Global Markets Weekly Update: July 14, 2023
U.S.
Stocks rise on cooling inflation signals
Stocks recorded a week of strong gains, as investors welcomed data showing a continued cooldown in inflation. The S&P 500 Index ended the week 6.50% below the all-time intraday high it established in early 2022. The Nasdaq Composite recorded an even stronger gain but remained 12.94% below its record peak. Standout performers within the S&P 500 included casino operators, along with regional banks and asset managers. Laggards included some major pharmaceutical firms and the typically defensive consumer staples sector. Friday saw the unofficial start of earnings season, as bank giants Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo reported second-quarter results.
The signal event of the week appeared to be Wednesday’s release of consumer price index (CPI) inflation data. Both headline and core (excluding food and energy prices) inflation rose 0.2% in June, a tick below expectations. The annual increase in headline inflation slowed to 3.0%, its slowest pace since March 2021, while core inflation slowed to 4.8%, the slowest since October 2021.
Producer price index (PPI) inflation data, released Thursday, was arguably even more encouraging. Headline producer prices rose only 0.1% over the year ended in June, nearing deflation territory. Core producer prices rose 2.4% over the period, but near the Federal Reserve’s overall inflation target of 2.0% and at their slowest pace since January 2021.
Consumer sentiment gauge sees biggest monthly gain since 2006
Other data released during the week suggested that the economy might be able to skirt a recession as inflation cooled, resulting in a “soft landing.” On Friday, markets appeared to get a boost from the University of Michigan’s gauge of current consumer sentiment, which rose well above expectations to 72.6, its highest level in nearly two years, and marked its largest monthly advance since 2006. Consumers surveyed reported better labor market conditions and falling inflation as reasons for improved optimism. Weekly jobless claims, reported Thursday, fell back more than expected, to 237,000, reversing almost all of the previous week’s jump.
10-year U.S. Treasury note yield falls back below 4%
U.S. Treasury prices jumped as longer-term yields retreated on the positive inflation data, with the yield on the benchmark 10-year note falling below 4%. (Bond prices and yields move in opposite directions.) According to T. Rowe Price traders, supportive technical conditions remained in place in the municipal bond market, with reinvestments from coupon payments and bond maturities leading to strong demand for munis.
Spreads in the investment-grade corporate bond market tightened early in the week, led by more volatile issues. Total weekly issuance was near the lower end of expectations, while issues early in the week were oversubscribed. Our traders reported that the high yield market was fairly quiet with light trading activity as investors awaited inflation data. Below investment-grade bonds then traded higher as broader risk markets and rates rallied following the soft CPI print and better-than-expected PPI figure. Our traders noted that investors will now turn their attention to earnings as several big banks began reporting on Friday.
According to our traders, in addition to the broader risk rally, a technical imbalance contributed to the positive tone in the bank loan market with limited supply outside of higher-dollar loans while buyers were mostly focused on discounted names. They noted that the secondary market was very well bid as issuance could not keep up with demand.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,509.03 |
774.15 |
4.11% |
S&P 500 |
4,505.42 |
106.47 |
17.34% |
Nasdaq Composite |
14,113.70 |
452.98 |
34.85% |
S&P MidCap 400 |
2,673.94 |
70.70 |
10.02% |
Russell 2000 |
1,931.09 |
66.43 |
9.64% |
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 2.95% higher—the biggest weekly gain in about three-and-a-half months. Signs of cooling inflation in the U.S. suggested that interest rates may soon peak. Meanwhile, China extended support measures to the property sector, raising hopes that additional economic stimulus could be forthcoming. Major stock indexes advanced. France’s CAC 40 Index climbed 3.69%, Germany’s DAX added 3.22%, and Italy’s FTSE MIB gained 3.19%. The UK’s FTSE Index 100 tacked on 2.45%.
European government bond yields fell as slowing U.S. inflation raised expectations that the Fed is nearing the end of its policy tightening cycle. UK bond yields also declined, but robust wage data appeared to cushion the drop.
ECB minutes hint at further monetary tightening and approach of peak rates
The minutes of the European Central Bank’s (ECB) June meeting showed support for further rate increases amid concerns about persistently high inflation. “It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner,” the minutes said, adding that increases in “interest rates beyond July” could be considered “if necessary.” However, most policymakers backed chief economist Philip Lane’s argument that they should follow a “meeting-by-meeting approach, particularly as rates were moving closer to a possible peak level.”
UK economic output falls less than expected; wage growth hits record level
The UK economy shrank 0.1% sequentially in May after expanding 0.2% in April, the Office for National Statistics said. Economists had expected a contraction of 0.4%, according to a poll of economists by FactSet. On a rolling three-month basis, gross domestic product grew 0.1%.
Excluding bonuses, UK wages grew at a record annual pace of 7.3% in the three months through May. However, the labor market showed signs of easing, with the jobless rate ticking up to 4% from the 3.8% recorded in the three months to April.
Surging mortgage rates hit UK housing market
The Royal Institution of Chartered Surveyors said in its June report that Britain’s homebuyers pulled back from the property market at the sharpest pace in eight months, in a sign that higher borrowing costs were weighing on affordability. The measure of new buyer interest tumbled to -45% from -20% in May. Meanwhile, the average rate on a two-year fixed mortgage loan rose to 6.66%—the highest level since August 2008.
Dutch government resigns over immigration
The Dutch four-party coalition government led by Prime Minister Mark Rutte collapsed after he tried to introduce a tougher immigration policy. A general election is not expected before October or November.
Japan
Japanese equities lagged their Asian peers over the week, missing out on a regional rally driven by favorable developments in the China technology space and hopes of further Chinese stimulus. The Nikkei 225 Index generated a flat return, and the broader TOPIX Index fell 0.7%.
Growing expectations that the Bank of Japan (BoJ) could adjust its yield curve control framework as early as its July 27–28 meeting (having last tweaked it in December 2022) exerted upward pressure on domestic yields. The yield on the 10-year Japanese government bond (JGB) rose to 0.47%, from a prior 0.44%, nearing the 0.50% level at which the BoJ caps JGB yields.
The yen strengthened to around JPY 138 against the U.S. dollar, from about JPY 142 the previous week, in anticipation of monetary policy normalization and the prospect that the BoJ raises its inflation outlook for this fiscal year in July. Conversely, the greenback struggled as U.S. producer prices grew by less than expected in June, which investors perceived as increasing the likelihood that the U.S. Federal Reserve could be closer to ending its interest rate hiking cycle.
Summit paves way for increased cooperation on semiconductor supply chains
Japan’s Prime Minister Fumio Kishida met European Union leaders Charles Michel and Ursula von der Leyen on July 13 in Brussels at the 29th EU-Japan Summit, where they agreed to boost strategic cooperation on digital and on critical raw materials supply chains. Von der Leyen said that their objective was to “reduce overreliance for products that are vital for our economies, like critical raw materials and semiconductors, on a handful of suppliers.”
Brussels also agreed to lift the remaining restrictions on food imports from Fukushima, which had been in place since the 2011 nuclear disaster. Kishida said that the decision to lift the restrictions will provide strong support for the reconstruction of the affected area.
China
Chinese equities rallied after Beijing telegraphed measures to support the country’s flagging economy. The Shanghai Stock Exchange Index rose 1.29% while the blue chip CSI 300 added 1.92%. In Hong Kong, the benchmark Hang Seng Index gained 5.71%.
Chinese officials announced an extension to two of the 16-point stimulus guidelines rolled out last November to support the ailing property sector. The extended policies aim to defer property development loans and encourage financial institutions to ensure the delivery of projects and will be in effect until the end of 2024.
In corporate news, China’s financial regulators imposed a fine of more than USD 1 billion on technology giants Ant Group and Tencent Holdings. The penalty was widely interpreted as an end to more than two years of probes into China’s biggest internet companies and a broader tech sector crackdown that spurred investor concerns about Beijing’s shifting approach to private enterprise.
On the economic front, China’s CPI remained unchanged in June from a year earlier and marked the weakest reading since February 2021. Core inflation, which excludes volatile food and energy prices, slid to 0.4% from the previous month’s 0.6%. The PPI slipped to a lower-than-expected rate of 5.4%, its ninth consecutive monthly decline. The data pointed to increasing deflation risks in China’s economy and more evidence that the country’s post-lockdown recovery is weakening.
China trade data continue to disappoint, but lending rebounds
China’s exports fell a larger-than-expected 12.4% in June from a year earlier, the sharpest decline in nearly three years as global demand remained weak. Imports shrank by 6.8%, above expectations. Separately, new bank loans rose a higher-than-expected RMB 3.05 trillion in June, compared with May’s RMB 1.36 trillion. While monthly results showed an uptick in activity, data remained soft compared with a year ago.
Other Key Markets
Brazil
Early in the week, the government reported that the month-over-month inflation rate in June was -0.08%, marginally higher than expected, and that the year-over-year inflation rate dropped to 3.16%. This is well below the central bank’s Selic rate, the key policy rate, currently 13.75%.
T. Rowe Price sovereign analyst Richard Hall considers the details of the most recent inflation report to be a little mixed but broadly positive. He notes in particular that there was a decent non-core deflationary shock, with prices for food at home and gasoline weighing on inflation. He also detects a broader cooling in core goods price pressures, with demand-sensitive high-priced goods and cars experiencing outright deflation.
Hall believes that inflation will creep back up toward 5% in a few months purely due to base effects, as some preelection tax cuts expire. However, he also believes that—in the absence of some unexpected price shock in the Brazilian economy—the central bank is poised to start reducing the Selic rate in the next couple of months.
Colombia
Early in the week, the government reported that CPI inflation in June was 0.3% month over month and 12.1% year over year, down from a year-over-year measurement of 12.4% in May. These readings were a little lower than generally expected.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, most of the decrease was led by food prices, which have had three consecutive months of negative readings. While energy prices have been edging lower, the government’s unwind of fuel subsidies, even if it’s gradual, remains a headwind for more disinflation. Meanwhile, core inflation also showed some relief on a sequential basis at 0.4% month over month and 10.5% year over year, led by goods, but Gifford notes that services inflation has also been showing signs of letting up.
Given weaker economic activity and this year’s strong currency rally—the Colombian peso rose almost 12% versus the U.S. dollar in the second quarter and 16% through June 30—Gifford expects to see continuing improvement in the inflation picture. However, the latest inflation figures suggest that it is not yet time for the central bank to begin an easing cycle.
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