Global Markets Weekly Update: March 10, 2023
Rate worries erase nearly all of 2023’s gains
Stocks pulled back sharply over the week, as investors absorbed more tough talk from Federal Reserve Chair Jerome Powell and signs that he and his fellow policymakers still had work to do in cooling inflation and the hot labor market. The S&P 500 Index fell on Friday to its lowest intraday level since January 5, and T. Rowe Price traders noted the selling may have been accelerated by the index going below both its 100-day and 200-day moving averages—metrics followed by technical traders. Small-caps underperformed large-caps, while value stocks fell more than their growth counterparts, pushing the Russell 1000 Value Index into negative territory for the year-to-date period.
Financials led the declines within the S&P 500 and contributed to the pronounced weakness in value stocks. Concerns grew throughout the week about the health of SVB Financial, or Silicon Valley Bank, as customer pulled deposits after the technology-oriented regional bank was forced to sell and realize losses in securities held on its balance sheet in order to meet capital requirements—marking the second-biggest bank failure in U.S. history, according to The Wall Street Journal. Trading in SVB stock was halted Friday morning, and the Federal Deposit Insurance Corporation (FDIC) then placed the bank into receivership to protect depositors. Stocks in other regional banks fell in response, although only moderately, suggesting that investors concluded that SVB’s risk exposure was exceptional. Shares of the major “money center” banks (notably Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) held up better, in part because stricter banking regulations required them to previously mark down the value of some securities.
Markets began their slide on Tuesday morning, after Fed Chair Powell testified before Congress that policymakers were prepared to speed up the pace of tightening and raise rates higher than anticipated if inflation maintains its current trajectory. He noted that the process of getting inflation down to the Fed’s long-term 2% target will likely be bumpy, referring to a broad reversal of the disinflationary trend in January, while adding that stronger recent economic data suggest the ultimate level of interest rates may be higher than expected. He also reiterated that history strongly cautions against prematurely loosening policy.
Job growth remains robust, but wage growth cools
Powell also referred to the challenges posed by the tight labor market, and the week brought mixed signals on how much success the Fed’s rate hikes have had in cooling wage pressures. Payroll processor ADP’s tally of private sector employment surprised on the upside when it was released Wednesday, showing an increase of 242,000 jobs in February, roughly twice January’s increase. Separate data on job openings missed expectations, however, while fewer people than expected quit voluntarily—generally considered a better sign of how Americans perceive the job market. Weekly unemployment claims, reported the next day, also hit their highest level since late December, although some noted that several one-off, “idiosyncratic” factors may have been at work.
Investors appeared especially uncertain how to react to Friday’s closely watched official payrolls report, which showed an increase of 311,000 nonfarm jobs in February, well above consensus expectations of around 200,000. The unemployment rate rose unexpectedly, however, from a January five-decade low of 3.4% to 3.6%. Average hourly earnings also rose a bit less than expected, by 0.2%, which may have been due to many new jobs coming in relatively low-paying sectors; nearly six out of 10 jobs created in the private sector in February were in the leisure and hospitality and retail trade sectors.
Speculation that SVB’s troubles might cause the Fed to dial back its interest rate hikes to prevent further stresses in the financial system appeared to spur a plunge in short-term Treasury yields. As markets opened Friday, the two-year yield plummeted from 4.9% to just above 4.6%, while futures markets began pricing in a quarter-point hike at the next Fed meeting instead of a half-point hike, according to CME Group data. By the end of the day, futures were also pricing in a roughly 23% chance that the federal funds rate would end the year at its current level or even lower by the end of year.
Friday’s flight to safety left the yield on the benchmark 10-year U.S. Treasury note down roughly 27 basis points for the week. (Bond prices and yields move in opposite directions.) The risk-off environment caused credit spreads to widen, however, especially in the high yield corporate market. Our traders noted that the investment-grade market also struggled with elevated issuance.
% Change YTD
S&P MidCap 400
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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.
Shares in Europe fell along with global markets amid worries about stress in the banking system and the potential effects of a prolonged period of elevated interest rates. In local currency terms, the pan-European STOXX Europe 600 Index ended 2.26% lower. Major stock indexes also fell. Germany’s DAX Index weakened 0.97%, France’s CAC 40 Index declined 1.73%, and Italy’s FTSE MIB Index dropped 1.95%. The UK’s FTSE 100 Index lost 2.50%.
Italy’s Visco criticizes ECB hawks
Bank of Italy Governor Ignazio Visco criticized European Central Bank (ECB) colleagues for making statements about future increases in borrowing costs when policymakers had apparently agreed not to give such guidance. The outburst, at the end of a speech in Rome, may hint at rising tensions among policymakers in advance of next week’s policy decision. “Uncertainty is so high that the Governing Council of the ECB has agreed to decide ‘meeting by meeting,’ without ‘forward guidance,’” Visco said. “I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes.” Over the week, a kettle of hawks, including ECB Chief Economist Philip Lane and Dutch central bank chief Klaas Knot, pressed for the ECB to continue raising interest rates after its March meeting to control inflation.
Eurozone economy weaker than previously estimated
Eurozone economic growth in the fourth quarter was revised down to 0% from an initial estimate of 0.1%.
Consumer demand weakened in January. Retail sales grew 0.3% sequentially—much less than expected—and dropped 2.3% from year-ago levels.
German industry appears stronger, but retail sales continue to shrink
German industrial production rebounded 3.5% sequentially in January, recovering from the 2.4% decline registered in December. Increased output in energy-intensive industries and construction provided an uplift. Manufacturing orders also rose, instead of falling as forecast, thanks to increased demand from non-European countries. But domestic and eurozone orders fell sharply. Retail sales, however, fell 0.3% sequentially.
UK economy rebounds more than forecast
The UK economy rebounded by more than expected in January, driven by growth in the services sector, according to official statistics. Gross domestic product rose 0.3% sequentially, after contracting in December, official data showed. Economists polled by FactSet had forecast growth of 0.1%.
Japan’s stock markets registered modest gains for the week, with the Nikkei 225 Index rising 0.78% and the broader TOPIX Index up 0.60%. This was despite a sell-off in Japanese bank stocks on Friday, following a slump in their U.S. peers, as well as the Bank of Japan’s (BoJ) decision to leave its accommodative monetary policy unchanged in March.
The central bank’s continued commitment to its ultra-loose stance sent the yield on the 10-year Japanese government bond (JGB) sharply lower—it finished the week at 0.42%, from 0.50% at the end of the previous week. The yen weakened to about JPY 136.7 against the U.S. dollar, from around JPY 135.8 the prior week. The Japanese currency came under pressure on the dovish BoJ, as well as stronger-than-expected U.S. economic data and hawkish messaging from the Fed reigniting fears that central banks could continue raising interest rates longer than expected.
BoJ leaves monetary policy unchanged at Kuroda’s last meeting
The BoJ made no changes to its monetary policy at the final meeting chaired by outgoing Governor Haruhiko Kuroda, who steps down in April. The central bank kept its key short-term interest rate on hold at -0.1% and reiterated its 0% target for 10-year JGB yields. It will also continue its large-scale bond buying in pursuit of yield curve control (YCC), whereby 10-year JGB yields are allowed to fluctuate in the range of around plus and minus half a percentage point from the target level.
Investors’ focus now turns to the BoJ’s April meeting, which will be the first under incoming Governor Kazuo Ueda, whose appointment was confirmed by parliament on Friday. Ueda has hinted at various possibilities for the future of the BoJ’s YCC framework, while emphasizing that the outlook for underlying prices will determine whether it is reviewed in the direction of normalization. There is some speculation that the BoJ could widen further the range in which JGB yields are allowed to fluctuate or abandon the framework altogether.
Japan’s economy expanded by less than initially estimated
Japan’s economic growth over the last three months of 2022 was downgraded to an annualized 0.1% quarter on quarter from a preliminary estimate of a 0.6% expansion. This was largely due to private consumption falling short of estimates as rising inflation curbed spending. Prime Minister Fumio Kishida recently ordered the government to draft additional measures to counter price hikes and support Japan’s fragile post-COVID recovery.
Chinese equities retreated as signs of weakening demand and a lower-than-expected 2023 growth target unveiled by Beijing tempered concerns about the country’s outlook. The Shanghai Stock Exchange Index declined 2.95%, the worst weekly loss in more than two months, and the blue chip CSI 300 fell 3.96% in local currency terms. In Hong Kong, the benchmark Hang Seng Index plummeted roughly 6%, its biggest weekly loss in over four months, according to Reuters.
Beijing set an economic growth target of around 5% this year at the National People Congress (NPC), China’s parliament, which started Sunday, March 5, and ends Monday, March 13. The target lagged most forecasts but represents a recovery from 3% growth last year, when coronavirus lockdowns, an ailing property sector, and weakening export demand led to China’s lowest economic growth in decades.
At the NPC, Premier Li Keqiang said that China would seek to ensure economic stability and expand consumption this year and strive to become a mid-level developed economy by 2035. Premier Li also said that China would prioritize stable development in the real estate sector and guard against risks to top property developers as consumer sentiment remains cautious.
Meanwhile, China’s parliament approved a plan for a sweeping reform of central government institutions under the State Council, the country’s cabinet. Reforms include the formation of a financial regulatory body and national data bureau and a revamp of the country’s science and technology ministry. The changes mark the biggest bureaucratic restructuring in years and come as China seeks to accelerate the development of critical technologies, such as advanced semiconductors, to reduce its reliance on U.S. technology amid rising bilateral tensions.
Economic data surprise to the downside
China reported that its consumer price index rose 1% in February from a year earlier, trailing forecasts, down from a 2.1% rise the previous month. Core inflation rose 0.6% in February from 1% in January, while producer prices also fell more than expected due to lower commodity costs. The latest data affirmed that China’s inflation remains muted, unlike in the U.S. and Europe, and raised expectations that the central bank would maintain its supportive policy stance.
In other economic news, Chinese exports and imports extended declines in the first two months of the year as the global economic slowdown hit trade activity. Exports fell 6.8% in January and February from the prior-year period, improving from December’s 9.9% drop. Imports contracted 10.2% over the two-month period, greater than the 7.5% decline in December. China combines trade data for the first two months of the year to smooth out distortions arising from the weeklong Lunar New Year holiday.
Other Key Markets
Stocks in Turkey, as measured by the BIST-100 Index, returned about 3.3%.
According to T. Rowe Price sovereign analyst Peter Botoucharov, the last few days have been eventful regarding Turkey’s already volatile political situation. President Recep Tayyip Erdogan of the ruling AK party (AKP) has officially called for presidential and general elections to take place on May 14. To begin the election process, he is expected to dismiss the Grand Assembly legislature. Erdogan and the AKP are likely to conduct a far-reaching campaign against the opposition candidate, but at present, they have been claiming that the government is concentrated primarily on relief efforts for the families and regions impacted by the early-February earthquake and aftershocks.
The opposition, which is a six-party bloc known as the National Alliance, nominated the leader of the largest opposition party (CHP) Mr. Kemal Kilicdaroglu as the joint presidential candidate. Meral Aksener, the leader of the second-largest opposition party (IYI), decided to reunite with the Alliance after her two favored presidential candidates (the mayors of Ankara and Istanbul) were voted to take positions as vice presidents if Kilicdaroglu wins the presidency.
Along with its nominee, the National Alliance also unveiled a road map to governance. According to the road map, the leaders of all member parties shall also become vice presidents, while at least one Cabinet minister will be allocated in the same manner. Also, there will be a power-sharing mechanism between the presidency and constituent parties, where major decisions such as the renewal of elections, declarations of state of emergency, and appointments to top civil service posts will be taken in consultation.
Botoucharov believes that the February earthquake and these recent political developments are increasing the unpredictability of the electoral outcome. On one hand, some voters may prefer a strong incumbent given increased national, economic, and geopolitical uncertainty. On the other hand, voters’ discontent with the government’s poorly organized earthquake rescue and relief efforts could be a major factor that strengthens the opposition’s chances to win the elections.
Chilean stocks, as measured by the S&P IPSA Index, returned about -0.8%.
President Gabriel Boric has been in office for about one year, and one of his stated priorities in early 2022 was the need for tax reform to increase government revenues. This week, in a surprise defeat for Boric, the lower house of Congress failed to reach the votes necessary to move forward the government’s tax reform proposal. If it had been enacted, it would have increased revenues to fund social expenditures. Because the legislation did not pass, it cannot be presented for another year within the lower chamber, although Boric could insist that the reform be introduced in the Senate.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, this is a major blow for the Boric administration, as well as Finance Minister Mario Marcel Cullell, who had spent months socializing the reform both within the government and with national audiences. While some believe this legislative setback could be indicative of resistance to some of Boric’s more radical proposals, Gifford notes that the lack of additional revenues will make it difficult for the government to strengthen the country’s social safety net and deliver on promises made with protestors since 2018. Marcel, however, plans to continue working with Boric to figure out another way to boost revenues.
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