Global Markets Weekly Update: July 21, 2023
U.S.
Most of the major U.S. equity indexes advanced on hopes that the tight labor market and moderating inflation would help the economy avoid a hard landing. The tech-heavy Nasdaq Composite, however, suffered a modest pullback. Value stocks outperformed their growth counterparts in the large-cap Russell 1000 Index.
Retail sales increased modestly in June; initial jobless claims decline
Retail sales ticked up 0.2% sequentially in June, a slower pace than the 0.6% consensus estimate reported by FactSet. Upward revisions to the May data raised the growth rate for that month to 0.5% from the initial reading of 0.3%.
New filings for unemployment benefits fell for a second consecutive week and by more than economists had expected, with initial claims reaching their lowest level since May.
Yellen downplays risk of recession; forward-looking indicator hints at economic weakness
U.S. Treasury Secretary Janet Yellen told Bloomberg TV that she does not expect the U.S. to lapse into recession, citing the labor market’s resilience and slowing inflation.
Meanwhile, the Conference Board’s Leading Economic Index, a forward-looking gauge of U.S. economic activity, decreased for a 15th consecutive month in June—the longest string of sequential declines since 2007–2008. The decrease appeared to stem from weakness in consumer sentiment and new orders as well as a slowdown in housing construction.
Bond investors price in rate hike
Two-year U.S. Treasury note yields increased during the week. However, the yield on the benchmark 10-year U.S. Treasury note was little changed, leading to a further inversion of the yield curve as investors appeared to price in a near certainty of another Federal Reserve rate hike at the central bank’s July 25–26 policy meeting. The tax-exempt municipal bond market continued to see positive momentum as reinvestments from coupon payments and bond maturities bolstered demand for municipal bonds. T. Rowe Price traders also noted that new deals saw strong levels of oversubscription.
Investment-grade corporates see solid demand
In the investment-grade corporate bond market, T. Rowe Price traders reported that new issuance throughout the week was largely oversubscribed, led by highly anticipated issues from six large banks. An improved macro backdrop was supportive for high yield bonds.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,227.69 |
718.66 |
6.28% |
S&P 500 |
4,536.34 |
30.92 |
18.15% |
Nasdaq Composite |
14,032.81 |
-80.90 |
34.07% |
S&P MidCap 400 |
2,705.82 |
31.88 |
11.33% |
Russell 2000 |
1,960.26 |
29.17 |
11.30% |
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 0.95% higher on hopes that evidence of slowing inflation eventually could herald the end of monetary policy tightening. Most major Continental stock indexes rose modestly. Italy’s FTSE MIB advanced 0.67%, France’s CAC 40 Index gained 0.79%, and Germany’s DAX added 0.45%. The UK’s FTSE 100 Index climbed 3.08%, helped, in part, by the British pound depreciating relative to the U.S. dollar. The index includes many multinational companies with overseas revenues.
European government bond yields broadly ticked lower as cooling inflation in the U.S. and the UK raised expectations that major central banks could be close to the end of tightening monetary policy. Yields on Italy’s 10-year sovereign bonds briefly dropped below a one-month low of 4%. In the UK, yields on 10-year government bonds declined on the reassuring inflation figures.
UK inflation slows more than expected; BoE’s Ramsden says it is still too high
UK annual consumer price growth slowed to 7.9% in June from 8.7% in May due to a decline in gasoline prices. The magnitude of the slowdown in inflation exceeded a consensus estimate and matched the Bank of England’s (BoE) forecast. BoE Deputy Governor David Ramsden said: "CPI inflation has begun to fall significantly but remains much too high.” The Monetary Policy Committee “has consistently stressed that monetary policy decisions will address the risk of more persistent strength in domestic wage and price settling,” he noted.
Eurozone economy skirts recession, revised figures show
The eurozone economy avoided a recession in the first quarter of this year, with revised figures showing it remained unchanged instead of contracting as previously estimated. Gross domestic product was flat in the first three months of the year, up from a prior estimate of a 0.1% contraction.
ECB hawks draw back from September rate hike
Two of the leading hawks in the European Central Bank (ECB), Dutch central bank governor Klaas Knot and Bundesbank chief Joachim Nagel, appeared to moderate their stance on future interest rate increases. Knot said that core inflation appears to have "plateaued" and that any decision to raise interest rates beyond July is "a possibility but by no means a certainty." Nagel, who has repeatedly called for more rate hikes beyond July, said that a decision on whether to raise rates in September or not would depend on incoming data.
Japan
Japan’s stock markets registered mixed performance for the week, with the Nikkei 225 Index falling 0.3% and the broader TOPIX Index gaining 1.0%. Sentiment was largely driven by investor caution ahead of the Bank of Japan’s (BoJ’s) July 27–28 monetary policy meeting and a slight dampening in expectations that the central bank would tweak its yield curve control (YCC) framework. However, a hot June core consumer price inflation print, in line with consensus expectations, exerted some pressure on the BoJ to tighten policy and to raise its inflation forecasts.
Against this backdrop, the yield on the 10-year Japanese government bond rose slightly to 0.48% from 0.47% at the end of the previous week. The yen weakened to around JPY 141.82 against the U.S. dollar, from about JPY 138.76 the prior week.
Government revises up inflation forecasts as price pressures build
The Cabinet Office’s midyear economic forecast updates showed that Japan’s government revised down its forecast for economic growth in the fiscal year that began April 1 to 1.3% from 1.5%. It raised its total consumer price inflation forecast for the 2023 fiscal year to 2.6% from a previously forecast 1.7%. Many observers expect the BoJ to follow suit and raise its inflation forecasts at its July monetary policy meeting.
Inflation remains well above the BoJ’s 2% target—in June, Japan’s core consumer price index rose 3.3% year on year, in line with expectations and a slight uptick from the prior month’s 3.2% increase.
BoJ dampens expectations of monetary policy normalization
Comments by BoJ Governor Kazuo Ueda, as reported by the Reuters news agency, dampened expectations that the central bank might take steps to normalize monetary policy after a period of prolonged stimulus. Ueda said that there was still some distance to achieving the central bank’s 2% inflation target in a sustainable fashion. Having patiently continued ultra-loose monetary policy under YCC, the BoJ will scrutinize at each policy meeting the progress made in achieving its inflation target.
China
Chinese equities retreated as the latest economic data pointed to faltering growth. The Shanghai Stock Exchange Composite Index tumbled 2.16% in local currency terms, while the blue chip CSI 300 declined 1.98%. In Hong Kong, the benchmark Hang Seng Index fell 1.74%.
On a year-over-year basis, China’s gross domestic product expanded 6.3% in the second quarter—below expectations but faster than the 4.5% growth rate recorded in the first quarter. On a quarterly basis, the economy grew 0.8%, down from the first quarter’s 2.2% expansion. Quarterly readings provide a better reflection of underlying growth in China than comparisons from a year ago, when Shanghai and other cities were under pandemic lockdown. Unemployment remained steady at 5.2% in June, but youth unemployment jumped to a record 21.3%.
The government pledged to improve conditions for private businesses to boost corporate confidence amid the faltering recovery, according to a statement released Wednesday. Separately, Chinese authorities unveiled an 11-point consumption plan to boost household spending.
New home prices remain steady while property investment declines
Following a brief recovery earlier in the year, China’s real estate sector has started showing signs of weakness amid poor consumer sentiment and persistent deflationary pressures. New-home prices in China were unchanged last month, after increasing 0.1% in May. Property investment fell 7.9% in the January-to-June period, down from a 7.2% decline recorded in the first five months of the year.
Other Key Markets
Turkey
On Thursday, the Turkish central bank decided to raise its key policy rate, the one-week repo auction rate, from 15.0% to 17.5%.
According to the central bank’s post-meeting statement, policymakers “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.” They also noted that “recent indicators point to continuation of the increase in the underlying trend of inflation,” which has been driven by “domestic demand, cost pressures stemming from wages and exchange rates, and the stickiness of services inflation.”
With a goal of bringing inflation down to the central bank’s 5% target in the medium term, central bank officials affirmed their intention to continue tightening monetary policy “as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”
Peru
In its monetary policy meeting late last week, the Peruvian central bank kept its key policy rate, the reference rate, at 7.75%, which was widely expected. However, T. Rowe Price emerging markets sovereign analyst Aaron Gifford viewed the post-meeting statement as dovish—even though the board maintained its data-dependent stance and asserted that its hold decision “does not necessarily imply” that its tightening cycle is over.
The dovish tones come from statements that both the headline and core consumer price index have fallen “significantly,” that most countries globally are now seeing a declining trend in inflation pressures, that inflation is no longer just seen as being close to the central bank’s 1% to 3% target range by the end of this year but will also be within that range early next year, and that economic activity indicators have shown “deterioration” since last month. On the other hand, policymakers expressed caution about climate factors being a risk for inflation.
With headline and core inflation falling in June and weak economic growth, Gifford believes that the beginning of a policy-easing cycle could be near.
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