U.S.

Stocks rise on easing inflation fears

Hopeful signs on the inflation front helped the major benchmarks end with solid gains for the week, although stocks closed out their first negative month since February. A decrease in longer-term interest rates over much of the week provided a boost to growth shares in particular by reducing the implied discount on future earnings. Smaller-cap stocks outperformed, however, narrowing the significant year-to-date gap with large-caps.

Trading volumes picked up around month-end, but T. Rowe Price traders noted that market activity remained generally muted as summer vacation season came to a close. Markets were scheduled to be closed the following Monday in observance of the Labor Day holiday.

As many observers noted, the week appeared to be one in which bad news for the economy was considered good news for stock prices, given the interest rate implications. On Tuesday, the S&P 500 Index recorded its best one-day gain since June, following news that job openings unexpectedly fell by 338,000 in July and hit their lowest level since March 2001. Job quits, considered by some to be a more reliable indicator of the strength of the labor market, also fell considerably.

Unemployment rate hits 17-month high

Friday’s closely watched nonfarm payrolls report appeared to confirm loosening labor market conditions. The Labor Department reported that employers added 187,000 jobs in August, somewhat above consensus expectations, but gains for the previous two months were revised lower by a combined 110,000. Average hourly earnings also rose by only 0.2% for the month, a tick below expectations. Most notably, perhaps, the unemployment rate climbed from 3.5% to 3.8% to reach its highest point since February 2022. As 736,000 people reentered the job market, the labor force participation rate hit 62.8%, its highest level since the start of the pandemic in February 2020.

Even as the labor market slowed, hopes appeared to grow that the economy would escape even a substantial slowdown in 2023—the so-called no landing scenario. On Thursday, the Commerce Department reported that personal spending jumped 0.8% in July, above expectations and well above a 0.2% increase in consumer prices during the month. On Friday, the Institute for Supply Management reported that its gauge of manufacturing activity—although still indicating a contraction in the sector—climbed unexpectedly to its best level since February. A gauge of overall business activity in the Chicago region also surprised on the upside.

Expectations grow that the Fed will remain on hold for the rest of the year

Atlanta Federal Reserve Bank President Raphael Bostic appeared to give sentiment a boost on Thursday, telling a conference in South Africa that he believed the current level of interest rates was “appropriately restrictive” and on track to bring down the inflation rate to the Fed’s target of around 2.0%. Along with the inflation and jobs data, his comments seemed to bolster hopes that the Fed would forgo another rate increase this year. The probability that the Fed would remain on hold for the rest of the year, as measured by the CME FedWatch tool, rose considerably over the week, from 44.5% to 59.8%.

While short-term Treasury yields decreased considerably over the week, the yield on the benchmark 10-year U.S. Treasury note increased sharply on Friday morning, leaving it modestly lower for the week. (Bond prices and yields move in opposite directions.) According to our traders, it was a quiet week in the fixed income market overall, with no primary issues in the corporate bond markets and generally light trading activity.

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 1.49% higher on hopes that interest rates would soon peak and that a recession, while possible, would likely prove to be shallow and short-lived. Stocks also appeared to receive a lift from China’s efforts to bolster its economy. Major stock indexes in France, Germany, Italy, and the UK also advanced.

European government bond yields edged lower as core inflation data and comments from policymakers suggested that the European Central Bank (ECB) could be nearing the end of its monetary policy tightening cycle. The yields on 10-year government bonds issued by France and Germany ticked lower. Softer economic data pushed the yield on UK 10-year sovereign bonds near one-month lows.

Headline inflation and jobless rate hold steady; core inflation slowed

The annual inflation rate in the eurozone was steady at 5.3% in August, according to a preliminary estimate from Eurostat, the European Union’s official statistical office. The result was slightly higher than the 5.1% expected by economists polled by FactSet. The core inflation rate, a measure of underlying price pressures that filters out volatile food and energy costs, slowed in line with expectations, coming in at 5.3%—a 20-basis-point improvement from July. (A basis point is 0.01 percentage point.)

The minutes from the ECB’s July meeting called out the strong labor market in the euro area and suggested that a soft landing might be possible for the slowing eurozone economy. The seasonally adjusted unemployment rate stayed at a record low of 6.4% in July, matching a consensus forecast.

German inflation slows slightly; retail sales fall

Consumer price inflation moderated in August to 6.1% year over year, matching a 14-month low hit in May. Meanwhile, retail sales fell in July by 0.8% sequentially, compared with the 0.5% decline expected by economists polled by FactSet.

UK mortgage approvals shrink, house prices drop again

Bank of England mortgage data showed that the number of home loans approved but not yet completed in July dropped 10% from the prior month. Meanwhile, UK house prices fell 5.3% in August—the largest decline since July 2009—according to mortgage lender Nationwide. 

Japan

Japan’s stock markets gained over the week, with the Nikkei 225 Index rising 3.4% and the broader TOPIX Index up 3.7%. Some weaker-than-forecast U.S. economic data releases boosted expectations that the U.S. Federal Reserve was getting closer to halting its interest rate hiking cycle, supporting sentiment. Investors also welcomed China’s latest measures to boost its markets and economy.

The yield on the 10-year Japanese government bond fell to 0.63%, from 0.64% at the end of the previous week. The Bank of Japan (BoJ) announced that it would conduct bond-buying operations one day before its auction of 10-year notes in the week beginning September 4, which weighed on yields.

While the yen strengthened to around JPY 145.4 against the U.S. dollar, from about JPY 146.4 the prior week, its historic weakness continued to stoke speculation that Japan’s monetary authorities could intervene in the foreign exchange markets to prop up the currency.

Government pledges measures to ease record-high fuel prices

Seeking to alleviate the effects of high fuel costs on households and businesses, Japan’s government pledged measures to ease record-high gasoline prices and to extend its subsidy program for oil wholesalers beyond September until the end of the year.

While the weak yen has pushed up gas prices, the government’s subsidies have helped keep overall levels of inflation down, supporting the case for the BoJ to maintain its accommodative stance. BoJ Board member Toyoaki Nakamura reiterated that monetary easing needs to be persistently maintained in pursuit of the central bank’s inflation target and that any policy pivot will take time.

Concerns about slowing growth weigh on capital expenditures

On the economic data front, Japan’s unemployment rate unexpectedly rose to 2.7% in July from the prior month, against expectations of a 2.5% increase. Labor demand weakened, with the number of manufacturing sector openings trending downward.

Concerns about a global, and particularly Chinese, economic slowdown weighed on Japanese companies’ capital expenditures in the period from April to June, which grew 4.5% year on year, the lowest annual gain in five quarters. Many firms became more cautious about increasing spending on plants and equipment amid negative developments in the Chinese property sector, given that the country is Japan’s largest trading partner.

China

Chinese stocks rose after the government issued a series of stimulus measures aimed at reviving the economy. The blue chip CSI 300 Index and Shanghai Composite Index both advanced for the week. In Hong Kong, the benchmark Hang Seng Index rose for the week ended Thursday after financial markets were closed Friday due to the approach of a typhoon.

The previous Friday, China’s central bank cut the amount of foreign currency deposits that domestic banks must hold as reserves. The reduction in the foreign exchange reserve requirement ratio from 6.0% to 4.0% effectively freed up more foreign currency in the local market to buy the renminbi currency, which fell to its lowest level since 2007 against the U.S. dollar in August. The central bank’s move came hours after China’s financial regulator said it would reduce minimum down payments for homebuyers nationwide and encouraged lenders to lower rates on existing mortgages.

The raft of policy announcements signaled Beijing’s growing concern about the economy, which has been losing momentum this year. Disappointing data, deflationary pressures, record youth unemployment, and a deepening slump in the debt-laden property sector are some of the factors that have fueled an erosion of confidence in China’s economy.

Country Garden Holdings, formerly China’s largest developer by sales, revealed in a filing that it might default on its debt if its financial performance continued to deteriorate. Meanwhile, China Evergrande Group, another major developer that is already in default, unveiled more losses and postponed credit meetings that were supposed to start this week. The problems in the real estate sector have fueled worries about contagion to other parts of China’s financial system, including the loosely regulated trust industry.

T. Rowe Price analysts believe that while China’s economy has struggled to rebound from pandemic restrictions lifted in late 2022, recent stresses in the property sector and shadow banking system do not pose an immediate systemic risk as the government pursues its so-called common prosperity agenda. However, with China recording quarter-on-quarter economic growth of just 0.8% as of June and recent trade activity coming off cyclical highs, we believe the country faces a period of below-trend growth. We are carefully monitoring property sector developments and possible spillovers to other sectors. In the near term, weak economic growth and low inflation leave room for policymakers to further ease monetary policy, according to our analysts.  

Other Key Markets

Turkiye (Turkey)

Late the previous week, Turkiye’s central bank surprised investors with a larger-than-expected increase in its key interest rate, the one-week repo auction rate, from 17.50% to 25.00%. According to the central bank’s post-meeting statement, policymakers acknowledged that there has been “a continued increase in the underlying trend of inflation” and asserted that their monetary tightening efforts “will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.” Central bank officials also stated that they will continue to gradually “simplify and improve the existing micro- and macroprudential framework.”

T. Rowe Price sovereign analyst Peter Botoucharov believes that this will be seen as another good step in the right direction in terms of Turkiye returning to more orthodox monetary policymaking. He also believes potential simplification and removal of macroprudential regulations could foster more normal functioning of the local interest rate markets and provide greater stability of the lira in the foreign exchange markets.

Brazil

On Thursday, Brazil’s Finance Ministry sent the government’s 2024 budget to Congress, with a projected 0% primary deficit, as promised in the new fiscal rules. However, the government now says that it will require new revenues totaling about 1.5% of gross domestic product next year. Their plan to increase revenue is mostly focused on tax enforcement, though T. Rowe Price sovereign analyst Richard Hall believes that the government will need to implement further revenue measures than they have identified so far. Hall believes that the risk main risk to increased revenues would be an economic downturn that is worse than a mild recession, in which revenues would decline and government leaders would feel compelled to ramp up spending.