Global Markets Weekly Update: February 24 2023
U.S.
Stocks suffer biggest decline in 10 weeks
A cascade of upside inflation and growth surprises pushed the S&P 500 Index to its worst weekly loss since early December. At its close on Friday, the index had surrendered roughly 35% of the rally that began in October, but it remained up 3.40% for the year to date. The declines pushed the narrowly focused Dow Jones Industrial Average into negative territory for 2023, however. Communication services and consumer discretionary stocks performed worst within the S&P 500, but the declines were widespread, and growth stocks fell only modestly more than value shares.
The Cboe Volatility Index (VIX), Wall Street’s so-called “fear index,” jumped but remained a bit below its mid-December levels, and T. Rowe Price traders noted that volumes were relatively muted for much of the week. Markets were closed on Monday in observance of the Presidents’ Day holiday.
Inflation appears to regain momentum as year begins
Stocks fell sharply following worrisome signs that inflation might have reversed course and accelerated again as the year began. On Friday, the Commerce Department reported that its core (less food and energy) personal consumption expenditures (PCE) price index jumped 0.6% in January, above expectations of an increase of 0.4% and its biggest rise since August. December’s figure was also revised higher, pushing the year-over-year increase—widely considered to be the Federal Reserve’s preferred inflation gauge—from 4.6% to 4.7%, the first pickup in pace since September. Consensus expectations had been for another decline to around 4.3%. Along similar lines, personal spending rose a solid 1.8% in January, the biggest increase in nearly two years and also well above expectations.
Additional data suggested that both consumers and employers were yet to be deterred by rising interest rates. The University of Michigan’s gauge of consumer expectations in February was revised higher to its best level in over a year, and both initial and continuing jobless claims fell back and came in below consensus. In a sign of solid household balance sheets, sales of new single-family homes reached their highest level since March 2022, when 30-year mortgage rates were roughly 2.5 percentage points lower. A few major retailers reported disappointing earnings and offered cautious guidance during the week, however, suggesting some tightening in household budgets.
Investors expect more rate hikes
Not surprisingly, the week’s data had a large impact on expectations for the timing and extent of future Fed rate hikes. According to CME Group data, futures markets began pricing in a roughly 27% chance of a half-point (0.50%) hike in the federal funds target rate at the upcoming March policy meeting, with approximately a 38% chance that the so-called terminal rate would reach a target range of 5.50% to 5.75% or higher. Likewise, expectations that the Fed would begin cutting rates in the fall dwindled considerably.
St. Louis Federal Reserve President James Bullard, widely considered a “hawk,” appeared to provide a brief boost to sentiment on Tuesday, however. In an interview with CNBC, he remarked that he still thought that the Fed should bring rates to five and three-eighths—or 5.375%, a tongue-in-cheek reference to policymakers’ median estimate, since the Fed is unlikely to raise rates by an eighth of a point. And then “we can see how the data come in,” he added.
Bond yields hit highest level in over three months
The growth and inflation data sparked a sell-off in U.S. Treasuries, with the yield on the benchmark 10-year U.S. Treasury note nearing 4.00% for the first time since mid-November. Municipal bonds performed even worse for much of the week, despite a lack of new issuance.
Investment-grade corporate bonds traded lower after some prominent retailers reported earnings and some concerns about the health of the U.S. consumer gained traction. According to our traders, risk sentiment was further weakened by the release of the Fed’s last policy meeting minutes.
Our high yield bond traders reported that market volumes were below average as elevated cash balances led to less aggressive selling. The sector also saw very light primary market activity as most issuers appeared to be waiting for the market’s tone to improve. In the bank loan market, investors seemed to be somewhat more risk averse and sought to reduce exposure to lower-quality loans.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
32,816.92 |
-1,009.77 |
-1.00% |
S&P 500 |
3,970.04 |
-109.05 |
3.40% |
Nasdaq Composite |
11,394.94 |
-392.33 |
8.87% |
S&P MidCap 400 |
2,600.68 |
-65.44 |
7.01% |
Russell 2000 |
1,946.35 |
-55.87 |
7.34% |
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 fell as better-than-expected economic data and corporate earnings raised the prospect that central banks might persist with interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.42% lower. Major stock indexes also declined. Germany’s DAX Index lost 1.76%, France’s CAC 40 Index slid 2.18%, and Italy’s FTSE MIB Index dropped 2.76%. The UK’s FTSE 100 Index gave up 1.57%.
Slower Eurozone headline inflation confirmed
Inflation in the eurozone eased in January to an annual rate of 8.6% from 9.2% the previous month. That was only marginally higher than the initial estimate, even after data from Germany showed that consumer price growth remained elevated in the bloc’s largest economy. However, underlying price pressures continued to increase, with the core inflation measure—which excludes fuel and food prices—accelerating to 5.3% from the 5.2% registered in December.
Germany's economy shrinks more than expected....
The German economy shrank more than expected in the fourth quarter, spurring fears of a recession. Gross domestic product declined 0.4% compared with the previous three months—worse than the early estimate of a 0.2% contraction. The final data showed household consumption and capital investment were weaker than initially estimated.
….but forward-looking PMI suggests eurozone business activity is strengthening
Private sector business activity in the eurozone picked up pace in February, reaching a nine-month high, a survey of purchasing managers by S&P Global showed. A preliminary reading of the composite Purchasing Managers' Index (PMI), which measures the combined output of the services and manufacturing sectors, rose to 52.3 in February from 50.3 in January. (PMI readings greater than 50 indicate an expansion in activity). Stronger services activity and a return to growth in manufacturing output drove the increase.
Business activity in the UK manufacturing and services sectors unexpectedly ticked up in February, according to PMI data from S&P Global/CIPS. The survey indicated that prices charged by companies eased only fractionally during the month, and many firms mentioned the need to pass on higher wages, food costs, and energy bills.
Japan
Equities in Japan lost ground over the week, with the Nikkei Index falling 0.22% and the broader TOPIX Index down 0.18%. Comments perceived as dovish by incoming Bank of Japan (BoJ) Governor Kazuo Ueda lent some support to markets on Friday, but this was outweighed by general worries about the impact of further interest rate hikes by the U.S. Federal Reserve. Surging consumer prices added fresh pressure on the BoJ to start scaling back its massive stimulus program. Against this backdrop, the yield on the 10-year Japanese government bond continued to hover around the BoJ’s 0.50% upper limit, while the yen weakened to about JPY 135.2 against the U.S. dollar, from about 134.1 at the end of the prior week.
Next BoJ Governor emphasizes monetary policy continuity
In a hearing in the lower house of parliament, Kazuo Ueda, who is set to become BoJ Governor in April, adopted a largely dovish tone, emphasizing monetary policy continuity but also acknowledging that current policy had side effects. He said that it will take time for the BoJ to achieve its 2% inflation target in a sustainable and stable manner, and given the current economic and price situation as well as the outlook, it is appropriate to continue with monetary easing. However, when the BoJ’s inflation target is realized, the central bank will be able to take steps to normalize monetary policy. Without going into specifics, Ueda hinted at various possibilities for the future of the BoJ’s yield curve control framework, while emphasizing that the outlook for underlying prices will determine whether it is reviewed in the direction of normalization.
Ueda asserted that the main reason for the rate of increase in consumer prices—Japan’s core consumer price index rose 4.2% year-on-year in January, its biggest gain in over 41 years—is cost-driven inflation due to rising import prices and not due to strong demand. He emphasized the need to focus on a variety of factors, including wage growth, to determine underlying price trends.
Services sector sees growth, while manufacturing slows
Flash PMI data showed sustained growth in Japan’s services sector in February, as the most recent wave of the coronavirus pandemic subsided, providing a boost to demand. Conversely, the health of the manufacturing sector deteriorated, reflected in a sharp drop in new orders and production. Inflationary pressures remained stubbornly high across the private sector.
China
Chinese stocks advanced after three weeks of losses as hopes for stepped-up regulatory support offset concerns about elevated U.S. tensions. The Shanghai Stock Exchange Index gained 1.34% and the blue chip CSI 300 added 0.66% in local currency terms. In Hong Kong, the benchmark Hang Seng Index fell 3.43% as a resurgent U.S. dollar added to concerns over the strength of China’s economic recovery.
China’s yuan currency dropped to a seven-week low against the dollar after the release of unexpectedly strong U.S. inflation data on Friday raised expectations that the Federal Reserve would keep raising interest rates. Signs of worsening U.S.-China relations—a key factor influencing currency trading in recent years—also pressured the yuan amid reports that the U.S. plans to increase the number of troops helping train Taiwanese forces. The U.S. is Taiwan’s biggest weapons supplier and has recently increased its presence around the island to guard against a potential invasion by China.
PBOC keeps rates steady as growth dampens need to loosen policy
The People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates unchanged for the sixth consecutive month, as expected. Signs of economic growth appeared to dampen the need to loosen policy after Beijing’s removal of pandemic restrictions in December resulted in a batch of better-than-expected indicators.
Many analysts forecast the central bank will continue its accommodative stance to support the economy amid a sluggish property market, tumbling exports, and fragile consumer confidence. However, the PBOC instructed lenders to control the pace of new loans after they reached a record level in January, Reuters reported. New loans jumped to RMB 4.9 trillion in January driven by state-backed infrastructure projects even as demand from businesses remained weak, according to Reuters.
In regulatory news, China’s securities regulator published new rules to revive offshore initial product offerings following a regulatory freeze that began in July 2021. The rules grant oversight of variable interest entity structures and allow access to foreign capital as Beijing attempts to boost overseas listings, which it cited as vital for letting domestic companies access liquid capital markets. The guidelines go into effect on March 31.
Other Key Markets
Turkey
Stocks in Turkey, as measured by the BIST-100 Index, returned about 0.6%.
On Thursday, the Turkish central bank decided to reduce its key interest rate—the one-week repo auction rate—from 9.00% to 8.50%. In light of the tragic loss of life and devastation stemming from the early-February earthquake and aftershocks, a rate cut was not unexpected.
In their post-meeting statement, central bank officials noted that the “impact of the earthquake on production, consumption, employment, and expectations is being extensively evaluated,” but they anticipate that “it will not have a permanent impact on performance of the Turkish economy in the medium term.”
Nevertheless, policymakers concluded that it has become “even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.” They considered their 50-basis-point rate cut to be a “measured reduction” in interest rates and deemed it as being “adequate to support the necessary recovery in the aftermath of the earthquake.” T. Rowe Price sovereign analyst Peter Botoucharov believes that macroeconomic policymaking, based on highly stimulative monetary policy, is unlikely to change ahead of the elections, which at present are still expected to take place in May or June.
Mexico
Stocks in Mexico, as measured by the IPC Index, returned about -2.0.
On Thursday, the Mexican central bank released the minutes from its February 8 policy meeting, at which policymakers unanimously decided to raise the overnight interbank interest rate by 50 basis points, from 10.50% to 11.00%. In contrast, the U.S. Federal Reserve’s most recent interest rate increase on February 1 was only 25 basis points.
According to the minutes, most meeting participants agreed that the Mexican labor market was continuing to strengthen but that the broader economy in the fourth quarter had lost momentum versus previous quarters. Most attributed the moderation in the manufacturing sector to “the slowdown in U.S. demand.”
Regarding inflation, policymakers noted that the January headline inflation rate of 7.91% was lower than expected, but that the 8.45% core inflation rate was higher than anticipated. They also expressed concern that core inflation “continues at high levels and remains more persistent than expected.” In addition, they projected that the eventual downward trajectory of the core inflation rate “will be above the previously anticipated one.” As a result, central bank officials concluded that “it is necessary to continue with the magnitude of the reference rate adjustment of the previous policy meeting in order to be in a better position to tackle a still complex inflationary environment.”
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