U.S.

Stocks continue good start to 2023

Stocks recorded a second consecutive week of gains as investors weighed key inflation data and quarterly earnings reporting season kicked off in earnest on Friday. The Nasdaq Composite and growth-oriented sectors outperformed, helped by rebounds in some mega-cap technology-related names, including Amazon.com, Tesla, and Microsoft. Consumer staples shares lagged. JPMorgan Chase, Wells Fargo, and Bank of America beat consensus expectations when they released earnings Friday morning, but cautious outlooks from the banking giants caused shares to fall in early trading.

Inflation pressures ease even as hiring remains healthy

Investors seemed to spend much of the week waiting for and then reacting to the Labor Department’s report on consumer price index (CPI) inflation on Thursday morning, which Wall Street generally viewed as benign, according to our traders. Headline prices fell 0.1% in December, a tick lower than expected and the first decline since May 2020. The drop brought the year-over-year gain to 6.5%, its lowest level since October 2021. The 12-month increase in core (less food and energy) consumer inflation fell as expected to 5.7%, also the slowest pace in over a year. Ongoing increases in the Department’s calculation of shelter costs, which lag actual declines in home prices and rents, were largely behind remaining inflation pressures.

The week’s economic calendar was fairly light, but some of the other data suggested that the economy remained relatively healthy even as inflation pressures eased—bolstering hopes that the Federal Reserve would manage a “soft landing.” Weekly jobless claims fell to a three-month low of 205,000, while the University of Michigan’s preliminary reading of consumer sentiment jumped much more than expected and reached its highest level since April. The survey showed that consumers expected prices to rise 4.0% over the next 12 months, down from 4.4% in December, although longer-term expectations rose a bit, from 2.9% to 3.0%.

U.S. Treasury yields trend lower

The cooling inflation data helped U.S. Treasury yields to continue trending lower, with the yield on the benchmark 10-year U.S. Treasury note falling on Friday morning to an intraday low of 3.43%, its lowest level since soon after the Fed’s mid-December meeting. Positive technical conditions—namely, subdued issuance levels and signs of positive cash flows into the asset class—underpinned a rally in the municipal market, according to our traders.

The investment-grade corporate bond primary calendar was active early in the week, although the level of new deals ultimately reached the low end of weekly estimates. Our traders observed solid performance from several of the recent new issues. In the secondary market, trading volumes remained at or above daily averages.

According to our traders, elevated cash balances and broad risk-on sentiment before and following the release of the CPI data supported the performance of high yield bonds with solid demand across sectors. They also noted that the week’s new deals were a welcome sign for market participants trying to remain invested, who generally showed a preference for higher-quality names. The issuance pipeline seems to be building with several companies expected to come to the market over the next few weeks.

The positive economic data and supportive technical conditions drove the bank loan market’s performance. Our traders observed improved demand—especially for discounted names—from retail investors. And there appeared to be minimal selling incentives due to manageable flow activity and light issuance.

U.S. Stocks

^{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 rallied for a second consecutive week, as better-than-expected economic data raised hopes of a short and shallow recession. However, some central bankers said interest rates would need to rise further, tempering market optimism. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.88% higher. Major stock indexes rose strongly. Germany’s DAX Index climbed 3.26%, Italy’s FTSE MIB Index advanced 2.40%, and France’s CAC 40 Index added 2.37%. The UK’s FTSE 100 Index gained 1.88%.

Early data suggest German economic growth stagnated in the fourth quarter

The German economy likely stagnated in the fourth quarter of 2022, after growing 0.4% in the previous three months, according to a first estimate from the national statistics office. The Finance Ministry said the data pointed to a milder, shorter slowdown over the winter. For the full year, the economy expanded 1.9%, down from 2.6% in 2021, as the Russia-Ukraine war and surging energy costs curbed output. Meanwhile, the German Chambers of Commerce and Industry said that more than half of Germany’s companies were suffering from labor shortages.

Eurozone jobless rate stays at record low; investor morale rises

Eurozone unemployment remained at 6.5% in November, as expected by economists, official data showed. Meanwhile, investor morale strengthened for a third straight month in January. The economic sentiment index compiled by Sentix rose to its highest level since June last year but remained in negative territory. This follows official eurozone data published earlier this month that showed economic sentiment improving in December for the first time since the start of the Russian invasion of Ukraine.

Unexpected UK growth eases recession fears; BoE official hints at rate hike

Gross domestic product in the UK grew 0.1% sequentially in November, beating a consensus forecast for a 0.2% contraction in a FactSet survey of economists. This upside surprise fueled expectations that the economy might avoid a recession. Increases in telecommunications, computer programming, and food and beverage services during the World Cup soccer tournament helped the economy grow. The Office for National Statistics said that the economy would have to shrink about 0.5% in December to record a second quarter of economic contraction.

Bank of England (BoE) Chief Economist Huw Pill said in New York that the UK faced the risk of persistent inflation, hinting that interest rates would probably rise again. "The distinctive context that prevails in the UK—of higher natural gas prices with a tight labor market, adverse labor supply developments and goods market bottlenecks—creates the potential for inflation to prove more persistent,” Pill stated, which would “strongly influence my monetary policy position in the coming months." Financial markets expect the BoE to raise its key interest rate by half a percentage point (0.50%) to 4.00% in February.

Japan

Japan’s equity markets gained over the week, with risk appetite supported by weaker momentum in U.S. consumer price inflation, which raised hopes that the U.S. Federal Reserve would slow the pace of its interest rate hikes. The Nikkei Index rose 0.56%, and the broader TOPIX Index was up 1.46%.

Tokyo inflation accelerates

As core consumer price inflation in the Tokyo area rose 4.0% year on year in December—the fastest rate in 40 years—speculation grew that the Bank of Japan (BoJ) could revise up its inflation forecasts and assess the viability of further monetary policy adjustments at its next meeting (January 17–18). The central bank surprisingly tweaked its yield curve control (YCC) framework in December. As a result, the BoJ was again forced to conduct unscheduled bond-buying operations to keep the 10-year Japanese government bond (JGB) yield around its new 0.50% cap, roughly the level at which it ended the week. The yen strengthened to about JPY 128 against the U.S. dollar, from around JPY 132 the prior week.

Speculation about BoJ monetary policy heats up

BoJ watchers were spurred on during the week by an article in Japan’s Yomiuri Shimbun newspaper, which added to speculation about the central bank’s monetary policy trajectory. It claimed that the BoJ would inspect the side effects of its ultra-easy stance at its January meeting, given there are ongoing distortions in market interest rates even after the December modification of its YCC framework. Additional policy revisions could be implemented if market distortions cannot be corrected by the BoJ adjusting the amount of its JGB purchases, for example. The BoJ is also likely to revise up its forecasts for the consumer price index for fiscal years 2023 and 2024 to be closer to its 2% target.

However, while the revisions to the BoJ’s inflation forecasts are widely expected, further monetary policy changes may not be imminent until after the end of Governor Haruhiko Kuroda’s term in April. Of 43 economists surveyed by the Bloomberg news agency, all but one predicted that the BoJ would leave its policy unchanged in January. Looking ahead, more than half of respondents saw a move toward policy normalization by July.

Asked whether the BoJ needs to tweak its ultra-loose policy, Prime Minister Fumio Kishida said that monetary policymakers must have a view on the outlook for the economy, and there needs to be careful communication and dialogue with markets.

China

Chinese stocks rose as a softer-than-expected U.S. inflation print and optimism about the post-pandemic reopening outlook boosted sentiment. The Shanghai Composite Index gained 1.19% and the blue chip CSI 300 advanced 2.35%, a four-month high.

Hopes that domestic demand will recover in the coming months rose after Beijing abandoned its zero-COVID policy in December and officials stepped up measures to support the struggling property sector. Earlier in the week, China issued a large quota for crude oil imports to prepare for an expected uptick in energy demand as infections start to wane and economic activity returns to normal. Economists polled by Reuters projected a swift rebound for China’s economy once infections peak and forecast 4.9% growth this year versus an estimated growth pace of about 3% in 2022.

On the trade front, China’s exports fell 9.9% in December from a year ago as global demand softened and rising infections disrupted activity after the government rolled back pandemic restrictions. Imports fell a better-than-expected 7.5%. For the full year, China’s trade surplus reached an all-time high of USD 878 billion as strong export growth for most of 2022, a weak yuan, and the rising price of goods boosted the value of exports. 

Inflation increases, but producer prices decline

In other economic news, China’s inflation gained momentum, rising 1.8% in December. Core inflation, which excludes food and energy prices, picked up slightly after remaining unchanged for three consecutive months. Meanwhile, producer prices weakened as virus-related disruptions curbed industrial demand. The producer price index declined 0.7% in December after falling 1.3% in November.

Other Key Markets

Mexico

Mexican stocks, as measured by the IPC Index, returned about 3.9%.

Late last week, Mexico’s central bank (Banxico) published the minutes from its meeting on December 15, when policymakers decided—though not unanimously—to raise the key interest rate by 50 basis points, from 10.00% to 10.50%.

According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the minutes seem neutral but have some hints of dovishness. While the majority of policymakers are still worried about broad-based inflation pressures, they recognized that supply-side issues are improving, that inflation is close to a peak, and that Banxico has already tightened monetary policy significantly.

Gifford believes that bank officials are willing to continue raising rates in the near term at a more moderate pace, though most policymakers are saying that they are close to the end of rate increases. He also thinks that the hawkish central bank officials are trying to promote a message of caution, which would translate into keeping the key interest rate at a restrictive terminal rate for a while. On the other hand, he believes that the more moderate Banxico officials are signaling that the longer they hold rates at elevated levels, the more restrictive monetary policy will become as inflation and inflation expectations trend lower.

Brazil

Stocks in Brazil, as measured by the Bovespa Index, returned about 1.9%.

On Sunday, January 8—in a scene reminiscent of the U.S. Capitol riot about two years ago—former President Jair Bolsonaro’s supporters broke through security lines at a demonstration in Brasilia and temporarily invaded Congress, the supreme court, and the president's office—though not the president’s residence. While security forces removed the demonstrators and made hundreds of arrests, T. Rowe Price sovereign analyst Richard Hall believes that this demonstrates the degree of rejection that President Luiz Inácio Lula da Silva is facing from a sizable portion of the population.

Toward the end of the week, Lula’s Finance Minister Fernando Haddad announced a number of fiscal measures intended to reduce the government’s budget deficit. According to Hall, this fiscal package is not overwhelming. It relies heavily on the revenue side, particularly temporary tax measures. Haddad did announce some plans for spending cuts, but details were lacking. Based on Haddad’s estimates, all of these proposed measures should be sufficient to balance the budget in 2023. However, Haddad stated that he thought a deficit of 0.5% to 1.0% of gross domestic product was more likely to be the result, due to expectations for spending pressures to emerge this year.