Global Markets Weekly Update: October 20, 2023
U.S.
Macro and geopolitical concerns nearly push Nasdaq back into bear market territory
Geopolitical concerns, tough talk from Federal Reserve officials, and a rise in long-term bond yields to new 16-year highs appeared to weigh on sentiment and drive the S&P 500 Index to its biggest weekly decline in a month. The Nasdaq Composite Index fared worst among the major benchmarks and nearly moved back into bear market territory, ending the week 19.91% below its early-2022 intraday highs. Relatedly, growth stocks lagged their value counterparts.
Stocks started the week on a strong note, marking the 15th straight Monday of gains for the S&P 500, seemingly helped by limited negative news flow regarding the Middle East over the weekend. Deepening tensions later in the week appeared to drain the gains, however. In particular, shares fell sharply on Thursday afternoon, following reports that a U.S. Navy destroyer had shot down a cruise missile apparently headed toward Israel. Reports of a drone attack on a U.S. base in Iraq also seemed to weigh on sentiment, according to T. Rowe Price traders.
Fed policymakers remain “unconvinced” inflation is tamed
Our traders noted that “Fedspeak” that was arguably less dovish than recent remarks from policymakers may have also been at work. Richmond Fed President Thomas Barkin told a real estate conference in Washington that he was “still looking to be convinced” that demand was slowing and cooling inflation. In comments before the Economic Club of New York on Thursday, Fed Chair Jerome Powell seemed to give a brief boost to sentiment after acknowledging “a clear tightening in financial conditions,” but The Wall Street Journal reported that markets pulled back sharply after Powell stated that he saw no signs that the current stance of Fed policy would push the economy into a recession.
Some upside economic surprises may have reinforced worries that rates would remain “higher for longer.” On Tuesday, the Commerce Department reported that retail sales rose 0.7% in October, roughly double consensus expectations. The increase was particularly strong among online retailers and at restaurants and bars, indicating continued strength in discretionary spending. Over the preceding 12 months, however, sales rose 3.8%, roughly in line with consumer inflation. Meanwhile, weekly jobless claims surprised on the downside, falling below 200,000 for the first time since January.
Commerce data showed the industrial side of the economy remained considerably weaker, however. Overall industrial production picked up by 0.3% in September but remained roughly flat over the preceding year (up 0.8%). The housing sector also demonstrated the impact of rising rates, as well as the tight labor supply. September housing starts rose more than expected, but building permits, a more forward-looking gauge, fell 4.4% in the month, the sharpest decline in 10 months.
Benchmark 10-year U.S. Treasury yield nears 5% for the first time since 2007
The yield on the 10-year U.S. Treasury note nearly touched 5% in intraday trading at the end of the week, reaching its highest level since July 2007. (Bond prices and yields move in opposite directions.) According to our traders, the tax-exempt municipal bond market weakened alongside Treasuries, with yields on AAA rated municipal bonds moving higher while remaining volatile. Along with the sell-off in the Treasury market, primary issuance was heavy, which represented another strain on the secondary market. Demand for the new deals was generally adequate, however.
Banks dominated new issuance throughout the week in the investment-grade corporate bond market, and spreads widened only slightly despite the week of heavy issuance. Our traders noted that the high yield market came under pressure, however, as tensions escalated in the Middle East. Weakness was felt across ratings and sectors, and below investment-grade funds reported negative flows amid greater risk aversion. Conversely, the bank loan market seemed somewhat insulated from broader risk-off sentiment, seeing healthy demand for collateralized loan obligations alongside limited issuance.
U.S. Stocks
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
33,127.28 |
-543.01 |
-0.06% |
S&P 500 |
4,224.16 |
-103.62 |
10.02% |
Nasdaq Composite |
12,983.81 |
-423.43 |
24.05% |
S&P MidCap 400 |
2,393.28 |
-12.63 |
-1.53% |
Russell 2000 |
1,680.79 |
-38.92 |
-4.57% |
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 3.44% lower amid uncertainty about the outlook for interest rates and fears that conflict in the Middle East could escalate. A spate of disappointing earnings reports worsened the risk-off mood. All the major Continental stock indexes also closed in the red. Italy’s FTSE MIB fell 3.12%, Germany’s DAX lost 2.56%, and France’s CAC 40 Index dropped 2.67%. The UK’s FTSE 100 Index declined 2.60%.
European government bond yields broadly climbed as investors weighed the prospect that interest rates could remain higher for longer due to sticky inflation. Germany’s benchmark 10-year government bond yield rose, ending the week just shy of 2.9%. Italian bond yields also advanced, with the yield differential between German and Italian 10-year debt increasing above 200 basis points. In the UK, the yield on the benchmark 10-year government bond rose after inflation data came in as unchanged instead of slowing further.
ECB monitoring oil prices, policymakers hint rates to stay on hold for some time
Several European Central Bank (ECB) policymakers, including ECB President Christine Lagarde, Robert Holzmann of Austria, and Yannis Stournaras of Greece, highlighted the inflation risk posed by the rise in oil prices ignited by fighting in the Middle East. Meanwhile, ECB Chief Economist Philip Lane told a Dutch newspaper that the central bank may need to wait until the spring before it can be confident that inflation is returning to the 2% target. Bundesbank President Joachim Nagel echoed Lane’s comments, adding that price pressures remain “too high” in the eurozone, and “upside risks are still pretty present.”
UK inflation remains high; pay growth still strong
Inflation in the UK unexpectedly held steady at an annual rate of 6.7% in September due to rising gasoline prices. Services inflation accelerated to 6.9%. Separate data showed that, in the three months through August, wage growth, excluding bonuses, rose 7.8% year over year—close to the record high. Bank of England (BoE) Chief Economist Huw Pill said before the release of the data that policymakers “still have some work to do” to ensure that inflation returns to the 2% target.
German investor sentiment improves; French business confidence worsens
German investor morale improved more than expected in October, driven by expectations of further declines in inflation and stable short-term interest rates in the eurozone, according to the ZEW economic institute. In France, however, business confidence fell across most sectors of the economy in October, according to the official statistics agency.
Japan
Japan’s stock markets fell over the week, with the Nikkei 225 Index down 3.3% and the broader TOPIX Index declining 2.3%. This was against a backdrop of a slight easing in inflationary pressure in Japan, although wage growth was in focus amid signs of a move higher in pay demands for next year.
The latest messaging from the U.S. Federal Reserve indicated that interest rates would remain higher for longer, prompting a surge in bond yields. The yield on the 10-year Japanese government bond rose to 0.83%, its highest level in around 10 years, from 0.76% at the end of the previous week. The Bank of Japan (BoJ) adjusted the parameters of its yield curve control policy in July, effectively allowing yields to rise more freely but capping them at 1%. In a sign that the central bank wants a gradual rise in yields and no sharp moves toward its ceiling, it again intervened during the week to slow the pace of increases, announcing an unscheduled bond-purchase operation.
The yen traded within the upper end of the JPY 149 against the U.S. dollar range, hovering near the JPY 150 threshold that many anticipate could prompt Japanese authorities to step in to stem the yen’s slide. The government again stated that it is prepared to intervene in the currency markets if it detects an excessive swing in exchange rates. If no action is taken, such an excessive swing can cause harm to the real economy as regular people and businesses suffer.
Inflation slows but remains above BoJ’s target, focus remains on wage growth
Japan’s rate of inflation slowed in September, with the core consumer price index rising 2.8% year on year, down from 3.1% in August. However, price increases remained above the BoJ’s 2% target for the 18th straight month, and the BoJ is widely expected to revise up its inflation forecasts at its October meeting.
The focus remains on wage growth, where a move higher in pay demands for next year could indicate changing wage-setting behavior and rising confidence that the BoJ is getting closer to its target. The Japanese Trade Union Confederation, an umbrella organization known as Rengo, plans to demand a wage hike of at least 5% in the 2024 “shunto” labor-management talks between unions and companies. The BoJ sees sustained wage growth as key to meeting its inflation target.
China
Stocks in China fell sharply as deepening property sector woes offset optimism about a better-than-expected gross domestic product report. The Shanghai Composite Index declined 3.4% while the blue chip CSI 300 gave up 4.17%, erasing all gains from the reopening rally earlier in the year. In Hong Kong, the benchmark Hang Seng Index fell 3.6%, according to FactSet.
Country Garden, formerly China’s largest property developer, announced that it was unable to meet all its offshore debt payments after it received a 30-day grace period in August. The company’s missed dollar bond interest payment makes it all but certain that it will default on a dollar bond for the first time and highlighted the troubles China’s real estate market faces. Meanwhile, home price data showed no letup in the ongoing property market slump. New home prices in 70 of China’s largest cities fell 0.3% in September from August, extending declines for the third consecutive month.
Concerns about China’s property market outweighed a surprisingly strong gross domestic product release, which showed that China’s economy expanded an above-forecast 4.9% in the third quarter over a year earlier, slowing from the 6.3% rise recorded in the second quarter. On a quarterly basis, the economy grew 1.3%, up from the second quarter’s 0.5% expansion. Quarterly readings provide a better reflection of underlying growth in China than comparisons over a year ago, when major cities were under pandemic lockdown.
Other data showed that parts of China’s economy may be stabilizing. Retail sales rose a better-than-expected 5.5% in September from a year earlier, up from 4.6% in August. Industrial production growth was unchanged from August, while urban unemployment fell slightly.
Other Key Markets
Poland
On Sunday, October 15, Poland held parliamentary elections. While the ruling Law and Justice Party won more seats than any other party, it did not secure a majority to stay in power. On the other hand, several allied opposition parties won more than enough seats combined to secure a majority in the legislature. However, according to T. Rowe Price credit analyst Ivan Morozov, it may take some time for them to form a government, as President Andrzej Duda, who hails from the ruling party, is likely to prolong the government formation process as long as possible.
One of the key campaign promises of the opposition was to reestablish more constructive dialogue with Poland’s partners in the European Union, which is withholding approximately EUR 100 billion in funds and grants and potentially up to EUR 34 billion in loans from the EU’s Recovery and Resilience Facility (RRF) due to the EU’s disapproval over Polish judicial reforms. However, in order to unfreeze EU funds, a government of opposition parties will need to negotiate with President Duda, whose support would be needed for legislation to pass, as the opposition would not have enough votes to override a veto.
Hungary
Morozov recently attended some International Monetary Fund (IMF) meetings with Barnabas Virag, the deputy governor of Hungary’s central bank, and Tibor Toth, the State Secretary at the Ministry of Finance. According to Morozov, Virag and Toth are expecting economic growth to be in the 3% to 4% range in 2024, with their fight against elevated inflation to remain a top priority. They expect year-over-year inflation to be in the 7% to 8% range by the end of 2023 but also anticipate that it will converge toward the 4% to 6% average range in the central Eastern European region. As for monetary policy, the central bank intends to pursue an environment of positive real (inflation-adjusted) interest rates—a key ingredient for a healthier macroeconomy. However, the government raised its fiscal targets for 2023, opting not to cut spending to meet the previous targets given the weak economy and the fact that high inflation hit domestic consumption hard this year.
Morozov expects that the central bank will maintain a tight monetary policy and that, given policymakers’ stated preference for positive real interest rates, interest rate reductions are possible in 2024 and 2025—assuming that inflation continues to fall toward the central bank’s 3% target without extra inflation pressure stemming from a weakening forint. As for the country’s fiscal situation, Morozov is skeptical that the government will be able to meet its fiscal targets in 2024. However, he does believe that the fiscal deficit will continue to decline over the next couple of years.
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