17.2%) surprised to the downside.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about 1.0%. In recent weeks, President Luiz Inácio Lula da Silva (Lula) has made public comments and complaints about Brazil’s central bank and the level of interest rates (the Selic rate has been at 13.75% for several months) and expressed his preference for raising the central bank’s inflation target. Some of Lula’s supporters and allies believe that the central bank’s tight monetary policy is not only responsible for an economic slowdown, but is also undermining Lula’s administration.
Having previously refrained from responding in public, Brazilian central bank president Roberto Campos Neto appeared on a local news program on Tuesday and answered questions from journalists. Some observed that Neto seemed to be trying to make peace with Lula and his political allies by acknowledging Lula's democratic mandate, talking about how even the central bank doesn’t like to have such high interest rates and emphasizing the central bank’s efforts to increase financial inclusion. Many believe that a change in the bank’s inflation target is unlikely in the near term, however.
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