Global markets weekly update

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Stocks mixed again as rotation continues

Stocks recorded mixed returns for the second consecutive week, with small-cap and value shares continuing to outpace the large-cap growth stocks that have led the market over much of the year. Indeed, at the close of trading on Thursday, the technology-heavy Nasdaq Composite 100 Index was lagging the broader S&P 500 Index and barely outperforming the small-cap Russell 2000 Index for the year to date, before large-cap growth shares rebounded to close the week. The week was also notable for the S&P 500 Index selling off on Wednesday by more than 2% for the first time since February 2023, while the Nasdaq suffered its worst loss since October 2022.

T. Rowe Price traders observed that the micro seemed to take precedence over the macro for much of the week, as investors absorbed one of the busiest weeks of the earnings reporting season. A 12.33% decline in Tesla and a 5.03% decline in Class C shares of Google parent Alphabet following earnings reports contributed heavily to Wednesday’s declines. Nevertheless, as of the end of the week, analysts polled by FactSet were predicting that overall earnings for the S&P 500 had risen by 9.8% compared with the same quarter a year ago—up slightly from the 9.7% estimated the previous week.

Housing market slump continues, but business investment picks up

The week’s economic calendar arguably painted an especially mixed picture of how well consumers and businesses were faring. On Wednesday, the Commerce Department reported that only 617,000 new homes were sold in June, well below expectations of around 640,000 and the lowest monthly number since last November. The average selling price also fell roughly 4% from the year before. The same day, S&P Global reported that its gauge of manufacturing activity unexpectedly fell back into contraction territory, to 49.5 (with readings above 50.0 indicating expansion) for the first time since December.

Thursday brought several upside surprises in the data, however, which may have contributed to a morning rally off the benchmarks’ midweek lows. The Commerce Department reported that durable goods orders, excluding those for defense and aircraft—a common proxy for business investment—rose 1.0% in June, the most since March 2022. On the consumer front, weekly and continuing jobless claims fell more than expected, while real (inflation-adjusted) consumer spending rose at an annualized pace of 2.3% in the second quarter, more than expected and up from the 1.5% gain in the previous quarter.

The Commerce Department also reported on Thursday that the economy grew at an annualized rate of 2.8% in the second quarter, according to its initial estimate, well above expectations and double the first-quarter pace. However, much of the gain came in the form of inventory building and increased government spending.

Investors appear reassured by Fed’s preferred inflation gauge

Another factor in Thursday’s rebound appeared to be the Commerce Department’s release of its core (less food and energy) personal consumption expenditures (PCE) price index, which rose a tick more than expected (0.2%) in June but stayed steady at an annual rate of 2.6%—not too far above the 2.0% target for the Federal Reserve’s preferred inflation gauge.

The inflation data appeared to cement expectations for a Fed rate cut at its September meeting. Futures markets tracked by CME FedWatch ended the week pricing in a zero chance of the federal funds rate staying at its current level of a target range of 5.25% to 5.50% by the September meeting versus a slight one the week before.

The yield on the benchmark 10-year Treasury note also ended the week slightly lower. (Bond prices and yields move in opposite directions.) Our traders noted that tax-exempt municipal bond yields were little changed as a busy primary calendar appeared to take attention away from the secondary market.

Meanwhile, issuance in the investment-grade corporate bond market was slightly above expectations, but many issues were oversubscribed. According to our traders, the high yield bond market was little changed with below-average volumes throughout the week. However, they noted that positive flows industrywide to actively managed below investment-grade funds and exchange-traded funds, as well as modest new issuance, provided technical support for the asset class.

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.55% higher, largely thanks to a rally on Friday as investors focused on a better day of quarterly earnings reports. Among major Continental indexes, Germany’s DAX gained 1.35%, France’s CAC 40 Index lost 0.22%, and Italy’s FTSE MIB gave back 1.27%. The UK’s FTSE 100 Index rose 1.59%.

Tech, luxury goods earnings in focus

European equity markets sagged midweek as earnings in the technology and luxury goods sectors weighed on returns. Tech was particularly weak thanks to negative sentiment spilling over from steep declines in Tesla and other “Magnificent Seven” mega-cap stocks in the U.S.

Heading into Friday’s official opening ceremonies for the summer Olympics in Paris, French President Emmanuel Macron called for a political truce during the games. Travel disruptions caused by Friday’s arson attacks on France’s high-speed rail infrastructure marred the opening to some degree but didn’t appear to affect the CAC 40 Index for the day.

Eurozone sovereign bond yields decrease

Core eurozone government bond yields continued to decrease as weaker-than-expected readings from the region’s flash purchasing managers indexes boosted expectations for monetary easing. Markets priced in 50 basis points (0.50 percentage point) of interest rate cuts from the European Central Bank (ECB) over the remainder of 2024 for the first time since early June. A broadly risk-off tone in markets was helpful to safe-haven German sovereign debt, but French and Italian government bond yields widened relative to Germany as political developments continued to fuel fiscal concerns.

UK chancellor to provide results of public finances audit

UK Chancellor of the Exchequer Rachel Reeves said that she would announce the findings of an audit of public finances at the end of July. Press reports have speculated that the review could reveal a deficit of as much as GBP 20 billion, prompting tax increases.

The Bank of England (BoE) revealed a new facility to provide funding for nonbank financial institutions designed to avoid the government bond market volatility experienced two years ago during the short tenure of former Prime Minister Liz Truss. UK economic data have been mixed, leading to speculation about whether or not the BoE will follow the ECB and make its first interest rate cut at its August policy meeting. 

Japan’s stock markets registered sharp weekly losses, with the Nikkei 225 Index falling 6.0% and the broader TOPIX Index down 5.6%. Japanese technology stocks remained under pressure as the shares of U.S. mega-cap technology companies continued to sell off.

Yen strengthens, weighing on exporters

The yen strengthened for the third successive week, to around JPY 154.2 against the USD, from a prior JPY 157.45, continuing to hurt the profit outlook for Japanese exporters. This follows indications that the government intervened in the foreign exchange markets earlier in July to prop up the Japanese currency. Yen strength was also attributed to the unwinding of short positions as well as growing anticipation of narrowing U.S.-Japan interest rate differentials.

The yield on the 10-year Japanese government bond rose to 1.06% from 1.04% at the end of the previous week. Investors looked ahead to the Bank of Japan’s (BoJ’s) July 30–31 monetary policy meeting, speculating whether the central bank would raise interest rates at the same time as it details plans for the tapering of its massive bond purchases. The tapering is likely to be gradual and take place in several stages to avoid causing an unwelcome spike in yields. The BoJ has come under pressure to raise rates again in July to defend the currency and narrow the difference between domestic and foreign bond yields.

Inflation ticks higher

On the economic data front, the latest inflation print kept the door open for a potential rate hike, with the Tokyo core consumer price index rising 2.2% year on year in July, in line with expectations and up from 2.1% in June. However, weakness in private consumption has been cited as a constraint against raising rates. Flash Purchasing Managers’ Index data, compiled by au Jibun Bank, showed activity at Japan’s private sector firms returning to growth in July, with service providers leading the expansion, while manufacturers saw a marginal reduction in output.

Chinese equities fell after unexpected rate cuts by the central bank failed to instill confidence in the economic outlook. The Shanghai Composite Index declined 3.07% while the blue chip CSI 300 was down 3.67%. In Hong Kong, the benchmark Hang Seng Index retreated 2.28%, according to FactSet.

The People’s Bank of China cut its medium-term lending facility (MLF) by 20 basis points to 2.3%, its first reduction since August 2023, after holding the rate steady at its regularly scheduled operation on July 15. The move came on Monday, after the central bank reduced its seven-day reverse repo rate, a key short-term policy rate, by 10 basis points to 1.7%. Shortly afterward, Chinese banks cut their one- and five-year loan prime rates by 10 basis points to 3.35% and 3.85%, respectively, making it cheaper for consumers to take out mortgages and other loans. 

The string of rate cuts pointed to Beijing’s growing urgency to support growth after China’s gross domestic product undershot expectations in the second quarter. Other data also highlighted weakness in the economy as retail sales, industrial production, and property investment slowed in June. Many analysts anticipate that the central bank will continue to loosen policy and potentially reduce its reserve requirement ratio to bolster the economy.

A lack of significant policy initiatives following the Third Plenum, a once-in-five-year meeting of top officials in the ruling Communist Party, also contributed to bearish sentiment. During the three-day meeting that ended July 18, President Xi Jinping vowed to make “high-quality development” the main priority for China but provided no detailed policies, disappointing those who hoped for measures to bolster consumption and end a yearslong property slump. 

Canada

The Bank of Canada (BoC) cut interest rates by 25 basis points during the week in a widely expected move that brought its key policy rate down to 4.50%. It was the second straight cut by the BoC, which had left rates at the 5.0% level for nearly a year before beginning to cut rates in June.

Policymakers said that easing price pressures supported the interest rate cut. The Canadian consumer price index (CPI) had come in at 2.7% in the latest report, above the BoC’s 2% goal but down from a high of just over 8% in June 2022. Central bank officials cited excess supply as a driver behind lower inflationary pressures; however, the BoC policy statement also noted that “price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up.”

The Canadian dollar weakened versus the U.S. dollar immediately following the BoC meeting as the divergence between monetary policy in the two countries grew.

Ukraine

Ukraine agreed to a debt restructuring deal with an ad hoc creditor committee that represents about a quarter of its bondholders. While the agreement still needs to be approved by two-thirds of all bondholders, it appears to lessen the chances that the country will default on its debt in the near term.

Creditors and the Ukrainian government appeared far apart in negotiations just a month ago, but the two sides came together in a deal that appears to offer more favorable terms to bondholders, including a substantially lower write-down in the value of the bonds.

Hungary

The Hungarian central bank, as expected, reduced its benchmark interest rate to 6.75% with a 25-basis-point cut, the 10th cut in an easing cycle that started last October and has brought the policy rate down from 13%. Two consecutive CPI reports that showed monthly inflation readings at 0.0% appeared to give the central bank confidence to deliver another rate cut. Hungary’s forint traded lower versus the euro following the monetary policy decision after recently reaching a six-week high against the neighboring currency.

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