Global Markets Weekly Update: January 05, 2024
U.S.
Stocks start 2024 on a down note
Stocks gave back a portion of the past several weeks’ solid gains as investors appeared to rotate into sectors that lagged in 2023, including utilities, energy, consumer staples, and health care. Conversely, a slide in Apple shares following an analyst downgrade weighed on the large-cap, technology-heavy Nasdaq Composite Index. The small-cap Russell 2000 Index also fell more than the broad market. T. Rowe Price traders noted that trading volumes were relatively muted over much of the holiday-shortened week, with markets shuttered on Monday in observation of the New Year’s Day holiday.
Geopolitical concerns appeared to weigh on sentiment as 2024 trading began. Over the previous weekend, and in advance of upcoming elections in Taiwan, Chinese President Xi Jinping stated that “the reunification of the motherland is a historical inevitability.” (According to Reuters, the official English translation was perhaps less pointed, stating that "China will surely be reunified.") Investors also appeared worried about a further escalation of tensions in the Red Sea, with Iran sending a warship and the U.S. sinking attacking ships armed by Houthi rebels from Yemen.
The week’s shortened economic calendar offered mixed evidence about the economy’s momentum heading into the new year. On Tuesday, S&P Global revised lower its gauge of December manufacturing activity, indicating the fastest pace of contraction since August. On the other hand, the Institute for Supply Management’s (ISM’s) similar gauge, released Wednesday, showed factory activity picking up more than expected in the month. Both firms’ surveys indicated continued expansion in the much larger services sector, although at a substantially slower pace than expected in the case of the ISM.
Conflicting jobs signals
The week’s headline labor market data generally surprised on the upside, although underlying trends were more mixed. The closely watched monthly nonfarm payroll report showed that employers added 216,000 jobs in December, well above consensus forecasts. Monthly growth in average hourly earnings stayed steady at 0.4%, slightly above expectations, and the unemployment rate similarly defied expectations by remaining at 3.7%. The workforce participation rate fell back unexpectedly to 62.5%, however, its lowest level since February. The ISM’s Non-Manufacturing Employment Index also fell sharply into contraction territory and hit its lowest level since July 2020.
Reflecting the contradictory signals in the jobs reports, perhaps, stock prices and bond yields fluctuated following their release Friday morning. The yield on the benchmark 10-year U.S. Treasury note ended higher for the week and moved above the 4% threshold for the first time since mid-December. (Bond prices and yields move in opposite directions.)
Quiet start to the year for municipals
It was a quiet start to the year in the tax-exempt municipal bond market amid low new issuance and subdued secondary trading volumes. According to our traders, while coupons were paid on January 1, investors appeared to be showing patience in reinvesting cash.
U.S. investment-grade corporate bonds generated negative performance over much of the week. The start of the year brought heavy issuance, although less came to market than was widely anticipated. The majority of issuance was also shorter in duration, or less sensitive to changes in interest rates. While new deals garnered relatively strong demand, buyers commanded a higher yield premium relative to Treasuries over the course of the week. Our traders attributed this trend to supply overhang, a weaker macro tone, and repricing risk.
High yield bonds were also weaker as they retraced some of the positive performance during the last two weeks of December. Our traders noted that robust primary market activity is expected through January, with some estimates calling for issuance totals as high as $25 billion. The bank loan market began the year with a quieter tone, although our traders noted that loan primary market activity started to pick up with deals that were mainly refinancing- and repricing- based.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
37,466.11 |
-223.43 |
-0.59% |
S&P 500 |
4,697.24 |
-72.59 |
-1.52% |
Nasdaq Composite |
14,524.07 |
-487.28 |
-3.25% |
S&P MidCap 400 |
2,712.50 |
-69.04 |
-2.48% |
Russell 2000 |
1,951.14 |
-75.93 |
-3.75% |
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 0.55% lower and snapped seven consecutive weekly gains, as optimism for an early cut in interest rates waned. Major stock indexes mainly fell. France’s CAC 40 Index declined 1.62%, while Germany’s DAX lost 0.94%. However, Italy’s FTSE MIB eked out a 0.29% gain. The UK’s FTSE 100 Index slid 0.56%.
European government bonds fell sharply, sending yields higher, as traders pared aggressive rate-cut expectations. The yield on the benchmark 10-year German bund rose to more than 2.1%, while in Italy, the 10-year government bond yield closed the week above 3.8%. In the UK, the 10-year gilt ended with an almost 3.8% yield.
Eurozone inflation picks up in December
A reacceleration in eurozone inflation in December appeared to make early rate cuts by the European Central Bank less likely. A preliminary estimate indicated that annual consumer price growth rose to 2.9% from a two-year low of 2.4% in November, reflecting a cut in government subsidies for electricity, gas, and food. However, a measure of core inflation, which excludes more volatile food and energy costs, eased to 3.4% from 3.6%.
German labor market holds up
The number of unemployed Germans rose by a seasonally adjusted 5,000 to 2.703 million in December, much less than the 20,000 increase that analysts polled by FactSet had expected. The seasonally adjusted jobless rate rose slightly to 5.9%.
Some signs of recovering UK housing market
Demand for loans to purchase homes continued to recover—albeit from low levels—continued in the final month of 2023. Mortgage approvals increased to just above 50,000 from 47,890 in November, according to the Bank of England. Lower mortgage rates and hopes of a cut in borrowing costs contributed to a 1.1% month-over-month uptick in home prices, according to a survey by mortgage lender Halifax.
Japan
Japan’s stock markets were mixed over a New Year’s holiday-shortened week (having resumed trading on Thursday). The Nikkei 225 Index lagged the broader TOPIX Index. Lackluster market performance followed a deadly earthquake on January 1 that struck Japan’s Noto Peninsula in the Hokuriku region and was followed by a series of aftershocks.
In addition to the devastating human cost—the death toll had risen to over 90 people, and hundreds were unaccounted for—there were economic costs, including major damage to infrastructure that threatened to disrupt manufacturing and other supply chains. The area hit hardest by the earthquake has multiple semiconductor-related factories, while some anticipate that there could subsequently be delays to the restart of nuclear power plants across Japan. Nevertheless, while assessment of the earthquake’s impact is ongoing, initial estimates indicated that the macroeconomic impact is likely to be limited. Bank of Japan (BoJ) Governor Kazuo Ueda affirmed that the central bank would fully support the financial system following the disaster.
Earthquake could impact monetary policy decision-making
The earthquake prompted debate that any potential exit by the BoJ from its negative interest rate policy could now be delayed, given the need to assess the earthquake’s effects on the economy. The yen dropped sharply, falling to the low145 range against the U.S. dollar, from around 141 at the end of the previous week. While this lent support to Japan’s exporters, broader investor sentiment suffered as the release of the minutes of the U.S. Federal Reserve’s December meeting indicated that rate cuts would likely come later than currently priced in by markets. Yen weakness is largely driven by the interest rate differential between the U.S. and Japan. The yield on the 10-year Japanese government bond was broadly unchanged over the shortened week at 0.61%.
Despite concerns about a delay to the BoJ’s potential policy change, Ueda said that there had been some shift away from Japan’s prolonged period of low growth and low inflation in 2023. He hoped for further progress in achieving balanced rises in wages and inflation. He has previously highlighted the significance of the spring “shunto” wage talks and said that the key is whether wages continue rising, leading to more increases in services prices.
China
Stocks in China retreated amid persistent concerns about its economy. The Shanghai Composite Index fell 1.54%, while the blue chip CSI 300 gave up 2.97%. In Hong Kong, the benchmark Hang Seng Index declined 3%, according to FactSet.
Economic data for December continued to show a varied picture of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) contracted for the third consecutive month, falling to a below-consensus 49.0 in December as declines in new orders and exports accelerated. The nonmanufacturing PMI rose to 50.4 from 50.2 in November as stronger construction activity offset weakness in the services sector. Readings above 50 represent growth from the prior month.
Separately, the private Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.8 in December from November’s 50.7, its strongest reading since August. The private Caixin survey of services activity reached its highest level since July and beat estimates. On the monetary policy front, the People’s Bank of China injected RMB 350 billion via its Pledged Supplemental Lending program, a low-cost funding program aimed at policy-oriented banks, in its latest effort to shore up the property sector. The controversial tool was heavily used between 2014 and 2019 as a source of government funding to rebuild shantytowns. China’s 10-year government bond yield dropped to 2.54% on the morning of Thursday, January 4, its lowest level since April 2020, as the central bank’s liquidity support fueled expectations that it will cut interest rates this year to aid growth.
More evidence of China’s property slump underscored concerns about a key growth sector. New home sales by the country’s top 100 developers fell 34.6% in December from the prior-year period, up from the 29.6% drop in November, according to the China Real Estate Information Corp. The housing downturn continues to drag on China’s economy as falling home prices, construction delays, and builder defaults weigh on consumer sentiment.
Other Key Markets
Türkiye (Turkey)
In late December, Türkiye's government announced a 49% increase in the country's minimum wage for 2024. While this wage hike is well below the approximately 90% minimum wage increase for 2023, it is above expectations of 30% to 35%, the base line scenario previously suggested by Minister of Treasury and Finance Mehmet Simsek.
While T. Rowe Price sovereign analyst Peter Botoucharov believes that the government’s pivot toward more orthodox fiscal and monetary policies since mid-2023 is appropriate, and while he expects the government will continue to gradually remove various macroprudential regulations, he also believes that the main reason for the larger-than-expected minimum wage increase is to provide support to the ruling party ahead of the local elections in March.
As a result, Botoucharov believes that headline consumer price inflation—currently above 60%—will remain high and could even accelerate in the first half of 2024. However, if the government’s macroeconomic policies maintain a more orthodox stance, he would expect inflation to start slowing in the second half of the year.
Mexico
On Thursday, the Mexican central bank published the minutes to its mid-December monetary policy meeting, at which policymakers unanimously decided to keep the overnight interbank interest rate at 11.25%. According to the minutes, Governing Board members characterized Mexican economic activity as continuing to show “dynamism,” while observing that the labor market remained strong. Most policymakers acknowledged that inflation has “decreased significantly throughout the year,” though they noted that headline inflation increased slightly in November from October’s level.
Most central bank officials also noted that core inflation was 5.30% in November and acknowledged that it has declined from earlier levels, while non-core inflation was much lower, at 1.43%. Nevertheless, most policymakers believe that the inflation outlook “continues posing challenges,” with the balance of risks “biased to the upside,” one of the main risks being “the persistence of core inflation at high levels.”
Ultimately, the Governing Board decided to keep the benchmark rate at 11.25%. The Board believed that the current stance of monetary policy, which has been in place since March 2023, will enable inflation to converge to the central bank’s 3% target within the forecast horizon—specifically by the second quarter of 2025.
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