U.S.

Good news for the economy remains bad news for stocks

Stocks closed lower over the holiday-shortened week as some positive economic signals drove an increase in interest rates. Growth stocks fared better than value shares, and large-caps outperformed small-caps by a wider margin. A decline in Apple, the most heavily weighted stock in the S&P 500 Index, drove part of the declines after news that Chinese government employees would no longer be able to use iPhones. Investors also may have been discouraged by reports that the upcoming iPhone 15 will be significantly more expensive than current models. Declines in NVIDIA and other chipmakers also weighed on the indexes. Markets were closed Monday in observance of the Labor Day holiday.

The week’s economic calendar, while not especially heavy, seemed to drive sentiment by generally surprising on the upside. The standout appeared to be the Institute for Supply Management’s report on August services sector activity, which jumped unexpectedly to its highest level since February. The report indicated that new orders were growing at a faster pace, although order backlogs fell sharply, and inventories had risen considerably. Export orders also remained healthy, although worries grew during the week about a sharp slowdown in the Chinese economy (see below).

Jobless claims fall to lowest level since February

Meanwhile, Thursday’s weekly jobless claims report came in lower than expected, indicating continued strength in labor demand despite August’s solid increase in the unemployment rate (from 3.5% to 3.8%). Defying expectations for a small increase, the number of Americans applying for unemployment in the previous week fell to 216,000, the lowest level in six months. Continuing claims fell to 1.68 million, the lowest level since mid-July.

The jobless numbers sparked a rise in short-term bond yields, according to our traders, with the yield on the two-year U.S. Treasury note briefly crossing back above the 5% threshold on Thursday afternoon. The tax-exempt municipal bond market began the holiday-shortened week with a quiet tone as market participants awaited large new issues from California and the Port Authority of NY/NJ. These new deals came to market on Wednesday and were a drag on the secondary market as they were absorbed. The secondary market weakness continued into Thursday as yields on intermediate AAA municipal bonds rose. 

Heavy investment-grade issuance

In the investment-grade corporate bond market, credit spreads were resilient on Tuesday, widening only slightly amid a large amount of issuance after the holiday weekend. Later in the week, spreads tightened amid lighter issuance, which was oversubscribed. According to our traders, the high yield market was fairly quiet with below-average volumes following the long weekend. Higher-quality bonds underperformed given the move higher in rates, while only a few new deals were announced during the week.

Our traders reported firm sentiment in the bank loan market, with steady demand for discount paper. While few new issues came to the market, additional deals are expected over the next few weeks as issuers look to take advantage of the recent favorable conditions for the asset class.

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 0.76% lower on fears that elevated interest rates could be pushing the economy into a slowdown. Among major stock indexes, Germany’s DAX declined 0.63%, France’s CAC 40 Index lost 0.77%, and Italy’s FTSE MIB slid 1.46%. The UK’s FTSE 100 Index advanced 0.18%.

Yields on German and Italian 10-year sovereign bonds ticked higher amid concerns about the eurozone economy. In the UK, the yield on the 10-year government bond ended higher but pulled back from its midweek highs.

Eurozone growth revised lower; German industrial output falls again

A string of economic data provided more signals that the eurozone economy continues to stumble. Gross domestic product (GDP) in the bloc grew 0.1% in the second quarter, as a drop in exports contributed to Eurostat’s downward revision of its initial estimate of a 0.3% expansion. Retail sales volumes in the eurozone fell 0.2% sequentially in July, reflecting weaker automotive fuel purchases. The year-over-year decline was 1.0%.

Investor morale in the eurozone fell more than expected at the start of September, with Sentix’s index tumbling to -21.5 from -18.9 in August. Sentix said that a deepening slowdown in Germany was weighing heavily on sentiment. German industrial production in July fell for a third month running, by a greater-than-expected 0.8% sequentially. The decline was driven by a 9% drop in auto manufacturing.

BoE’s Bailey signals rate peak may be near

Bank of England (BoE) Governor Andrew Bailey cast doubt on a possible hike in UK interest rates at the upcoming September 21 policy meeting. He told a parliamentary committee: “I think we are much nearer now to the top of the [interest rate] cycle.” Referring to the decision, he said: “The judgments now are much finer [than before].”

The BoE’s August business survey suggests that underlying price pressures may be waning. Companies polled in the three months through August expected to raise prices by 4.9% over the coming year, down from 5.2% in the three months to July. They also expected wages to grow by 5.0% over the coming year, unchanged from July.

Japan

Japan’s stock markets registered mixed performance over the week, with the Nikkei 225 Index down 0.3% and the broader TOPIX Index gaining 0.4%. Concerns about China’s economic slowdown and the impact on global demand weighed on investor risk appetite.

Some weak economic data releases suggested that Japan’s economy was not doing as well as previously thought, with a downward revision to second-quarter economic growth weighing on sentiment. Japan’s second-quarter 2023 gross domestic product expanded 4.8% quarter on quarter on an annualized basis, weaker than preliminary estimates of 6.0% growth. Capital spending, private consumption, and public investment were all softer than anticipated. 

Against this backdrop, the yield on the 10-year Japanese government bond (JGB) held around the 0.6% range. As the Bank of Japan  keeps rates low through its policy of yield curve control, weak demand at JGB auctions suggests that investors are holding out for higher yields.

Authorities issue strongest warnings to date on currency intervention

The yen weakened to around JPY 147 against the U.S. dollar, its lowest level in over 10 months, from about JPY 146 at the end of the previous week, prompting Japan’s Ministry of Finance to issue its strongest warnings to date on foreign exchange market intervention to prop up the yen. Vice Minister of Finance for International Affairs Masato Kanda said that speculative action that cannot be explained by fundamentals can be observed and that if these moves continue, the government will respond appropriately without ruling out any options. The comments were then echoed by Finance Minister Shunichi Suzuki, who also emphasized that authorities were monitoring yen weakness with a sense of urgency. Japanese authorities last intervened to buy the yen and sell the U.S. dollar in October 2022.

Growing expectations that PM Kishida will reshuffle party leadership

On the political front, speculation grew during the week about a potential Liberal Democratic Party (LDP) leadership and cabinet reshuffle by Prime Minister Fumio Kishida, with several news agencies reporting that a revamp could take place as soon as the week beginning September 11. Kishida is reportedly aiming to maintain stability within the LDP as he positions himself to be reelected as party leader next year, and many of the party’s most influential members are expected to retain their positions.

China

Chinese stocks retreated as the latest economic indicators reinforced concerns about the country’s weakening outlook. The Shanghai Composite Index fell 0.53% while the blue chip CSI 300 Index gave up 1.36%. In Hong Kong, the benchmark Hang Seng Index declined for the week ended Thursday after financial markets were closed Friday due to a heavy rainstorm that flooded the city.

Services activity grows at slowest pace since December

The private Caixin/S&P Global survey of services activity fell to a below-forecast 51.8 in August from July’s 54.1. Although the gauge remained above the 50 threshold, indicating expansion for the eighth consecutive month, it was the slowest increase since December as poor demand continued to drag on China’s economy. The reading was broadly in line with the prior week’s nonmanufacturing Purchasing Managers’ Index (PMI), which also eased to the lowest level this year. The official manufacturing PMI remained in contraction for the fifth consecutive month but came in slightly above expectations.

On the trade front, China’s exports fell 8.8% in August from a year earlier, softening from the sharp 14.5% drop in July. Imports shrank by 7.3%. Both readings were above expectations. Some economists viewed the data as a sign that some sectors in China’s economy may be bottoming out after the government recently issued a flurry of policy measures aimed at boosting demand. 

China’s renminbi currency fell to a record low of 7.36 against the U.S. dollar in overseas trading after the central bank set its yuan fixing rate at a two-month low. The exchange rate fell below the psychologically important level of 7.35 and close to the weakest since the inception of the offshore market in 2010. Pessimism about China’s economic outlook and signs of resilience in the U.S. economy have contributed to the interest rate differential between the two countries, which has increased downward pressure on the renminbi.

Other Key Markets

Türkiye (Turkey)

During the week, the government released its Medium-Term Programme (MTP) for the 2023–2026 time frame. T. Rowe Price sovereign analyst Peter Botoucharov he believes that the MTP is more realistic in its macroeconomic projections versus previous ones. This is an important step forward, as it acknowledges slower economic growth and higher inflation, at least in the 2023–2024 period, and a wider budget deficit (6.4% of GDP this year, which includes earthquake recovery spending). Botoucharov believes that slower growth, wider budget deficits, and a more gradual path to correcting external account imbalances point to a gradual return to orthodox policies and confirm the government’s post-election pivot in its policy direction.

On the other hand, Botoucharov notes some inconsistencies, such as in the 2025–2026 time frame, when inflation—currently at a year-over-year rate of almost 60%–is projected to be at a single-digit rate while economic growth is accelerating. Also, President Recep Tayyip Erdogan has had for some time the unconventional belief that high interest rates cause high inflation, making it possible that he will step back from an acceptance of tight monetary policy at some point.

Poland

On Wednesday, September 6, Poland’s central bank shocked investors by cutting its key policy rate, the reference rate, from 6.75% to 6.00%. This rate cut was much larger than expected—especially considering that the inflation rate, while it has been declining, remains well above the reference rate—and it prompted a sharp drop in the zloty versus the euro.

According to the post-meeting statement, policymakers acknowledged a “slowdown in activity growth,” noting that a preliminary estimate of annual GDP growth in the second quarter was -0.6%. However, they also noted that the labor market situation “remains good and unemployment is low.” Nevertheless, they justified their action by noting that “recently incoming data point to a weaker demand pressure than previously expected, which will contribute to a faster return of inflation” to the central bank’s inflation target.

Interestingly, policymakers asserted that “the decrease in inflation would be faster if supported by an appreciation of the zloty exchange rate, which would be consistent with the fundamentals of the Polish economy.” However, not long after the rate-cut decision, central bank governor Adam Glapinski expressed his belief that the current zloty exchange rate was acceptable and indicated that the central bank was not planning on intervening in the currency market.