Global Markets Weekly Update: May 19, 2023
Stocks briefly break out of trading band in narrow advance
Stocks recorded solid gains for the week, with the S&P 500 Index breaching the 4,200 level in intraday trading for the first time since late August. The index has remained notably range-bound over the past few months, and T. Rowe Price traders observed that the previous week marked the sixth consecutive one in which it failed to move by more than 1%—the longest such stretch since November 2019. The market’s advance remained notably narrow as well, however. The equal-weighted S&P 500 Index (SPEXW) lagged by 77 basis points (0.77%) and ended the week up only 0.93% for the year to date, 825 basis points behind the weighted index.
The disparity was reflected in the outperformance of several mega-cap technology-related stocks, particularly a strong gain in the shares of Google parent Alphabet and Facebook parent Meta Platforms. NVIDIA, Advanced Micro Devices (AMD), and several other chipmakers also recorded solid gains. Regional bank shares also rallied and recouped some of their recent losses, with a regional bank exchange-traded fund (ETF) recording its best daily gain since early 2021 on Wednesday, according to our traders. The typically defensive consumer staples, health care, and utilities sectors lagged.
Sentiment benefits from better tone in debt ceiling negotiations
The catalyst for the week’s gains appeared to be a notable shift in tone around debt ceiling negotiations. Following a Wednesday meeting at the White House, President Joe Biden stated he was confident there will be no default, while Republican House Speaker Kevin McCarthy called a deal “doable” and Democratic Senate Leader Chuck Schumer stated that the only path forward was via a bipartisan deal. President Biden traveled to Japan for a meeting of G-7 leaders, but the White House announced that he would cut his trip short and return on Sunday to continue negotiations. Stocks seemed to waver a bit on Friday, however, after Republican negotiators announced that they had decided to “press pause” in discussions.
Much of the week’s economic data were generally in line with consensus expectations, but investors appeared to react to some prominent surprises. Retail sales rose 0.4% in April, below consensus expectations and at the slowest year-over-year pace (1.6%) since early in the pandemic. Given that the data are reported on a nominal basis and that the consumer price index rose 5.5% over the same period, inflation-adjusted spending fell sharply. Industrial production rose 0.5% in April, well above expectations for a flat reading, driven in part by increased auto manufacturing.
The week also brought signs of surprising resilience in the labor market. Weekly jobless claims came in at 242,000, below expectations and below the previous week’s reading of 264,000, the highest level since late 2021. Continuing claims hit their lowest level in nine weeks.
Given the Federal Reserve’s stated intention of cooling the labor market to bring down inflation, investors were perhaps primed to react negatively to some hawkish commentary from Fed Chair Jerome Powell on Friday. An early rally evaporated after Powell stressed before a Fed conference that inflation remained far too high and that officials were resolute about bringing it back to their target of 2%. Nevertheless, Powell also stated that tightening credit conditions following recent banking turmoil meant that the “policy rate may not need to rise as much as it would have otherwise to achieve our goals.”
Bond yields rise on some upside economic surprises
The yield on the benchmark 10-year U.S. Treasury note rose sharply over the week, seemingly pushed higher by the jobs and manufacturing data. (Bond prices and yields move in opposite directions.) Our traders noted that the tax-exempt municipal bond market came under pressure as several new deals came to market, while a sale of tax-exempt holdings by the FDIC also increased supply.
In the investment-grade corporate bond market, primary issuance was notably above weekly expectations, according to our traders—a new issue from Pfizer marked the fourth largest on record. Conversely, the high yield market saw somewhat low volumes throughout the week as investors digested debt ceiling headlines about positive momentum toward a deal while hawkish Fed commentary weighed on rates. Several new deals were announced as earnings season continued to wind down and companies looked to bring new issues to the market before the Memorial Day holiday.
% Change YTD
S&P MidCap 400
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Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.72% higher. Among major markets, Germany’s DAX climbed 2.27%, while France’s CAC 40 Index gained 1.04%.
European government bond yields climbed amid growing confidence in the European economy and a possible breakthrough in U.S. debt ceiling negotiations. The yield on the 10-year German bond rose toward 2.5%, its highest level in more than three weeks. In the UK, the yield on the benchmark 10-year gilt surpassed 4% as policymakers hinted that more monetary tightening could be forthcoming if inflationary pressures do not moderate.
Eurozone industry output weakens more than expected; German investor morale falls
Official data provided further signals that Europe might be sliding into an industrial recession. Eurozone industrial production sank 4.1% sequentially in March, after rising 1.5% in February. On a year-over-year basis, industrial output declined 1.4%, after increasing 2.0% in the preceding month. While Irish production led the drop—mainly due the transfer pricing practices of multinationals—German, French, and Italian output also weakened.
In Germany, the ZEW economic research institute said investor morale fell for a third consecutive month in May. Its sentiment index entered negative territory for the first time since the end of 2022 amid concerns about rising interest rates. ZEW President Achim Wambach said Germany could slip into a mild recession.
European Commission raises growth, inflation forecasts
The European Commission raised its forecasts for eurozone economic growth this year and next and predicted inflation would remain stubbornly high. The latest projection calls for gross domestic product (GDP) to expand 1.1% this year and 1.6% in 2024, up from the previous forecast for growth of 0.9% and 1.5%, respectively. Wage increases are expected to drive inflation higher to 5.8% in 2023 and 2.8% in 2024, up from the previous estimates of 5.6% and 2.5%, respectively.
BoE’s Bailey says upside risks to inflation still significant; UK jobless rate rises
Bank of England (BoE) Governor Andrew Bailey reiterated in a speech that monetary policy would have to tighten further if there was evidence of more persistent inflationary pressures. He predicted that inflation could start to slow significantly in April as energy increases drop out of the annual calculations. But policymakers “still judged the risks to inflation to be skewed significantly to the upside,” he said, noting that second-round effects would take longer to unwind than they did to emerge.
The UK’s unemployment rate crept up to 3.9% in the three months through March, from 3.8% in the three months through February, the national statistics office said. However, wage growth showed little signs of easing over the period. Average weekly pay excluding bonuses rose to 6.7% compared with a year earlier, from 6.6%.
Japan’s stock markets registered their sixth consecutive weekly gain, with the Nikkei 225 Index rising 4.8% and the broader TOPIX Index up 3.1%. Both indexes reached near 33-year highs during the week, boosted by solid domestic earnings, yen weakness, and strong overseas buying of Japanese equities. Sentiment was also supported by data showing that the Japanese economy grew by more than expected over the first quarter of the year, boosted by a post-COVID revival in consumption. Hopes that the U.S. government would reach a deal on raising the debt ceiling further added to investor optimism.
Against this backdrop, the yield on the 10-year Japanese government bond rose to 0.39%, from 0.37% at the end of the previous week. It dipped to its lowest since March during the week, as the Bank of Japan (BoJ) continued to appear unwavering in its commitment to ultra-loose monetary policy. The yen weakened substantially, to around JPY 138.17 against the U.S. dollar, from the prior week’s JPY 135.75. Strong inflation data stemmed some of the yen’s depreciation toward the end of the week.
Japan’s economy grew by more than expected in Q1, boosted by revival in consumption
Japan’s gross domestic product expanded at an annualized rate of 1.6% in the first quarter of the year, ahead of expectations. Economic expansion was attributable primarily to resurgent consumption—with consumers and businesses spending more than had been anticipated—as COVID restrictions were eased. Conversely, net trade was a drag on growth given weakness in exports.
Despite hot consumer inflation print, BoJ committed to patiently maintain ultra-loose stance
Japan’s April core consumer price index rose 3.4% year on year, largely driven by food price hikes. While in line with expectations, the reading marked a reacceleration in inflation and is well above the BoJ’s 2% inflation target. It led to some speculation that the BoJ would have to raise its inflation forecasts further and potentially tweak its massive stimulus program.
However, BoJ Governor Kazuo Ueda reasserted that the central bank is committed to patiently maintaining its ultra-loose monetary policy stance and cited risks from a slowing global economy and uncertainty about whether wage growth will be sustained. He said that the cost of prematurely shifting policy is extremely high, while the cost of waiting to ensure that inflation is sustainably at 2% is smaller. It is appropriate to take time to determine when to modify easy policy, Ueda added.
Chinese equities were mixed amid concerns that the country’s post-COVID recovery is losing steam. The Shanghai Stock Exchange Index gained 0.34% while the blue chip CSI 300 added 0.17% in local currency terms. In Hong Kong, the benchmark Hang Seng Index declined 0.90%.
Official data showed industrial output, retail sales, and fixed asset investment grew at a weaker-than-expected pace in April from a year earlier. Unemployment fell to 5.2% in April from March’s 5.3%, but youth unemployment jumped to a record 20.4%, raising concerns that the post-pandemic recovery is not strong enough to attract new talent. Investors found the latest figures disappointing, although the data were helped by the comparison over the prior-year period, when China was still under lockdown.
The People’s Bank of China (PBOC) injected RMB 125 billion into the banking system via its one-year medium-term lending facility compared with RMB 100 billion in maturing loans. The medium-term lending rate was left unchanged, as expected. In its quarterly monetary policy report released on Monday, the PBOC pledged to maintain sufficient credit growth and liquidity in the economy, raising expectations that the central bank would step up easing measures in coming months.
On Friday, China’s yuan currency depreciated at the fastest pace in almost three months after the PBOC cut its central parity rate below RMB 7 per dollar for the first time since December. Signs of slowing growth in China and a surge in the U.S. dollar driven by hopes that the U.S. government would raise its debt ceiling in time to avoid a default have pressured the local currency.
Home prices rise for the fourth straight month
New home prices in 70 of China’s largest cities rose 0.4% in April in the fourth consecutive monthly gain but slowed from March's 0.5% growth, Reuters reported, citing official data. The month-on-month slowdown in home price gains came after data earlier in the week showed property investment and sales fell sharply in April, adding to worries about a key sector for China’s economic health.
Other Key Markets
On Sunday, May 14, Turkey held its presidential and general elections. The voter participation rate was high, as expected, with about 88%, or over 56 million voters, casting ballots.
According to the final presidential election results announced by the Supreme Election Court, the incumbent President Recep Tayyip Erdogan performed best with 49.5% of the votes cast versus 44.9% for his main opponent, Kemal Kilicdaroglu. The third candidate, Sinan Ogan, received about 5% of the votes. Because none of the three candidates won more than 50% of the votes, the top two candidates, Erdogan and Kilicdaroglu, will face each other in the second round of the presidential election on Sunday, May 28.
As for the general elections, the ruling two-party People’s Alliance coalition received more than 50% of the votes and should have about 320 seats in the 600-seat parliament. While the coalition lost a small number of seats, they will maintain a simple majority in the parliament. The main opposition Nation Alliance received about 35% of the votes, while the Kurdish Left Alliance came in third with about 10.5%.
T. Rowe Price sovereign analyst Peter Botoucharov believes that the peaceful nature of the electoral process should reduce the risk of disruptive sociopolitical events, such as protests, during the prolonged period of political uncertainty. However, he also believes that there is the risk of a split in the Nation Alliance due to tensions between two of the six parties in the coalition.
In addition, Botoucharov does not expect any changes to the country’s macroeconomic policy framework for the next few weeks, at least until the next president is sworn in and a new government put in place. Regardless of who prevails, Botoucharov believes the winner is likely to have a new economic team with a new Minister of Treasury and Finance given Turkey’s weak external position (e.g., large short-term external debts, weak lira, capital outflows), as well as a more orthodox monetary policy given the disconnect between low interest rates and elevated inflation.
Over the previous weekend, the Polish government announced that it would implement some additional fiscal measures totaling about 0.7% to 0.8% of the country’s GDP. The main measure is a 60% increase in monthly child benefit payments, from PLN 500 to PLN 800, as reported by Reuters.
T. Rowe Price credit analyst Ivan Morozov believes that the government is attempting to further stimulate consumption. However, he also believes that this effort will have two primary implications. One is an even wider structural deficit that could exceed 5% of GDP along with a more challenging medium-term fiscal path. The other is a further delayed convergence of inflation—measured at a year-over-year rate of 14.7% in April—to the central bank’s inflation target, which is 2.5% plus or minus medium-term variances of up to one percentage point.
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