Global Markets Weekly Update: September 03, 2021
U.S.
Mid-caps move into record territory
The major indexes ended the week mixed after the S&P MidCap 400 Index joined the S&P 500 and Nasdaq Composite indexes in reaching new intraday highs on Thursday. The small real estate sector outperformed within the S&P 500, while financials lagged. Trading volumes were generally subdued during what is widely considered the last week of the summer vacation season. Markets were scheduled to be closed the following Monday in observance of Labor Day.
T. Rowe Price traders observed that anticipation of the Labor Department’s closely watched monthly payroll reports loomed large over sentiment through much of the week. On Wednesday, payrolls firm ADP released its own tally of August private sector job gains, which came in well below expectations. The bad news was largely taken as good news, according to our traders, as it seemed to make the Federal Reserve less likely to begin tapering asset purchases later this year.
Job growth slows, but hourly earnings rise sharply
The slowdown in employment gains was confirmed in the official August report on Friday, which seemed to provoke a mixed reaction in markets. Nonfarm payrolls grew by 235,000 versus consensus expectations for a gain of around 750,000. Previous months’ gains were revised higher, however, and the unemployment rate fell to a new pandemic-era low of 5.2%. While the impact of the delta variant of the coronavirus was clear—hiring in leisure and hospitality ground to a halt in August—many observers pointed to constraints in labor supply rather than lower demand. Indeed, weekly jobless claims, released Thursday, fell again to their lowest level since March 2020, and average hourly earnings jumped 0.6% in August, roughly double expectations.
T. Rowe Price Chief U.S. Economist Alan Levenson expects children returning to school will allow some parents to rejoin the workforce, while the coming end of extended unemployment benefits should also result in some increase in the labor supply. He notes, however, that the number of people not looking for work because of coronavirus concerns remained stuck in August at around 1.5 million for the third consecutive month, while the recovery in child-care employment and spending has stalled.
The delta variant appeared to be taking a smaller toll on the manufacturing sector, although companies and suppliers surveyed by the Institute for Supply Management (ISM) reported continued struggles with “record-long raw materials lead times, continued shortages of critical basic materials, rising commodities prices, and difficulties in transporting products.” The ISM’s gauges of both factory and service sector activity—released Wednesday and Friday, respectively—surprised on the upside. Housing market numbers were weaker, with pending home sales falling in July for the second consecutive month.
Wage gains fuel inflation fears
The jump in hourly earnings appeared to spur inflation fears and an increase in the benchmark 10-year U.S. Treasury note yield on Friday morning, leaving it modestly higher for the week. (Bond prices and yields move in opposite directions.) The broad municipal bond market was little changed through most of the week and underperformed Treasuries. Light levels of primary market issuance and continued cash flows into municipal bond portfolios industrywide helped to preserve a favorable technical backdrop, according to our traders.
Steady demand and a lack of new issuance ahead of the holiday weekend created favorable technical conditions in the high yield bond market. Some positive economic data fueled growth hopes, and Fed Chair Jerome Powell’s dovish Jackson Hole remarks the previous week were also supportive for high yield bonds. Our traders noted that broader risk markets had a largely muted reaction to hawkish commentary from the European Central Bank (ECB) on reducing pandemic aid.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
35,369.09 |
-86.71 |
15.56% |
S&P 500 |
4,535.43 |
26.06 |
20.75% |
Nasdaq Composite |
15,363.52 |
234.02 |
19.21% |
S&P MidCap 400 |
2,760.55 |
-6.51 |
19.68% |
Russell 2000 |
2,292.05 |
14.90 |
16.06% |
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 Associates’ presentation thereof.
Europe
Shares in Europe were little changed, as investors assessed signs of slowing economic momentum. In local currency terms, the pan-European STOXX Europe 600 Index ended the week roughly flat. Major indexes were mixed. Germany’s Xetra DAX Index fell 0.45%, while Italy’s FTSE MIB Index gained 0.22%. France’s CAC 40 Index and the UK’s FTSE 100 Index were almost flat.
Core eurozone government bond yields rose on higher-than-expected eurozone inflation and hawkish commentary from some ECB policymakers, who called for a reduction in the purchase pace of the Pandemic Emergency Purchase Program. Peripheral eurozone and UK government bond markets mostly tracked core markets.
EU bans U.S. travel; EU infections stabilize but WHO is worried
An increase in the number of coronavirus infections in the U.S. prompted the European Council to remove the country from its so-called safe list for nonessential travel, reversing its recommendation in June to lift restrictions on all American travelers. However, fully vaccinated travelers should still be allowed to visit if they can produce a negative COVID-19 test result within three days of arrival. Even so, this guidance is nonbinding; individual member states can impose their own restrictions.
The number of coronavirus cases in the European Union (EU) and European Economic Area stabilized, although the number of deaths rose, according to the European Centre for Disease Prevention and Control. The Centre said it expected the trend in cases to remain stable into September but forecast that hospital admissions and deaths would likely increase. In the UK, the number of people in private residential households testing positive for the coronavirus climbed, as did hospital admissions of infected people, official data showed. The high transmission rate of COVID-19 across Europe is "deeply worrying," the European office of the World Health Organization (WHO) said, while calling for vaccination campaigns to be intensified.
Eurozone inflation jumps; economic sentiment weakens
Eurozone inflation accelerated more than forecast to 3% in August—up from 2.2% in July and well above the ECB's 2% target. Higher energy, food, and industrial goods prices drove the increase, according to the EU's statistics agency.
The European Commission's economic sentiment index fell to 117.5 in August from a record high of 119.0 in July, with optimism waning in all main sectors. France and the Netherlands posted the sharpest drops in sentiment.
Eurozone, UK final PMIs confirm slower growth
Final eurozone and UK purchasing managers’ indexes (PMIs) showed that business activity in August slowed more than indicated by preliminary estimates. IHS Markit said the UK composite activity fell to a six-month low due to a decline in service sector activity that appeared to stem from normalizing demand, labor shortages, and supply chain obstacles.
Japan
News of Prime Minister Yoshihide Suga’s resignation contributed to a strong rally in Japanese equities, removing some political uncertainty and raising expectations of increased economic stimulus. Gains were underpinned by Japan’s accelerating COVID-19 vaccination drive. The Nikkei 225 Index soared 5.38%, while the broader TOPIX Index rose 4.49%, reaching a 30-year high. The yield on the 10-year Japanese government bond rose to 0.04% (from 0.02% at the end of the previous week), while the yen weakened slightly to JPY 109.98 against the U.S. dollar (from 109.83 the prior week).
Yoshihide Suga to resign as prime minister
Amid mounting criticism of his government’s handling of the coronavirus pandemic, Prime Minister Yoshihide Suga announced his intention to resign this month. He said he would not seek reelection as leader of the ruling Liberal Democratic Party (LDP) when it holds its presidential election on September 29. Because the LDP controls the House of Representatives, the powerful lower chamber of parliament, its new leader will become prime minister. Former foreign minister Fumio Kishida has formally announced his candidacy, and other candidates are expressing their interest. Kishida has included as a pillar of his proposed policy platform an economic package with tens of trillions of yen to fight the pandemic.
Government opens agency to speed up administrative reforms that utilize information technology
The Digital Agency, a new government body designed to drive Japan’s digital transformation as part of the government’s administrative reform agenda, began operating on September 1. The agency’s work will be aimed at upgrading online services and infrastructure in the public sector. Its personnel comprises both public and private sector workers—Digital Transformation Minister Takuya Hirai is in charge of the agency, while Yoko Ishikura, professor emeritus at Hitotsubashi University, holds the top administrative post for someone appointed from the private sector.
Japan is perceived to be a laggard in the use of digital technology to carry out national policies. Slow progress in promoting administrative reforms that utilize information technology is due in part to decentralized information systems and privacy concerns. The lack of digitalization in government services for the public has caused problems during the coronavirus pandemic, for example, delaying the handling of applications for financial support and slowing the transmission of medical data. Many schools also struggled to switch to online teaching.
Industrial output shrinks amid sluggish auto production
Japan’s industrial production fell 1.5% month on month in July, following a 6.5% rise in June, as coronavirus-related supply chain disruptions weighed on car production. Car production is likely to continue posing a drag on overall output in the coming months: Toyota Motor announced in August that it would cut production for September by 40% from its previous plan, due to its inability to secure a number of parts.
China
Chinese stocks rose for a second consecutive week. The Shanghai Composite Index gained 1.7% and outperformed the large-cap CSI 300 Index, which rose 0.3%, according to Reuters.
Chinese companies posted robust earnings for the June quarter, with a 36% annual increase in earnings per share, according to mainland broker CITIC. Upstream resources sectors saw the strongest earnings growth, followed by new energy vehicles and semiconductors. The consumer, pharmaceutical, and telecom sectors lagged. On a two-year basis to smooth out impacts from the pandemic, net profits increased by over 10% over the second quarter of 2019, according to CITIC.
On Thursday, President Xi Jinping announced the launch of a new stock exchange in Beijing. The new exchange is aimed at providing equity financing for small and mid-size enterprises and reflects China’s strong commitment to its capital markets. News of the new bourse comes as many foreign investors have grown more wary of investing in Chinese assets following a regulatory clampdown on a number of industries. Foreign investors’ share of domestic Chinese equities fell in August to the lowest level since 2014, according to fund flow data from EPFR.
The yield on the 10-year Chinese government bond fell four basis points to 2.85%. The renminbi currency appreciated 0.5% against the U.S. dollar to 6.451.
The People’s Bank of China said that it would provide RMB 300 billion in low-cost funding to banks for lending to small and medium-sized enterprises (SMEs). Improving credit access for SMEs is a long-term objective for the central bank and does not necessarily signal a shift in monetary policy, according to analysts. Local governments have assumed a greater role in ensuring financial stability within their regions after they were allowed to sell bonds to recapitalize smaller local banks late last year, according to a recent Moody’s report.
China’s PMI readings for August offered the first sign of the economic impact following July’s outbreak of the delta variant, which triggered renewed lockdowns and restrictions across the country.
On the services side, the official nonmanufacturing PMI fell to 47.5 from 53.3 in July, its lowest reading since February 2020 (readings below 50 indicate contraction). The Caixin services PMI, a private survey that focuses on smaller businesses, fell to a worse-than-forecast 46.7, its first contraction in 16 months. Meanwhile, manufacturing PMIs from the government and Caixin suggested weakness for China’s manufacturing companies as they grapple with rising cost pressures. The latest PMIs also pointed to growing labor market pressures as service sector employers cut jobs in response to weak demand and rising costs.
Other Key Markets
Chile
Stocks in Chile, as measured by the S&P IPSA Index, returned about -0.4%. On Wednesday, the Chilean central bank surprised investors with a 75-basis-point increase in its key lending rate, from 0.75% to 1.50%. The decision among policymakers was unanimous, and the rate increase was larger than market expectations of 50 basis points.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement was unequivocally hawkish, with references to a closed output gap, "extraordinary" dynamism in private consumption, "massive" pension withdrawals, more fiscal stimulus, and higher-than-expected inflation and inflation expectations. As a result, policymakers responded aggressively to the accumulation of macroeconomic factors that “could provoke a more persistent increase” in price pressures that, in turn, could result in inflation exceeding the central bank’s 3% target over its two-year policy horizon.
On Thursday, the central bank issued its quarterly monetary policy report. On the back of higher growth and inflation forecasts, policymakers increased the amount and brought forward the timing for additional monetary tightening. Rather than pausing rate increases at a below-neutral stance at the end of 2022, as laid out in the previous report, the central bank now expects its key rate to reach a neutral level—neither stimulative nor restrictive—in the first half of next year. Central bank officials also expect to increase the key rate to a range of about 4.00% to 4.25% in its base case scenario before pausing.
Peru
Peruvian assets, which had stabilized somewhat in August following several months of losses, were under pressure again during the week. The government reported that inflation in August was measured at a 1.0% month-over-month rate and a 5.0% year-over-year rate. This was much higher than expected. According to Gifford, the data represent the highest monthly inflation reading on a seasonally adjusted basis since the late 1990s and the highest 12-month measure of inflation since 2009.
However, Gifford notes that most of the increase was due to non-core components, such as food, electricity and fuel, and transportation. Core inflation was at a more modest 0.3% month-over-month rate, or 2.4% year over year, but it is now above the central bank’s 2% target midpoint, and it is accelerating from the lows reached during the pandemic. With several sequential inflation surprises and monetary policy still loose, these latest readings may put pressure on the central bank to increase the magnitude of rate hikes following the modest initial increase of its key rate from 0.25% to 0.50% on August 12. Unlike Chile, however, Peru's output gap is still negative, and the pace of coronavirus vaccinations has been slower, so Gifford believes that the bar to become as hawkish as Chile’s central bank is quite high.
Also during the week, Moody's downgraded Peru's credit rating by one notch to Baa1 from A3, while revising its outlook to stable from negative. While Moody's believes that the outlook could remain stable as long as the government sticks to its new fiscal path—which envisions a 1% of gross domestic product reduction in the fiscal deficit per year starting in 2022—some are skeptical that the government will meaningfully tighten its fiscal accounts considering that newly elected President Pedro Castillo ran on a platform of sizable fiscal outlays.
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