Global markets weekly update

U.S.

Market’s narrow advance continues

The major indexes ended mostly higher for the week, with the S&P 500 Index and Nasdaq Composite touching new highs. The market’s advance remained exceptionally narrow for the second consecutive week, however, with an equally weighted version of the S&P 500 trailing its more familiar, capitalization-weighted counterpart by 215 basis points (2.15 percentage points). 

Relatedly, enthusiasm over the potential of artificial intelligence appeared to provide a continuing tailwind to technology-related stocks and growth shares, which outpaced value stocks by the largest margin since March 2023 (461 basis points), according to Russell indexes. The week was also notable for the shareholder approval of Tesla CEO Elon Musk’s roughly USD 48 billion pay package (in the form of Tesla stock), which may have partly reflected enthusiasm over his push for autonomous driving vehicles.

Inflation surprises on the downside…

Another factor behind growth shares’ outperformance may have been reassuring inflation data and falling interest rates, which increase the theoretical value of growth companies’ future earnings. On Wednesday, the Labor Department reported that headline consumer price index (CPI) inflation was flat in May for the first time in nearly two years. Core (less food and energy) prices rose 0.2%, a tick below expectations and a seven-month low. On a year-over-year basis, core inflation fell to 3.4%, the lowest level since April 2021.

Producer price index (PPI) inflation, reported Thursday, also surprised on the downside, defying expectations for a slight increase and falling 0.2%. On a year-over-year basis, core PPI fell back to 2.3%, marking an end to five consecutive months of increases. Relatedly, import prices fell 0.4% in May, their first decline in four months.

…but so do growth signals

Also calming inflation fears—but perhaps raising concerns about the overall health of the economy—were surprise jumps in weekly and continuing jobless claims. Over the week ended June 8, about 242,000 Americans filed for unemployment, the most in almost a year. Over the previous week, the number of people who had filed at least two weeks of claims hit 1.82 million, the most since the week ended January 20 and the third-highest number over the past year.

Perhaps because of its late arrival, the benign consumer inflation data appeared to have little impact on Federal Reserve policymakers, who concluded their scheduled policy meeting on Wednesday. Following the meeting, the Fed released its quarterly summary of individual members’ economic projections. While median growth expectations remained unchanged, expectations for core personal consumption expenditure (PCE) inflation—considered the Fed’s preferred inflation gauge—in 2024 rose from 2.6% to 2.8%. 

The Fed left rates unchanged, as was widely expected, but officials increased their median expectation for the federal funds rate at the end of 2024 significantly, from 4.6% to 5.1%, which would imply only one cut later in the year. In their post-meeting statement, however, Fed officials acknowledged that there has been “modest further progress” on inflation—versus “a lack of further progress” in the May 1 post-meeting statement.

Longer-term U.S. Treasury yields fall sharply

The downside growth and inflation surprises pushed the yield on the benchmark 10-year U.S. Treasury note sharply lower for the week, from 4.43% to 4.21%. (Bond prices and yields move in opposite directions.) Alongside the fall in yields, our traders noted that new issue volumes in the tax-free municipal market were more manageable versus the previous week, and demand was generally stronger for large high yield issues than for high-grade issues.

Meanwhile, the investment-grade corporate bond market was quiet over the week with new issuance well below expectations. Spreads widened initially, led by French banks as they felt the effects of political uncertainty in France (see below). According to our traders, volumes in the high yield market were also below average throughout most of the week, as the inflation releases and Fed meeting kept most issuers on the sidelines.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index returned -2.39% as political uncertainty undermined confidence following the strong showing by far-right parties in the European Parliament elections the previous weekend. None of the major European bourses avoided the fallout. Italy’s FTSE MIB fell 5.76%, Germany’s DAX gave up 2.99%, and France’s CAC 40 Index shed 6.23%. The UK’s FTSE 100 Index finished 1.19% lighter.

Political risk and uncertainty prevail 

European markets started the week on uncertain footing, weighed down by political risk after French President Emmanuel Macron called for snap legislative elections later in June after the European Union elections showed a broad shift toward right-wing and far-right parties. Meanwhile, comments from European Central Bank President Christine Lagarde confirming that restrictive monetary policy in Europe has not ended—and not to expect any further rate cuts any time soon—did little to sway the mood. 

Government yields surge

The uncertain political environment was also acutely reflected in European bond markets. Government bonds sold off sharply early in the week, with 10-year French and Spanish yields surging to their highest levels this year, before ultimately receding toward the week’s end. France's 10-year yield, for example, surged more than 20 basis points from last week’s close, to around 3.34% on Tuesday, as the snap election raised concerns about the country's already fragile public finances. Meanwhile, German bond yields fell, seemingly due to a bid for safety in reaction to the situation in France. 

U.S. consumer data offer brief encouragement

However, the midweek announcement of weaker-than-expected U.S. consumer price inflation data was a particular source of encouragement, prompting a rally on European equity markets. This revived hopes that more than one U.S. interest rate cut this year may still be in the offing. The ebullient mood, however, proved short-lived, as comments by the Fed following its June meeting seemed to confirm a single cut before the end of 2024.

But undermined by a lackluster macro picture 

Macro updates later in the week provided a mixed picture, at best, and meant that European equities generally ended the week negatively inclined. On the plus side, Euro area trade data showed a surplus balance in April, as exports growth far exceeded imports. However, industrial production fell unexpectedly in April, easing 0.1%, against a forecast 2% growth. Meanwhile, the UK economy stagnated in April as growth in services output was offset by falls in both production and construction output.

Japan

Japan’s stock markets registered mixed weekly performance, with the Nikkei 225 Index gaining 0.3% and the broader TOPIX Index down 0.3%. The outcome of the Bank of Japan’s (BoJ’s) June meeting was viewed as broadly dovish, lending support to equities.

In the fixed income markets, the yield on the 10-year Japanese government bond (JGB) fell to 0.93%, from 0.98% at the end of the prior week. The yen, already at historic lows, weakened over the week to around JPY 157.5 against the USD, from 156.6.

BoJ keeps policy unchanged, intends to release plan to taper JGB buying at July meeting

The BoJ kept monetary policy unchanged and voted to scale back its JGB purchases—a detailed plan on the tapering for the next one to two years will only be released at its July meeting, however. The decision defied market expectations that the central bank would reduce its massive bond buying this month and was viewed as broadly dovish, as it reaffirmed the likelihood that the pace of monetary normalization is likely to be gradual.

According to T. Rowe Price International Economist Aadish Kumar, discussions with market participants over the next few weeks will be key in determining the new pace of purchases with the aim of allowing long-term interest rates to be formed more freely in financial markets. Comments by BoJ Governor Kazuo Ueda at the post-meeting press conference came across as more hawkish than the monetary policy statement, as he pointed to a considerable cut in bond buying and also raised the possibility of hiking interest rates in July depending on the data. The July meeting policy changes will coincide with the outlook report that will allow the BoJ to communicate higher confidence in reaching its 2% inflation target sustainably.

Economy contracted by less than expected in Q1

Revised data showed that Japan’s GDP contracted by 1.8% on an annualized basis over the first quarter of the year, less than initial estimates of 2.0%, due largely to an upward revision in private inventories. Weakness in the first quarter had stemmed largely from the economic impact of the earthquake that hit Japan’s Noto peninsula in January and the suspension of some auto production. On the inflation front, producer prices increased 2.4% year on year in May, exceeding market expectations of a 2.0% rise.

China

Chinese equities fell in a holiday-shortened week as data showed that deflationary pressures continued to weigh on the economy. The Shanghai Composite Index declined 0.61%, while the blue chip CSI 300 gave up 0.91%. In Hong Kong, the benchmark Hang Seng Index was down 2.31%, according to FactSet. Markets in China were closed Monday for the Dragon Boat Festival.

China’s consumer price index rose a below-expected 0.3% in May from a year earlier, unchanged from April’s rise. Core inflation, which strips out volatile food and energy costs, rose 0.6%, slowing from April’s 0.7% increase. The producer price index fell 1.4% from a year ago, its 20th month of decline, but eased from a 2.5% drop in April. Weak consumer confidence and a protracted property sector slump have kept a lid on prices in China despite numerous measures from Beijing to prop up the economy and markets over the past year.

Data from the Dragon Boat Festival highlighted the consumer caution in China. Tourism revenue over the three-day holiday rose 8.1% from the 2023 break but lagged pre-pandemic levels, according to Ministry of Culture and Tourism data. Domestic traffic rose 6.3% from last year. However, average spending per traveler fell 12.3% from 2019, Bloomberg reported, citing Citigroup research. Some analysts predict that the government will continue rolling out support to stoke demand as weak consumer sentiment remains a drag on the economy.

Other Key Markets

Czech Republic

Early in the week, the Czech government reported that inflation in May was measured at a year-over-year rate of 2.6%. This was lower than expected and lower than the 2.9% year-over-year reading in April. According to T. Rowe Price credit analyst Ivan Morozov, the cost of food is the main reason for the decline in the year-over-year rate, but other data indicate mildly softening inflationary pressures. For example, core inflation momentum returned to 2%—which is the central bank’s inflation target—and he believes it is likely to stay around that level. 

Overall, Morozov believes that the inflationary picture in the Czech Republic remains benign and that the central bank still has room to reduce short-term interest rates. However, he also anticipates that policymakers are likely to act with caution as they look for indications that inflation remains well behaved.

Hungary

The Hungarian government reported that CPI inflation in May was measured at a year-over-year rate of 4.0%. This was above April’s 3.7% reading, but it was lower than expected. 

According to Morozov, the main factor behind the downward CPI surprise was weakness in core inflation, which moderated to a year-over-year rate of 4.0% versus 4.1% in April. Core inflation momentum picked up to greater than 6%, which reflects the expected repricing of services linked to last year’s inflation. As the time for repricing is over, Morozov believes that core momentum will recede to the 3% to 4% range in the months ahead. He also believes that the central bank has room to reduce short-term interest rates if inflation stays below policymakers’ forecasts.