Global Markets Weekly Update: July 16, 2021
U.S.
Small-caps continue to surrender momentum
The major indexes ended lower, but the S&P 500 Index and Nasdaq Composite reached new intraday highs at midweek before falling back. The small-cap Russell 2000 Index underperformed for the third consecutive week, further surrendering its leadership over the large-cap S&P 500 Index for the year-to-date period. T. Rowe Price traders noted that market activity was generally subdued despite the unofficial kickoff of second-quarter earnings reporting season. During the week, 21 S&P 500 companies were scheduled to report results, according to Refinitiv.
Inflation data again surprise on the upside
Growth and inflation data appeared to remain in the spotlight during the week. Stocks fell back on Tuesday, following the release of data showing that headline and core (excluding food and energy) consumer prices had jumped 0.9% in June, roughly twice consensus estimates. It was the fastest 12-month increase in the core rate (4.5%) since 1991. Surging used-car prices were again responsible for about one-third of the increase, but the inflationary pressures were broadly felt by consumers—food prices increased 0.8% in the month, and gasoline prices rose 2.5%. On Monday, the New York Federal Reserve reported that year-ahead inflation expectations had reached 4.8%, the highest on record in data going back to 2013.
Fed Chair Jerome Powell’s scheduled testimony before Congress on Wednesday and Thursday may have blunted the negative impact of the inflation data on markets. While acknowledging that the recent spike in inflation was larger than he expected, Powell repeated his view that inflation pressures are temporary and “substantial further progress is still a ways off” in terms of the Fed’s employment and inflation goals. Before raising short-term interest rates, the Fed is widely expected to begin tapering asset purchases designed to keep downward pressure on long-term rates. On Thursday, Chicago Fed President Charles Evans voiced concern about tapering too early, warning it could undercut the Fed's objectives.
Retail sales beat expectations, but consumers appear to grow more cautious
The week’s economic data were mixed relative to expectations. Manufacturing output contracted slightly in June, due largely to carmakers’ trouble finding chips. An index of manufacturing activity in the New York region hit a record high, however, reflecting strength in both new orders and shipments. Weekly jobless claims hit a new pandemic low of 360,000, in line with expectations.
Retail sales rose 0.6% in June, well above consensus expectations for a 0.4% decline. Sales outside of the volatile auto sector—which have been restrained by the global chip shortage—increased 1.3%. The Commerce Department data showed the clear impact of the reopening of the economy, with consumers shifting purchases away from home goods and toward restaurants, leisure, and apparel. Stocks fell back later Friday morning, however, after the University of Michigan’s preliminary gauge of consumer sentiment fell back to its lowest level since February, driven largely by inflation worries. “Consumers' complaints about rising prices for homes, vehicles, and household durables...reached an all-time record,” according to the survey’s lead researcher.
The yield on the benchmark 10-year U.S. Treasury note jumped briefly following the release of the retail sales data but ended lower for the week as a whole. (Bond prices and yields move in opposite directions.) Despite the rally in Treasuries, the broad municipal bond market was little changed over most of the week. T. Rowe Price municipal bond traders reported that demand was strongest for issues with shorter call structures and maturities under 10 years as investors sought to limit their exposure to interest rate risk.
Corporate bond investors grow a bit more cautious
Our traders observed balanced flows and relatively muted secondary trading volumes in the investment-grade corporate bond market. Overnight activity increased throughout most of the week before a retracing in rates sidelined investors. Credit spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—closed wider toward the end of the week as new issuance rose sharply.
Tuesday’s upside inflation surprises weighed on sentiment in the high yield market, according to our traders. Later in the week, broader risk markets were generally weaker as the dovish tone of Powell’s semiannual testimony to Congress raised concerns about the strength of the economic recovery.
U.S. Stocks1
Index |
Friday's Close |
Week’s Change |
% Change YTD |
DJIA |
34,687.85 |
-182.31 |
13.33% |
S&P 500 |
4,327.16 |
-42.39 |
15.20% |
Nasdaq Composite |
14,427.24 |
-274.68 |
11.94% |
S&P MidCap 400 |
2,616.96 |
-89.46 |
13.45% |
Russell 2000 |
2,163.24 |
-116.76 |
9.54% |
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 Associates’ presentation thereof.
Europe
Shares in Europe fell on concerns that the increase in coronavirus cases could derail an economic recovery. Some market participants also worried that central banks might tighten monetary policy sooner than expected to quell inflation. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.64% lower. Major European stock indexes also declined. France’s CAC 40 Index slid 1.06%, Italy’s FTSE MIB Index slipped 1.03%, and Germany’s Xetra DAX Index weakened 0.94%. The UK’s FTSE 100 Index tumbled 1.60%.
Core eurozone government bond yields fell, mostly tracking the move in U.S. Treasury yields, as U.S. Federal Reserve and European Central Bank (ECB) officials reaffirmed the view that inflationary pressures would prove to be transitory. Concerns about the rapidly spreading delta variant of the coronavirus also weighed on yields. Peripheral eurozone bond yields broadly tracked core markets. However, UK gilt yields ended roughly flat, as higher-than-expected inflation and hawkish commentary from two Bank of England policymakers offset some of the downward pressure on yields from the move in U.S. Treasuries.
UK to lift all lockdown measures; France, Netherlands reimpose restrictions
The UK remains on course to lift its remaining COVID-19 lockdown controls on Monday, even as the number of coronavirus infections surges. Meanwhile, France implemented new social restrictions to prevent the spread of the new variant. People must show a health pass, proving they have been vaccinated to use long-distance trains, to go out to eat and drink, and to visit shops, cinemas, and theaters. The Netherlands—which reimposed restrictions on bars, restaurants, and nightclubs late last week—reintroduced work-from-home guidelines. German Chancellor Angela Merkel warned that more of the population needs to be vaccinated before restrictions can be lifted.
ECB’s Lagarde not expecting unanimity at policy meetings
ECB President Christine Lagarde said in an interview with the Financial Times newspaper that next week’s Governing Council meeting would focus on changing guidance on interest rates after the adoption of a new inflation target last week. She also said she did not expect “unanimous consent” at policy meetings “because there will be some variations, some slightly different positioning.” However, she stressed the importance of incorporating the new framework’s requirement that policy should be “especially forceful or persistent” when interest rates are close to the lower bound.
UK inflation accelerates
UK consumer price inflation increased to 2.5% in June—the highest level since August 2018—and up from 2.1% in May. The Office for National Statistics cited increased prices for food, fuel, secondhand cars, clothing, and footwear as key factors. Subsequently, Bank of England Deputy Governor Sir Dave Ramsden and Monetary Policy Committee member Michael Saunders asserted that there could be a case for tightening policy soon because of growing inflationary pressures. Saunders said that options could include halting bond purchases in the next month or two—as opposed to in late 2021, as previously messaged by the bank—and further policy action next year.
Japan
Japan’s stock markets registered modest gains for the week, with the Nikkei 225 Index up 0.22% and the broader TOPIX Index gaining 1.04%. Tokyo was placed under its fourth coronavirus state of emergency, lasting until August 22 and covering the duration of the Olympic Games, as part of the government’s efforts to contain a resurgence in COVID-19 infections. The capital registered its highest daily count in new cases since January during the week. Against this backdrop, the yield on the 10-year Japanese government bond fell slightly to 0.02%, while the yen was broadly unchanged at JPY 110.04 against the U.S. dollar.
BoJ leaves main policy settings unchanged; Details climate strategy
At its July meeting, the Bank of Japan (BoJ) left short- and long-term interest rates unchanged and voted unanimously to maintain its asset purchase program, as was widely expected. The central bank guided for the continuation of qualitative and quantitative easing with yield curve control—as it aims to achieve its price stability target of 2% inflation—for as long as it is necessary to maintain that target in a stable manner.
The BoJ’s Outlook for Economic Activity and Prices report showed some revisions to the central bank’s economic forecasts. Estimates for gross domestic product were revised downward to 3.8% in fiscal year (FY) 2021, from 4.0% in April, and upward to 2.7% in FY 2022, from the previous 2.4%. The projected rate of increase in consumer prices for FY 2021 is faster, mainly due to higher energy prices. The BoJ said that if the vaccine rollout accelerates and pent-up demand for services consumption materializes relatively early, economic activity could improve by more than expected.
The BoJ issued a separate release on its climate strategy, in which it outlined a series of incentives for lenders to help businesses move toward a greener economy, as well as plans to buy foreign green bonds. A program of interest-free loans for climate change investments is likely to be launched in 2021, with eligible loans or investments including green loans and bonds, sustainability-linked loans/bonds with performance targets, and transition finance. The BoJ also said it would buy green bonds denominated in foreign currencies using its foreign reserves.
Sentiment among manufacturers rises to highest since November 2018
The Reuters Tankan sentiment index for manufacturers rose to 25 from 22 in June, its highest level since November 2018. Business confidence was boosted by Japan’s export-led economic recovery, which has been driven by solid global demand. Confidence was particularly strong among car, chemical, and metal products makers. Sentiment within the services sector turned more pessimistic, however, with the index falling to -3 from 0 in June, reflecting the continued negative impact of anti-coronavirus measures.
Separate data showed that wholesale prices continued to surge: The corporate goods price index, which measures the price companies charge each other for their goods and services, rose 5% year on year in June, following a 5.1% gain in May. This signaled that more and more companies were passing on higher costs to their corporate customers, as import price growth hit a record high over the month.
China
In a choppy week, the Shanghai Composite Index and large-cap CSI 300 Index rose by 0.4% and 0.5%, respectively. Markets showed relief after China’s second-quarter gross domestic product (GDP) report on Thursday was in line with expectations. Equity inflows into China via the Stock Connect channel turned positive after the GDP data, with the highest daily inflow since September, T. Rowe Price's Asian trading desk reported. Foreign investors bought technology, financial, and consumer stocks with solid fundamentals, avoiding expensive theme plays like electric vehicles, according to traders. On the pandemic front, provinces in southern China have continued to see a small number of new coronavirus cases.
Analysts welcomed the central bank’s move on July 9 to cut the required reserve ratio for banks by 0.5%. The move was swifter and more broad-based than expected and may offer some insurance against a second-half slowdown. China's bond market recorded inflows of USD 10 billion in June. The yield on the 10-year government bond fell five basis points to 2.97%, marking the first time since August 2020 it fell below 3.0%. In currency markets, the renminbi was little changed and closed at 6.471 versus the U.S. dollar.
China’s annual GDP growth rose 7.9% in the second quarter, down from 18.3% in the previous quarter, the country’s statistics office reported on Thursday. To reduce coronavirus-related distortions, the office also reported two-year average growth, which expanded 5.5% in the second quarter from 5% in the first quarter. The steady growth countered market fears that the central bank had cut the reserve ratio due to weak GDP growth. By sector, agriculture and services picked up last quarter, while industrial output stabilized, following its faster rebound last year.
June economic data were also upbeat. Retail sales came in stronger than expected, while power consumption was robust, suggesting that few factories had been affected by local lockdowns to contain new coronavirus clusters. Analysts are looking to investment and consumption to take over from property and exports as China’s main growth drivers in the second half of 2021.
Regulatory scrutiny of U.S.-listed Chinese companies
Increased regulatory scrutiny of U.S.-listed Chinese internet companies like ride-hailer Didi Chuxing continued to concern foreign investors. Commercial law firms in Hong Kong said that Beijing's stricter cybersecurity and antimonopoly regulations could accelerate the trend for Chinese companies to list in Hong Kong. While the valuations of China's leading internet companies could suffer in the short term, analysts said a more transparent legal and regulatory regime could benefit the sector in the long term.
Other Key Markets
Chile
Chilean stocks, as measured by the S&P IPSA Index, returned -2.2% through the close of business on Thursday. The market was closed for a holiday on Friday.
On Wednesday, in a widely expected move, the Chilean central bank raised its key interest rate from 0.50% to 0.75%. The decision, which was unanimous among policymakers, marks the beginning of a tightening cycle, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, as the central bank has held its policy rate at 0.50% since March 2020.
In their post-meeting statement, policymakers pointed to robust growth, which is back to pre-pandemic levels, as well as strong fiscal stimulus as the reasons for beginning a gradual increase in short-term rates. With regard to inflation, the statement notes that it has been a bit above the central bank’s target, but that inflation expectations have been well anchored.
Gifford notes that the central bank is projecting a policy rate of about 1.50% to 1.75% by the end of this year and 2.75% by the end of 2022 on average, but that the rate will not reach a neutral level of 3.5% over policymakers’ two-year forecast horizon. Gifford expects a similar path but highlights that external factors—such as eventual policy normalization in the U.S.—could require a faster or more aggressive tightening of monetary conditions in Chile.
South Africa
South African stocks, as measured by the FTSE/JSE All Share Index, returned about 0.2%. The country was rocked during the week by riots, looting, arson, and protests reportedly against the imprisonment of former President Jacob Zuma. In late June, Zuma was sentenced in a constitutional court ruling to a 15-month jail term for contempt of court.
According to T. Rowe Price analyst Roy Adkins, the violence, which has been largely confined to two of the country’s nine provinces, may have been intentionally instigated by people and groups close to Zuma. Their intention may be to disrupt the country’s economic and commercial infrastructure in an effort to weaken President Cyril Ramaphosa’s government and hinder his agenda of anticorruption and the reestablishment of the rule of law. Because the police were very slow to respond to the initial protests, many people—frustrated with the combined conditions of income inequality, poverty, unemployment, frequent power outages due to state utility Eskom’s equipment failures, and pandemic-related restrictions—may have seen the opportunity to loot with little fear of arrest.
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