U.S.

Stocks’ winning streak comes to an end

The major indexes finished mixed for the week, but not before the S&P 500 Index came close to matching its longest winning streak in nearly two decades—on Wednesday, the S&P 500 notched its eighth straight gain, while the Nasdaq Composite Index marked its ninth. The market’s strength was exceptionally narrow, however, with an equally weighted version of the S&P 500 Index lagging its market-weighted counterpart by 190 basis points (1.90)%, and the Russell 1000 Value Index trailing its growth counterpart by 404 basis points—the largest margin since March.

It was one of the final weeks of major third-quarter corporate earnings releases, and upside surprises from some technology-oriented firms appeared to provide support to the growth indexes. In particular, T. Rowe Price traders noted that high-valuation software stocks seemed to get a general boost from cloud monitoring and security firm Datadog, which surged 28% on Tuesday following stronger-than-expected earnings and guidance.

Investors pay close attention to Treasury auctions

U.S. Treasury debt auctions during the week seemed to play an uncommonly large role in driving sentiment in both the equity and bond markets, according to our traders. Favorably received auctions of three-year Treasury notes on Tuesday and 10-year notes on Wednesday appeared to boost sentiment.

The initial catalyst in ending the major indexes’ winning streaks, however, appeared to be Thursday’s USD 24 billion auction of 30-year U.S. Treasury bonds, which was met with the weakest demand in two years. Investors have lately been paying close attention to whether demand will be able to keep up with the government’s elevated borrowing needs, particularly in the wake of the temporary lifting of the federal debt ceiling.

There were very few economic data releases this week, and most were in line with expectations. The one exception may have been the University of Michigan’s release on Friday of its preliminary gauge of consumer sentiment, which fell unexpectedly to its lowest level in six months. According to the survey’s chief researcher, the wars in Gaza and Ukraine added to ongoing to concerns about higher interest rates. Long-run inflation expectations also reached 3.2%, the highest level in the survey since 2011.

Yields increase after weak 30-year U.S. Treasury bond auction

Treasury yields generally decreased through the middle of the week but climbed on Thursday amid the weak 30-year Treasury auction. (Bond prices and yields move in opposite directions.) Traders may have also reacted to comments from Fed Chair Jerome Powell, who told a gathering of the International Monetary Fund that policymakers were “not confident” that they had achieved “a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time.” The tax-free municipal market felt the impact of higher yields but benefited from heavy oversubscription on many of the new deals that came to market during the week.

Heavy new issuance in the investment-grade corporate bond market was also met with healthy demand. Buyers in the high yield bond asset class appeared somewhat more selective, according to our traders, but higher-quality bank loans continued to see solid demand.

U.S. Stocks

^{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 0.21% lower as optimism about a peak in interest rates dimmed. Major stock indexes were mixed. France’s CAC 40 Index was roughly flat, Germany’s DAX gained 0.30%, and Italy’s FTSE MIB tumbled 0.59%. The UK’s FTSE 100 Index lost 0.77%.

European government bond yields broadly climbed as markets wrestled with the prospect of interest rates remaining “higher for longer” after hawkish commentary from policymakers. European Central Bank (ECB) President Christine Lagarde said it will take more than “the next couple of quarters” for the ECB to start cutting rates. The yield on Germany’s 10-year government bond rose above 2.7%. Italian bond yields also ticked higher. UK bond yields endured a roller coaster ride after data showed the economy stagnated in the third quarter.

BoE Governor Bailey stamps on rate cut talk; UK economic growth flat

Bank of England (BoE) Governor Andrew Bailey said at a central bank conference in Ireland that it was “really too early” to talk about cutting interest rates. He spoke after BoE Chief Economist Huw Pill said that financial markets pricing in an initial rate cut in August next year “doesn’t seem totally unreasonable,” which triggered a sharp decline in short-dated government bond yields.

UK gross domestic product (GDP) in the third quarter matched the BoE’s forecast for zero growth, after expanding by 0.2% in the prior three months. Monthly GDP was better than expected, with the economy expanding 0.2% in September. GDP growth in August was revised down to 0.1% from 0.2%. The Office for National Statistics said growth was driven by expansion in engineering, health care sales, and machinery leasing, which offset falls in health, management consultancy, and commercial property rental.

Eurozone retail sales fall again; German industry output shrinks

The latest statistics continued to point to a weak European economy. Retail sales in the eurozone fell 0.3% in September, after declining 0.7% in August. The economic sentiment index produced by the Sentix consultancy came in at -18.6 in November, an improvement from the -21.9 recorded in the previous month. In Germany, industrial production in September fell 1.4% sequentially, after flatlining in August, while manufacturing orders increased 0.2%—well below the 1.9% registered in the previous month. In France and Italy, industrial output was flat in September compared with August.

Portugal to hold snap election

Portugal will hold a snap election in March 2024 after Prime Minister Antonio Costa resigned following the launch of a probe into alleged corruption in his Socialist administration. 

Japan

Japan’s stock markets rose over the week, with the Nikkei 225 Index up 1.9% and the broader TOPIX Index gaining 0.6%, supported by strong corporate earnings, the government’s commitment to additional economic stimulus, and continued currency tailwinds. The yen weakened past the 151 level to the U.S. dollar, from around 149 the prior week, depreciating to its lowest in around 33 years. Investor risk appetite was dampened toward the end of the week by hawkish comments from Federal Reserve Chair Jerome Powell, who said that the U.S. central bank won’t hesitate to tighten monetary policy further if needed to contain inflation, raising expectations that interest rates will remain higher for longer.

Normalizing short-term rates will be a serious challenge, BoJ Governor warns

In contrast, Bank of Japan (BoJ) Governor Kazuo Ueda warned that normalizing short-term interest rates will be a serious challenge, due to the potential impact on financial institutions, borrowers, and aggregate demand. Speaking at a conference organized by the Financial Times news organization, he said that it is too early to determine what specifically the central bank will do when it normalizes its policy stance. He added that the bank is making progress toward reaching its 2% inflation target.

The yield on the 10-year Japanese government bond (JGB) fell to 0.85%, from 0.91% at the end of the previous week. JGB yields remained elevated, however, following the BoJ’s October adjustment of its policy of yield curve control, the second tweak in three months. Effectively allowing yields to rise more freely, the central bank now regards its 1.0% ceiling for 10-year JGB yields as a reference, rather than strictly capping interest rates at that upper bound. However, Governor Ueda has repeatedly stated that the 10-year JGB yield is unlikely to rise significantly above 1.0%.

Government pushes ahead with economic stimulus package

Japan’s cabinet approved an extra budget to support Prime Minister Fumio Kishida’s latest economic stimulus package, which is worth more than USD 110 billion. Measures include cuts to income and residential taxes as well as cash handouts to low earners to ease the impact of inflation on households and reinforce wage increases. Japan’s inflation-adjusted real wages dropped in September while consumer spending also declined, reflecting the squeeze on individuals’ purchasing power that is stoking voter dissatisfaction.

China

Chinese equities rose as investors remained broadly unmoved by data showing that consumer prices slipped back into contraction, reviving the specter of deflation hanging over the economy. The Shanghai Composite Index rose 0.27%, while the blue chip CSI 300 gained 0.07%. In Hong Kong, the benchmark Hang Seng Index fell 2.61%, according to FactSet.

The consumer price index fell 0.2% in October from the prior-year period, after remaining unchanged in September, as lower pork prices weighed on food prices. Meanwhile, the producer price index dropped 2.6% from a year ago, marking the 13th consecutive month of decline.

Trade data offered a mixed snapshot of China’s economy. Overseas exports declined 6.4% in October from a year earlier, surpassing the 6.2% fall in September, amid weaker global demand. However, imports unexpectedly rose by 3%, reversing the 6.2% contraction in September and marking the first year-on-year growth since September 2022. Overall trade surplus fell to a below-consensus USD 56.5 billion, down from September’s USD 77.71 billion.

The latest readings underscored the fragility of China’s economy and appeared to add to concerns that growth has not yet bottomed. Despite Beijing’s recent efforts to prop up demand, many economists predict that the government will introduce further stimulus measures to counter deflationary pressures.

Other Key Markets

Mexico

On Thursday, the Mexican central bank decided to keep the target for the overnight interbank interest rate at 11.25%, where it has been since the end of March. The decision, which was unanimous among policymakers, was widely expected.

According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement was a bit less hawkish than in the past. For example, policymakers acknowledged that the disinflation process is advancing, though they also noted that the balance of risks for inflation is still to the upside. In addition, they softened the language about how long the policy rate needs to be maintained at its current level, shifting from “for an extended period” to “for some time.”

Nevertheless, policymakers kept their longer-term inflation projections intact and continue to anticipate that inflation will fall to their 3% inflation target by the second quarter of 2025. As such, Gifford does not expect the central bank to begin reducing interest rates this year, but possibly in the first quarter of 2024.