Global Markets Weekly Update: March 03, 2023
U.S.
Stocks regain lost ground
Stocks closed higher and regained some ground following their worst weekly decline in two months. Energy and materials shares were especially strong, while communication services were helped by a gain in Facebook parent Meta Platforms. Utilities stocks lagged. According to T. Rowe Price traders, a lack of notable catalysts seemed to result in low market volumes throughout much of the week. Sentiment also appeared to gain support from the S&P 500 Index staying above its 200-day moving average, a metric commonly followed by technical analysts and traders.
Heavy economic calendar offers mixed signals
While the week brought a number of important economic reports, their mixed nature may have been one reason for the market’s low volumes and muted reaction. The Commerce Department reported that orders for non-defense capital goods excluding aircraft, often used as an indicator of business investment, rose 0.8% in January, compensating for the 0.7% increase in producer prices over the month. However, overall durable goods orders posted their steepest decline since the height of the pandemic-related shutdowns in April 2020. Similarly, wholesale inventories fell for the first time since July 2020, but retail inventories (excluding autos) rose slightly.
Other evidence suggested that the manufacturing sector, while still weakening, was contracting at a slower rate. The Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) ticked higher in February for the first time since May, although it remained in contraction territory at 47.7 (levels below 50 indicate slowing activity). The Institute’s services PMI fell slightly but less than consensus expectations and still indicated moderate expansion (55.1).
The week’s biggest data surprise may have been an 8.1% jump in pending home sales in January, marking the second month of gains. The National Association of Realtors’ Chief Economist Lawrence Yun attributed the dip in mortgage rates over the new year and stated that “home sales activity looks to be bottoming out in the first quarter.”
Bostic: Rate hikes might pause this summer
Our traders noted that comments from Atlanta Federal Reserve President Raphael Bostic appeared to help spark a modest rally on Thursday afternoon. Speaking at a Racial Inequality Conference in Dallas, Bostic stated that he still supported only a quarter-point rate hike at the Fed’s upcoming policy meeting despite the previous week’s hot inflation data. He also stated that the "Fed could be in position to pause by mid to late summer."
Bostic’s comments appeared to help the yield on the benchmark 10-year U.S. Treasury note pull back from a new three-month intraday high of 4.09% and end the week only slightly higher. (Bond prices and yields move in opposite directions.) Meanwhile, the two-year note yield briefly hit 4.94%, an over 15-year high. The broad tax-exempt municipal market traded lower alongside rising Treasury yields. Our traders noted that new deals performed relatively well despite an uptick in new issuance.
Investment-grade corporate bonds declined for the week as rising Treasury yields and heavy new issuance weighed on the asset class. However, our traders noted that more manageable expectations for new issuance in March were constructive for risk sentiment, and corporate credit spreads tightened on Thursday. In the primary market, most deals were well oversubscribed, but the influx of supply was a drag on bonds trading in the secondary market.
High yield bonds were mostly well bid, and credit spreads continued to compress despite higher Treasury yields. According to our traders, improved equity performance seemed to bolster below investment-grade market sentiment, and the few new deals announced during the week were generally well received.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,390.97 |
574.05 |
0.74% |
S&P 500 |
4,045.64 |
75.60 |
5.37% |
Nasdaq Composite |
11,689.01 |
294.07 |
11.68% |
S&P MidCap 400 |
2,648.27 |
47.59 |
8.97% |
Russell 2000 |
1,928.26 |
37.78 |
9.48% |
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 rose as markets overcame worries about interest rates and focused on signs of an improving economic outlook. In local currency terms, the pan-European STOXX Europe 600 Index gained 1.43%. Major stock indexes also advanced. Germany’s DAX Index added 2.42%, France’s CAC 40 Index gained 2.24%, and Italy’s FTSE MIB Index climbed 3.11%. The UK’s FTSE 100 tacked on 0.87%.
During the week, European government bond yields rose as elevated inflation data raised concerns of aggressive monetary policy tightening by the European Central Bank (ECB). The yield on Germany’s 10-year sovereign bonds moved above 2.7%, while Italian government bonds of the same maturity hit fresh highs for 2023.
Eurozone core inflation rate accelerates; ECB’s Lagarde signals rate hike
Inflation in the eurozone eased to an annual rate of 8.5% in February compared with 8.6% in January, mainly due to falling energy costs, official data showed. However, core inflation, which excludes volatile food and energy costs and therefore provides a clearer picture of underlying pricing pressures, ticked up to 5.6% from 5.3%. The eurozone unemployment rate in January held steady at 6.7%, close to record lows.
European Central Bank President Christine Lagarde indicated that a further half-point interest rate increase would likely be forthcoming at the March 16 meeting. “We have every reason to believe that there will be another 50-basis-point increase at our next meeting in March,” she said. “I don’t have any reason to believe that it won’t be like that.” Meanwhile, minutes from the February policy meeting said there was only limited evidence of a stabilization so far in underlying measures of inflation. “Further increases were required for the Governing Council’s policy rates to enter restrictive territory,” the minutes said.
BoE’s Bailey keeps rate hike option open; housing market slowdown deepens
Bank of England (BoE) Governor Andrew Bailey warned that policymakers may still have to raise interest rates above 4% but that another hike is not inevitable. “At this stage, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more,” he said in a speech. “Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.” He added that a decision would be data dependent.
The number of loans for house purchases approved by British lenders in January fell to the lowest level since 2009, excluding a big drop at the start of the coronavirus pandemic, BoE data showed. House prices declined in February by the most in 10 years, adding to signs of a slowing housing market, mortgage lender Nationwide said.
Japan
Japan’s stock markets made gains over the week, with the Nikkei 225 Index rising 1.73% and the broader TOPIX Index up 1.57%. Investors welcomed an emphasis on monetary policy continuity by Bank of Japan (BoJ) governor nominee Kazuo Ueda as well as signs that the Chinese economy was recovering from COVID lockdowns. Japan’s easing of entry requirements for arrivals from mainland China was another positive. However, uncertainty about the likely peak in U.S. interest rates curbed market gains.
Against this backdrop, the yield on the 10-year Japanese government bond (JGB) continued to hover around the 0.50% level at which the BoJ caps JGB yields; however, the yield crossed the BoJ’s ceiling during the week amid upward pressure from U.S. Treasury yields, which climbed on strong data that stoked concerns about further Federal Reserve rate hikes. The yen remained in a narrow range for the week, trading at about JPY 136 against the U.S. dollar.
BoJ governor nominee defends merits of accommodative monetary policy
Speaking in the upper house of parliament, Kazuo Ueda, expected to succeed BoJ Governor Haruhiko Kuroda on April 9, reiterated the need to maintain accommodative monetary policy. He added that its merits—including improvements in corporate earnings and employment and an exit from deflation—outweigh the side effects on market functioning.
Ahead of Kuroda’s final monetary policy decision on March 10, the latest inflation data added to speculation about whether the BoJ would pivot further away from its ultra-loose stance, including another modification of its yield curve control framework (or possibly scrapping it altogether). Although core consumer price inflation in the Tokyo area slowed in February to 3.3% year on year from an over 41-year high of 4.3% in January, due largely to government energy subsidies on household electricity bills, inflation exceeded the BoJ’s 2% target for the ninth straight month.
As households grapple with intensifying cost-of-living pressures amid the rising cost of items such as food and energy, Prime Minister Fumio Kishida has ordered the government to draft additional measures to counter price hikes and support Japan’s fragile post-COVID recovery. The government’s last stimulus package was announced in October 2022 and was aimed at cushioning the impact on businesses and consumers of inflationary pressures and yen weakness.
China
Chinese stocks rose for the second week ahead of the National People’s Congress (NPC) meeting as strong economic data raised prospects for a better-than-expected recovery. The Shanghai Stock Exchange Index increased 1.87%, and the blue chip CSI 300 gained 1.71% in local currency terms. In Hong Kong, the benchmark Hang Seng Index advanced after four weeks of losses and added 2.79%, according to Reuters. The meeting of the NPC, China’s parliament, starts Sunday, March 5, and is expected to last about one week. The meeting happens every five years and is closely watched for signs about economic policy shifts and any senior leadership changes.
China’s official manufacturing PMI data rose to 52.6 in February from January’s 50.1, marking the highest reading since April 2012 as domestic activity picked up. Both production and new orders were strong as supply and demand recovered but raw materials remained in contraction. The nonmanufacturing PMI rose to 56.3 from 54.4 the previous month. Both indexes beat economists’ forecasts. Separately, the private Caixin/S&P Global survey of manufacturing activity returned to growth and marked its first expansion in seven months.
The People’s Bank of China (PBOC) Governor Yi Gang signaled at a press briefing Friday that the central bank could cut the reserve requirement ratio for banks to support the economy. Yi Gang also said that China will keep the yuan exchange rate “basically stable” this year, Reuters reported. The prior week, the PBOC released its quarterly policy report in which the central bank affirmed its prudent policy stance to support economic growth and stability in 2023. The PBOC also said it seeks to maintain sufficient liquidity and credit growth while upholding its commitment to financial risk management and market-oriented foreign exchange policy.
New home sales return to growth
New home sales at China’s top 100 developers rose by 14.9% following a 19-month slump as demand recovered after the government lifted its zero-COVID policy and unveiled measures to bolster the property sector at the end of 2022. The real estate sector, which accounts for almost a quarter of China’s economy, has seen the first year-on-year growth since July 2021.
In other news, Hong Kong lifted its indoor and outdoor mask requirement, marking the end of all major coronavirus restrictions in the city after almost three years. The city of Macau also scrapped its mask mandate as all cities in China returned to normalcy following the lifting of restrictions in December.
Other Key Markets
Colombia
During the week, President Gustavo Petro—who has been in office for only about seven months—made some changes to his Cabinet. Specifically, he replaced the heads of the Ministries of Education, Culture, and Sports. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the most notable departure was Education Minister Alejandro Gaviria. He was one of the moderate and technocratic figures in Petro’s cabinet and previously served as health minister during the Santos administration.
Gifford notes that this shakeup follows divisions within Petro’s Cabinet related to the president's health, pension, and labor reforms. Gaviria had authored a letter together with the finance minister, agriculture minister, and national planning director, stating that Petro’s health reform proposal was poorly designed and costly for state finances.
While Finance Minister Jose Antonio Ocampo remained in place, Gifford believes that there is the potential for the emboldened Petro to make additional Cabinet changes at some point. At the same time, the fracturing of the Cabinet suggests that Petro’s political capital is waning, which may limit his ability to successfully push legislation through Congress.
Brazil
Stocks in Brazil, as measured by the Bovespa Index, returned about -1.9%. Brazil’s central bank and its currently tight monetary policy stance continued to receive criticism from President Luiz Inácio Lula da Silva (Lula) and his administration. The benchmark Selic rate has been at 13.75% for several months, while the current inflation rate—roughly 6%—is well below the highs reached in the first half of 2022.
Lula’s minister of finance, Fernando Haddad, argued—as reported by Reuters—that high borrowing costs are the main hindrance to stronger economic growth. According to T. Rowe Price sovereign analyst Richard Hall, Haddad was quoted as saying, “There is a credit problem, a problem on the outlook for economic growth; the country is united around this cause, which is the reduction of interest rates.”
Haddad also claimed that the government was doing its part to protect the country’s fiscal situation—such as by partially reinstating some fuel taxes and by creating a temporary 9.2% export tax on crude oil—and to address the fiscal uncertainty that central bank officials highlighted in their post-meeting statement at the beginning of February.
Given the continuing criticism of the central bank from Lula and his allies, Hall would not be surprised to see policymakers implement major changes to their post-meeting communications following the March 21–22 policy meeting—changes that could turn a monetary policy document into a political document. Hall believes that it would be challenging for central bank president Roberto Campos to soften the tone enough to acknowledge the social costs of slowing economic activity without creating the impression that the central bank is succumbing to political pressure.
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