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Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
The US
The most closely watched event of the week was the conclusion of the policy meeting of the Federal Reserve (Fed) on Wednesday. As was widely expected, the Fed raised official short-term rates by 25 basis points (bp), and the “dot plot” showing individual policymakers’ rate expectations – while indicating a growing disparity in outlooks – indicated that officials expected to stop raising rates after one more hike in May. References to ongoing rate increases were also removed from the official statement.
T. Rowe Price Chief U.S. Economist Blerina Uruçi notes that Fed Chair Jerome Powell’s post-meeting press conference suggested that the Fed’s change in tone was driven by forecast uncertainty rather than a strong conviction that a 5.0% to 5.25% fed funds target range (assuming a 25bp rate increase in May) would be sufficiently restrictive, making a pause after May all but certain. While acknowledging that tensions in the banking system have tightened credit conditions, Powell’s prepared statement declared that it was “too soon to tell how monetary policy should respond” and warned that policymakers still “anticipate some additional policy firming may be appropriate.”
In response to questions, Powell also added that Fed officials “don't see rate cuts this year – they just don’t," which appeared to lead to a downturn in equity markets to end the day. Investors did not appear to take him at his word, however, and futures markets ended the week pricing in a 98.2% chance that rates would end the year lower, according to the CME FedWatch Tool – with a 94.8% chance that cuts would start this summer.
The week’s economic data arguably suggested that the economy still had significant steam heading into the banking turmoil, at least. Weekly jobless claims remained near five-decade lows. S&P Global’s Composite Purchasing Managers’ Index (PMI) of both current services and manufacturing activity, released Friday, jumped from 50.1 to 53.3 (with readings of 50 and over indicating expansion), indicating the fastest pace of private sector growth since last May, with new orders turning higher for the first time since September. According to S&P Global’s chief economist, the data were “broadly consistent with annualised GDP growth approaching 2%, painting a far more positive picture of economic resilience” than seen over the past several months.
Data regarding core capital goods orders, which exclude orders for aircraft and defence and are often used as an indicator of business investment, also surprised to the upside when released by the Commerce Department on Friday. Such orders increased in February by 0.2%, beating a Bloomberg survey estimate for a decline of the same magnitude.
Europe
Eurozone business activity expanded faster than expected in March, driven by strong growth in the services sector. A preliminary reading of S&P Global’s eurozone composite PMI rose to a 10-month high of 54.1 in March from 52.0 in the previous month. The result was well above the 50-mark separating expansion from contraction for the third month in a row and higher than the 51.9 consensus forecast in a FactSet survey of economists. However, manufacturing activity fell across most countries, especially Germany, due mainly to a rise in supplier delivery times.
More than a million people took to the streets across France on Thursday, with about 120,000 in Paris, according to the interior ministry. The demonstrations were sparked by proposed pension reforms, raising the retirement age by two years to 64. The French government forced through the legislation by President Emmanuel Macron triggering special constitutional powers to enact the proposed pension reform bill, sidestepping a vote in the country’s lower house.
The UK
The Bank of England (BoE) raised interest rates to 4.25% from 4.00%, the 11th consecutive increase. Minutes from the meeting showed that the Financial Policy Committee told policymakers before the vote that the "UK banking system maintains robust capital and strong liquidity positions," and that "the UK banking system remains resilient." Financial markets appear to expect rates to increase again amid no signs of a let up in inflation. On a year-over-year basis, consumer prices rose to 10.4% in February – well above the consensus expectation.
The latest macroeconomic data pointed to a resilient UK economy, with a purchasing managers’ survey indicating a possible return to growth in the first quarter. S&P Global’s Composite PMI, which measures activity in manufacturing and services, registered an expansion in business activity for a second consecutive month in March. Meanwhile, retail sales volumes rose 1.2% in February – the largest monthly gain since October.
Japan
The rate of consumer inflation slowed in Japan, with the core consumer price index rising 3.1% year on year in February, down from January’s 4.2%, an over four-decade high. The contribution from energy fell notably due to government electricity subsidies to cushion the impact of price pressures. Amid calls for further stimulus, a government panel endorsed plans during the week to add more than JPY 2 trillion to existing inflation relief measures, which will go toward responding to the rise in energy prices as well as support to low-income households.
March saw a continued divergence in the fortunes of Japan’s services and manufacturing sectors. While Japanese service providers saw solid improvement, as government support and an uptick in Chinese tourism boosted demand, the manufacturing sector contracted, with both output and new orders falling.
In the Summary of Opinions from its March meeting, the Bank of Japan (BoJ) acknowledged that, in view of recent price rises, there are calls to revise its accommodative monetary policy. However, it noted that it considers the risk from hasty policy change as more significant than the risk from delaying a change. It needs to carefully consider and discuss whether to revise policy, since revisions affect financial markets and a wide range of economic entities.
China
The People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates (LPR) at 3.65% and 4.3%, respectively, for the seventh consecutive month. The LPRs, which are based on the interest rates that 18 banks offer their best customers and published monthly by the PBOC, are quoted as a spread over the rate on the central bank’s one-year policy loans, known as the medium-term lending facility (MLF). The move was largely anticipated after the central bank left its MLF unchanged the prior week and unexpectedly announced a 25bp cut in the reserve requirement ratio for most banks, a move widely interpreted as an easing measure to support the economy.
China’s fiscal revenues fell 1.2% in the first two months of 2023 from a year earlier, while expenditures rose by 7%. State land sales revenue, a large source of direct funds for local governments, slumped 29% amid persistent housing market weakness despite the government’s efforts to shore up the property sector.
China’s economic indicators have picked up in recent months as consumption and infrastructure investment rebounded from pandemic lockdowns. However, many analysts predict that policymakers will maintain an accommodative stance as banking industry turmoil strains the global growth outlook.
Australia
It was a quiet week for economic data releases with only lower-tier data announcements. Australian household net worth fell further in the fourth quarter, mainly dragged by falling housing prices, reflecting worsening wealth effect. Yet, both Australian household and housing debt as a share of annual disposable income declined in the fourth quarter thanks to the increase in nominal income, indicating healthy household balance sheet having an offsetting effect on elevated inflation. Australian flash PMIs showed that business conditions weakened in March after the recent improvements. Firms reported that new orders had reached a new recent low in the month, which might signal declining demand as a result of monetary policy tightening.
Markets
Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.5% (3.7% YTD).
In the US, the S&P 500 Index closed 1.4% higher (3.8% YTD). Major benchmark returns varied widely as banking industry and recession worries weighed on value stocks and small-caps, while large-cap growth stocks benefited from falling interest rates. Relatedly, financials underperformed for a third consecutive week, and the small real estate sector suffered from worries about how stresses in the regional banking system would affect the commercial real market, where regional banks are the primary lenders. Over the week, Russell 1000 Growth Index returned 1.6% (10.7% YTD), Russell 1000 Value Index 1.0% (-3.0% YTD) and Russell 2000 Index 0.5% (-1.2% YTD). The technology-heavy Nasdaq Composite recorded a gain of 1.7% (13.2% YTD).
The average stock remained significantly weaker than the S&P 500 Index’s return suggests – the S&P Equal Weight Index rose 0.81% for the week but remained down 1.89% for the year. The week’s declines also pushed the Russell 2000 Index into negative territory for the year to date. Nevertheless, trading activity was markedly calmer than it had been the previous week, and the CBOE Volatility Index (VIX), widely referred to as Wall Street’s “fear gauge,” hit its lowest level since 9 March on Thursday before climbing back somewhat on Friday.
In Europe, the MSCI Europe ex UK Index gained 1.1% (5.4% YTD), despite weakness in bank stocks. Major stock indexes advanced. Germany’s DAX Index put on 1.3% (7.4% YTD), France’s CAC 40 increased 1.4% (8.6% YTD) and Italy’s FTSE MIB climbed 1.7% (9.9% YTD). Switzerland’s SMI gained 0.2% (0.4% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.08 for EUR, up from 1.07.
Bank stocks in the MSCI Europe ex UK Index resumed their sharp decline at the end of the week on renewed worries over the health of the financials sector. The slide reversed earlier gains on the news that UBS Group agreed to buy Credit Suisse in a deal brokered by the Swiss authorities. Although there were no specific headlines that triggered a move lower, the market focus appeared to have shifted to concerns about banks with exposure to commercial real estate.
In the UK, the FTSE 100 was up 1.1% (0.4% YTD) and the FTSE 250 rose 0.2% (-1.4% YTD). The British pound was little changed versus the US dollar, ending the week at USD 1.22 for GBP.
Japan’s stock markets generated mixed returns for the week. The Nikkei 225 Index firmed 0.2% (5.0% YTD), the broader TOPIX Index shed -0.2% (3.4% YTD) and the TOPIX Small Index retreated -0.2% (3.7% YTD). Following the latest developments in the global banking sector, investor concerns eased somewhat as six major central banks, including the BoJ, announced coordinated action on 19 March to enhance the provision of liquidity and to ease strains in global funding markets. The yen strengthened after the US Fed raised interest rates as anticipated but indicated that a pause in hikes had been considered amid the banking crises, finishing the week at JPY 130.7 against the US dollar from JPY 131.9 the prior week. The yield on the 10-year Japanese government bond was broadly unchanged at 0.28%.
In Australia, the S&P ASX 200 lost -0.5% (0.8% YTD) on the back of the headlines of the UBS/Credit Suisse merger over the weekend and US Treasury Secretary Janet Yellen’s denial of a unilateral extension of deposit insurance. Australian government bond yields moved lower due to concerns around rising recession risks after recent crises in the banking sector. The exchange rate of AUD/USD remained largely unchanged at 0.67.
MSCI Emerging Markets Index closed 2.2% higher last week (2.0% YTD), with a positive contribution to performance from the stock markets of China, Taiwan and South Korea and a negative contribution to performance from those of India and Brazil.
Chinese stocks rose on hopes that the country’s central bank will maintain an accommodative stance amid the global banking turmoil. The Shanghai Stock Exchange Index added 0.5% (5.7% YTD) and the blue-chip CSI 300 Index gained 1.7% (4.0% YTD). In Hong Kong, the benchmark Hang Seng Index moved 2.0% higher (1.1% YTD).
In Peru, according to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, who recently returned from a research trip to Peru and Chile, the country’s political and social crisis – which culminated in former President Pedro Castillo’s attempted self-coup and subsequent impeachment in December – has meaningfully subsided. Protests are now few in number, and Castillo’s replacement, former Vice President Dina Boluarte, has been able to hold on to her seat given the lack of consensus within Congress to bring forward elections. The impasse is due to a stalemate between the president, who has the power to dissolve Congress following two no-confidence votes in his or her Cabinet, and Congress, which has the power to impeach the president. Both are weak and want to keep their seats. Given the public’s demand for change, however, early elections are likely to take place in 2024, rather than 2026.
Gifford believes that the impact on the Peruvian economy from recent social and political turmoil is negative but manageable. The destruction of property and infrastructure, blockages of highways, and disruptions to tourism and mining have taken a toll on GDP growth, with economic activity shrinking 1.1% year over year in January. However, the recent reopening of key roads and tourist destinations as well as the government’s ability to minimise disruptions to mining activity suggest that the impact will be temporary. Also, the government has been accelerating public works in order to stimulate economic activity.
In Chile, the S&P IPSA Index returned 2.7% (-0.2% YTD). According to Aaron Gifford, the rejection of the new constitution last September and the failure of tax reform to pass through Congress a few weeks ago have significantly weakened the government of President Gabriel Boric. Gifford believes that their failure is symptomatic of the public’s shifting priorities and Boric’s low popularity in light of softening economic growth, high inflation, and rising public insecurity.
A second attempt to write and adopt a new constitution is now underway; the process will conclude with a nationwide mandatory plebiscite on 17 December. New efforts to implement tax and pension reforms are also likely, but the timeline is likely to be stretched out, and Gifford expects that any reforms will be watered down. While both Boric and Finance Minister Mario Marcel intend to prioritise fiscal responsibility, the government desperately needs new revenue sources to fund social expenditures previously promised to the populace in the last few years.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.3% (3.4% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.3% (1.4% YTD) and Bloomberg Emerging Markets Hard Currency Index 0.6% (1.7% YTD).
The upside data surprises appeared to lift the yield on the benchmark 10-year US Treasury note from a six-month intraday low on last Friday morning, but the yield still finished five basis points lower for the week, down from 3.43% to 3.38% (down -50bp YTD). The 2-year Treasury yield decreased seven basis points, from 3.84% to 3.77% (down -66bp YTD). The 2-10-year yield curve remained inverted – often seen as a harbinger of recession.
The German 10-year bund yield increased two basis points, up from 2.10% to 2.12% (down -44bp YTD).
Yield on 10-year UK gilts was little changed, ending the week at 3.28% (down -39bp YTD).
It was a volatile week for both spreads and rates in the US investment-grade sector, but new deals, which were dominated by utility providers, were met with healthy demand. The high yield market saw no new issuance for a third consecutive week, but the market held up well even as rate and recession fears appeared to deepen. Bank loan issuance is expected to remain light as long as broader volatility persists.
Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM
Michael Walsh, FIA, CFA
Solutions Strategist
Niklas Jeschke, CFA
Solutions Analyst
Eva Wu,
Solutions Analyst
202303-2812841
Notes
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