Global Markets Weekly Update: January 06, 2023
U.S.
Friday rally helps 2023 begin on a positive note
A Friday rally following an encouraging jobs report left the major indexes with a gain to start the year. Communication services stocks led the gains, helped by rallies in Charter Communications, Netflix, and Facebook parent Meta Platforms. T. Rowe Price traders noted that trading volumes were subdued over most of the week, remaining below 2022 averages. The S&P 500 Index also continued to move within a relatively tight band compared with most of 2022, with the index staying between 3,764 and 3,906 since December 16. The market was closed on Monday in observance of New Year’s Day.
The week brought a number of closely watched economic reports, and the market’s reactions seemed to signal investors’ preference for slowing growth and inflation over a robust economy—a trade-off Federal Reserve officials have made clear that they are ready to accept. A surprise increase in construction spending in December may have been partly behind the broad indexes’ poor start to trading on Tuesday, although Tesla’s decline also played a role. Likewise, our traders observed that the S&P 500 and Nasdaq 100 both fell over 1% on Thursday morning, after payroll processing firm ADP’s tally of jobs in the private sector showed an increase of 235,000 in December, well above expectations for around 150,000 and August’s recent low of 132,000. Weekly initial jobless claims also fell unexpectedly to 204,000, their lowest level since September.
Payrolls report raises hopes for a soft landing
Friday’s official payrolls report from the Labor Department appeared to turn sentiment back in a positive direction by raising hopes that the economy could be on its way to a “soft landing,” or cooling inflation without a significant recession. Nonfarm payrolls rose by 223,000 in December, the smallest increase in two years but above expectations. The separate household survey showed that unemployment fell back to its post-pandemic low of 3.5%, last recorded in September.
Promising for investors, healthy job growth appeared to be accompanied by cooling growth in average hourly earnings, which rose 0.3% in December, a tick below expectations. November’s figure was also revised lower, helping bring the year-over-year gain down to 4.6%, its lowest level since September 2021. Providing further evidence that the wage competition for workers might be easing, the labor participation rate climbed back to its recent high of 62.3%—although it was still roughly a full percentage point below its pre-pandemic levels (the rate peaked in early 2000 at 67.3%).
Both services and manufacturing activity fall—but so does inflation
Friday also brought news that the Institute for Supply Management’s index of services sector activity fell to 49.6, well below consensus and into contraction territory (below 50) for the first time since May 2020, as new orders slowed sharply. Prices paid continued to increase but at their slowest pace since January 2021. The Institute’s gauge of manufacturing activity, released earlier in the week, indicated a second month of contraction, while factory price pressures fell to their lowest level since April 2020.
Investors could only guess how the recent data would sway the decisions of Fed officials, of course. The release of minutes from the Fed’s mid-December policy meeting on Tuesday seemed to dampen an earlier rally, according to our traders. The minutes observed that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee's reaction function, would complicate the Committee's effort to restore price stability.”
Yet our traders also noted that some positive statements from the head of the St. Louis Fed, James Bullard, subsequently seemed to help bolster sentiment. In a presentation to a CFA conference on Thursday, Bullard noted that “due to front-loaded Fed policy during 2022, market-based measures of inflation expectations are now relatively low” and had returned “to a level consistent with the Fed’s 2% inflation target.”
Yields decrease on signs of slowdown
The news of a slowdown in the services sector appeared to send both short- and longer-term U.S. Treasury yields sharply lower on Friday morning, leaving the yield on the 10-year note down over 30 basis points (a basis point is 0.01 percentage point) for the week. (Bond prices and yields move in opposite directions.) The broad tax-exempt municipal bond market traded higher through most of the week as light supply and reinvestments from January coupon payments helped to buoy performance.
The investment-grade (IG) corporate bond primary calendar was active, according to our traders, with the level of new deals exceeding weekly expectations. Despite the influx of supply, corporate bonds held up relatively well amid strong macroeconomic sentiment ahead of the Fed meeting minutes. After the release of the minutes, which were perceived as hawkish, technical conditions supported IG corporates. Issuance slowed and secondary trading volumes increased, which helped offset weaker risk sentiment.
High yield bonds, particularly BB rated issues, enjoyed strong demand, as our traders noted that the lack of new issuance and healthy coupon payments in the coming week seemed to provide a floor for prices. The bank loan market was firmer amid generally positive investor sentiment, although trading volumes were somewhat light.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,630.61 |
483.36 |
1.46% |
S&P 500 |
3,895.08 |
55.58 |
1.45% |
Nasdaq Composite |
10,569.29 |
102.81 |
0.98% |
S&P MidCap 400 |
2,489.95 |
59.58 |
2.45% |
Russell 2000 |
1,792.80 |
31.55 |
1.79% |
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 surged as data indicated that the pace of inflation has slowed. The cost of natural gas also fell to levels last seen before Russia invaded Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 4.60% higher. Major stock indexes also advanced. Germany’s DAX Index gained 4.93%, France’s CAC 40 Index climbed 5.98%, and Italy’s FTSE MIB Index soared 6.22%. The UK’s FTSE 100 Index added 3.32%.
Eurozone inflation slows below 10%; French central banker still sees higher rates
A decline in energy price increases helped push eurozone inflation below 10% for the first time in two months, official data showed. Consumer prices in December rose 9.2% year over year, below a FactSet consensus estimate of 9.7%. Even so, the core inflation—which excludes volatile food, energy, alcohol, and tobacco prices—quickened to 5.2% from 5.0% in November.
Banque de France Governor François Villeroy de Galhau, who is a European Central Bank (ECB) policymaker, said in his new year address that interest rates would need to rise further to reduce underlying price pressures and suggested that they could peak this summer. He also said that the ECB should be prepared to leave borrowing costs at the terminal level for as long as necessary to squeeze inflation out of the system. Swap rates tied to ECB policy meeting dates are signaling that the deposit rate could peak around 3.5%.
Eurozone PMI revised higher
A final reading of S&P Global’s composite Purchasing Managers’ Index (PMI)—which measures business activity in the services and manufacturing sectors—signaled that a eurozone recession this year might be shallower than expected. The index was revised higher to 49.3 from a first estimate of 48.8. While the PMI was still below 50, indicating a contraction in activity, the index rose for a second consecutive month.
BoE: Mortgage approvals fall sharply
UK mortgage approvals fell to the lowest level in more than two years in November, as high inflation and increased borrowing costs strained household spending, data from the Bank of England (BoE) showed. A survey by mortgage lender Halifax showed house prices fell for a fourth consecutive month in December and registered the biggest quarterly decline since the global financial crisis. Halifax forecast that house prices could drop 8% this year.
Croatia adopts euro
Croatia formally adopted the euro as its currency on January 1, becoming the 20th member of the eurozone.
Japan
Japan’s stock market returns were negative for the week, with the Nikkei Index down 0.46% and the broader TOPIX Index falling 0.84%. Concerns about the global monetary policy tightening cycle and recessionary fears continued to weigh on sentiment. Investors speculated about the future trajectory of the Bank of Japan’s (BoJ’s) monetary policy, given the surprise modification to its yield curve control in late December. Meanwhile, Japanese authorities continued to emphasize the importance of seeing wage growth come through, with Prime Minister Fumio Kishida urging companies to deliver pay increases above the rate of inflation.
BoJ defends new yield cap
The BoJ conducted unscheduled bond-buying operations to defend its newly increased 0.50% cap on the 10-year Japanese government bond yield, which finished the week at that level, up from 0.42% at the end of the previous week. Pressure on the cap reflected investors’ expectations that the BoJ would increasingly pivot away from its ultra-loose monetary policy stance. It was reported by the Nikkei news agency during the week that the BoJ could be set to raise its inflation forecasts in January, which could be perceived as providing grounds for such a pivot. The yen weakened to around the JPY 134.1 level against the U.S. dollar, from about JPY 131.1 the prior week, mainly in anticipation of further hawkishness by the U.S. Federal Reserve.
Kishida urges companies to deliver above-inflation pay rises
With nominal wage growth in November well below consensus expectations, Prime Minister Kishida urged Japanese companies to deliver above-inflation pay increases. He warned of the risks associated with inflation outpacing wage growth, including the erosion of households’ purchasing power in an environment of low economic growth. Raising pay is a key pillar of the government’s “New Capitalism” agenda to better distribute the fruits of growth.
Likewise, the BoJ, through its accommodative monetary policy, aims to achieve price hikes in tandem with wage growth. The central bank believes that Japan’s economy is currently in a critical phase regarding whether it can achieve a virtuous cycle between wages and prices and that it is appropriate to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages.
China
Chinese equities rose amid reports that Hong Kong would reopen its border to mainland China and that Beijing was considering relaxing curbs on borrowing for the ailing property sector. The Shanghai Composite Index advanced 2.21% and the blue chip CSI 300 gained 2.82%, marking its biggest gains in weeks.
Hopes of further support for property developers rose following news that Beijing may ease the stringent “three red lines” policy that featured prominently in the government’s crackdown on the real estate sector in 2020, Bloomberg reported, citing unnamed sources. The policy consisted of a series of debt thresholds aimed at curbing leverage among developers seeking to borrow more. China is also considering a nationwide cap between 2.0% to 2.5% on real estate commissions to boost demand, Bloomberg reported. Separately, the People’s Bank of China announced that first-time homebuyers would be offered lower mortgage rates if new home prices fall for three consecutive months.
The changes mark a significant shift in China’s real estate policy, following a series of measures introduced since November to restore confidence in a sector that accounts for almost a quarter of the nation’s economy. In recent weeks, the government has stepped up calls to expand fiscal spending and softened its policy stance for various industries, including internet platforms and coal imports, underscoring Beijing’s focus on prioritizing economic growth.
December PMI slumps
In economic news, the official Purchasing Managers’ Index (PMI) data for manufacturing and non-manufacturing fell in December. Overall, the composite PMI fell to 42.6 from 47.1 in November, marking the biggest decline since February 2020, before the coronavirus outbreak. The drop in economic activity was largely attributed to the surge in infections after China abandoned its zero-COVID approach in early December. Meanwhile, data from a private survey showed China’s manufacturing, services, and property sectors weakened sharply in the fourth quarter of 2022 due to virus-related disruptions, raising the prospect that the economy may have contracted in the final months of last year.
Other Key Markets
Colombia
On Thursday, the government reported that inflation in December was higher than expected at 1.3% month over month and 13.1% year over year. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, this is the highest inflation rate in more than two decades. Leading the rise was mostly non-core components, though core inflation also moved higher to 10.0% year over year. Food prices are primarily responsible, and this also had an adverse impact on restaurants and other things. Energy prices also remained high. In addition, Gifford sees evidence of demand-side pressures due to strong economic activity and the recent holiday shopping season, with increased demand for lodging and transportation. Nevertheless, Gifford continues to expect Colombian inflation to peak in the next few months due to very high base effects.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -0.7%.
On Sunday, January 1, Luiz Inácio Lula da Silva (Lula) took office as president. Although Lula had a narrow election victory over former President Jair Bolsonaro, many observers thought his speech did not seem aimed at unifying the divided electorate. On the other hand, Fernando Haddad, who was sworn in as finance minister, delivered what was widely considered a moderate speech, in which he expressed interest in funding important government programs without creating an unsustainable debt situation. However, Haddad failed to provide firm details on how to find that balance.
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