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June 2022 / WEEKLY GLOBAL MARKETS UPDATE

Global Markets Weekly Update

Our analysts recap activities across global markets in our weekly report.

Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.

U.S.

Stocks advance as gains appear to broaden

Stocks recorded modest gains over the shortened trading week (markets were closed Wednesday in observation of the Juneteenth holiday), helping push the S&P 500 Index to fresh all-time highs. The week also saw modest signs of a broadening and rotation in the market, with value stocks outperforming growth shares and most of the major benchmarks outperforming the technology-heavy Nasdaq Composite. Friday was a so-called triple-witching day, with roughly USD 5.5 trillion in options related to indexes, individual stocks, and exchange-traded funds set to expire, according to Bloomberg and options platform SpotGamma.

The start of the week brought some additional evidence that easing labor demand and dwindling savings might be making consumers more cautious. On Tuesday, the Commerce Department reported that retail sales had increased only 0.1% in May, according to advance estimates, while falling a downwardly revised 0.2% in April. Notably, sales at bars and restaurants fell 0.4%, signaling less discretionary spending, in particular, but sales at grocery stores also fell 0.4%, perhaps reflecting recent price cuts in certain food categories (retail sales data are not adjusted for inflation).

Factories busiest in nearly a year, but consumers pull back

In a reversal of recent trends, however, manufacturing signals released the same day were somewhat stronger. The Federal Reserve announced that industrial production had expanded 0.9% in May, well above consensus expectations and the fastest pace in nearly a year. Factories were also operating at 78.7% of capacity, a tick above expectations and the highest level since last November.

Data released later in the week also arguably suggested that the economy was stronger than indicated by the retail sales data. On Friday, S&P Global announced that its composite index of business activity had risen to 54.6 in June, according to preliminary data, its best level in over two years. (Levels above 50.0 indicate expansion.) The services sector appeared to be in especially good shape, with payrolls increasing at the best pace in five months and rebounding from two months of declines. Encouragingly, selling price pressures in the sector were among the lowest recorded since the onset of the pandemic. Services providers continued to face higher wage bills, however, suggesting some pressure on operating margins.

Bond markets continue to absorb heavy new issuance

The lackluster retail sales data appeared to push longer-term Treasury yields lower, but Friday’s stronger S&P Global readings brought them back up to end the week modestly higher. (Bond prices and yields move in opposite directions.) Tax-exempt municipal bond yields held relatively steady for much of the week, and T. Rowe Price traders noted that secondary trading volumes were light despite a heavy issuance calendar.

Issuance in the investment-grade corporate bond market was also heavy early in the week, with expectations for total weekly issuance surpassed by the end of the day Tuesday. Somewhat improved investor sentiment and equity gains supported the performance of high yield bonds. Our traders noted that signs that the economy could be slowing, along with encouraging comments from Federal Reserve officials about the likelihood of a rate cut later this year, seemed to bolster the performance of risk assets overall.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.79% higher, rebounding as worries about political uncertainty appeared to ebb and the outlook for monetary policy easing brightened. Major stock indexes rose. Germany’s DAX gained 0.90%, France’s CAC 40 Index put on 1.67%, and Italy’s FTSE MIB climbed 1.97%. The UK’s FTSE 100 Index added 1.12%.

Index Friday's Close Week’s Change % Change YTD
DJIA 31,500.68 1611.90 -13.31%
S&P 500 3,911.74 236.90 -17.93%
Nasdaq Composite 11,607.62 809.27 -25.81%
S&P MidCap 400 2,334.40 113.96 -17.86%
Russell 2000 1,765.72 100.04 -21.36%

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.

Bank of England (BoE) stands pat, while inflation slows to target

As expected, the BoE left its key interest rate unchanged at a 16-year high of 5.25%. Seven members of the Monetary Policy Committee voted to keep rates steady; two backed a cut to 5%. Some members said the decision was finely balanced, potentially signaling that policymakers are drawing closer to reducing borrowing costs this year.

The headline inflation rate dropped to the central bank’s target of 2% in May, down from 2.3% the month before. Core inflation, which excludes food and energy, eased to 3.5% from 3.9% in April. However, services inflation of 5.7% was higher than consensus expectations.

Swiss National Bank cuts rates again, Norges Bank holds rates steady

The Swiss National Bank lowered rates by a quarter of a percentage for the second consecutive meeting, taking its policy rate to 1.25%. The accompanying statement noted that inflation pressure has decreased since the previous quarter. Meanwhile, Norway’s central bank, Norges Bank, kept its rate at 4.5%. It said that based on its current assessment of the outlook and balance of risks, the policy rate will likely be kept at this level for the rest of the year before gradually being reduced.

Eurozone business activity stumbles

Private sector business activity in the eurozone unexpectedly slowed in June as services lost momentum and manufacturing contracted more sharply, purchasing managers’ surveys showed. The HCOB Composite Purchasing Managers' Index (PMI)—combining activity in manufacturing and services—fell to 50.8 from 52.2 in May, according to preliminary figures compiled by S&P Global. (A PMI reading greater than 50 indicates expansion.) In Germany, overall business activity increased slightly, with the slowdown in the rate of expansion reflecting weakness in manufacturing production. In France, a decrease in new orders caused output to contract for a second month in a row.

Japan

Japan’s stock markets generated negative returns over the week, with the Nikkei 225 Index falling 0.6% and the broader TOPIX Index down 0.8%. Uncertainty about the future trajectory of the Bank of Japan’s (BoJ’s) monetary policy weighed on sentiment. 

The yield on the 10-year Japanese government bond (JGB) rose to 0.97%, from 0.93% at the end of the previous week, as investors sought to digest data showing that inflation had accelerated in May and how this would factor in to the BoJ’s decision-making about when to next raise interest rates. The nationwide core consumer price index rose 2.5% year on year in May, following a 2.2% uptick in April, but was slightly short of consensus expectations for a 2.6% increase. BoJ Governor Kazuo Ueda reiterated that a July rate hike is possible, depending on data, even as the central bank is set to provide details of its planned tapering of JGB purchases in the same month, as the two are separate matters.

Yen further weakens versus USD

In the currency markets, the yen weakened to around JPY 158.8 against the USD, from the prior week’s 157.4, hovering near fresh 34-year lows as it remained weighed down by U.S.-Japan interest rate differentials. Japanese authorities again expressed their readiness to take resolute action if there is speculative, excessive volatility in the foreign exchange markets. This followed their interventions in April and May 2024 to buy yen and sell U.S. dollars to strengthen the value of the Japanese currency, and this appears to have had limited effect in reversing the yen’s downtrend. 

On the economic data front, expansion in business activity across Japan’s private sector stalled in June, with the flash composite purchasing managers’ index (PMI) compiled by au Jibun Bank falling to 50.0, from 52.6 in May. This was driven by a fall in services activity that was partially attributed to labor constraints. However, business conditions within the manufacturing sector improved marginally for a second successive month. Separate data showed that Japan’s exports surged 13.5% year over year in May, helped by weakness in the yen and solid increases in shipments to the U.S. and China.  

China

Chinese stocks retreated as mixed economic data dampened investor sentiment. The Shanghai Composite Index fell 1.14%, while the blue chip CSI 300 gave up 1.3%. In Hong Kong, the benchmark Hang Seng Index gained 0.48%, according to FactSet. 

Industrial production rose a weaker-than-expected 5.6% in May from a year earlier, slowing from April's 6.7%. Fixed asset investment grew 4% in the calendar year to May compared with a year ago but eased from the January to April period as real estate investment declines deepened. Meanwhile, retail sales increased an above-consensus 3.7% in May from a year earlier and outpaced April’s 2.3% gain. The nationwide urban unemployment rate remained steady at 5%. 

The People’s Bank of China injected RMB 182 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.5%, as expected. With RMB 237 billion in loans set to expire this month, the operation resulted in a net withdrawal of RMB 55 billion from the banking system, but the central bank boosted funding by injecting RMB 4 billion in short-term loans. Chinese banks left their one- and five-year loan prime rates unchanged at 3.45% and 3.95%, respectively, as expected. 

New home prices extend declines 

China’s new home prices fell 0.7% in May, accelerating from a 0.6% drop in April, marking the steepest month-on-month contraction in nearly a decade, according to the statistics bureau. The data—which showed that new home prices declined for the 11th straight month—came after Beijing unveiled a historic rescue package in May to revive the property sector. Some analysts have cautioned that the measures may not be sufficient to draw a line under the housing market slump, which remains a significant drag on the economy.

Other Key Markets

Hungary

Central bank slows pace of rate cuts despite improved short-term inflation outlook

On Tuesday, the National Bank of Hungary (NBH) held its regularly scheduled meeting and reduced its main policy rate, the base rate, from 7.25% to 7.00%. The NBH also reduced the overnight collateralized lending rate—the upper limit of an interest rate “corridor” for the base rate—from 8.25% to 8.00%. In addition, the central bank lowered the overnight deposit rate, which is the lower limit of that corridor, from 6.25% to 6.00%. These 25-basis-point rate cuts were in line with market expectations.

According to the central bank’s post-meeting statement, policymakers noted that a “significant increase in real wages” and improving consumer confidence were two of the factors contributing to growing household consumption in the first quarter, though they noted that a “general decline in investment” weighed on the economy’s growth potential and that “tightness” in the jobs market “has eased” in recent quarters.

Regarding inflation, policymakers claimed that the “short-term outlook for inflation has improved” amid expectations that better-than-expected economic data and falling oil prices “will result in a lower inflation path in 2024” versus the central bank’s March forecast. However, they still expect the decline in core inflation to stop in the second quarter, with core inflation rising close to 5% by the end of the year. In addition to an improved short-term inflation outlook, central bank officials acknowledged that “the incipient recovery in Hungarian economic growth, historically high foreign exchange reserves, the persistent improvement in the current account balance and a cautious approach to monetary policy” are factors that are improving the country’s risk perception.

Despite these positives, policymakers concluded that volatile financial markets, “significant” geopolitical tensions, and inflation risks “continue to warrant a careful and patient approach” toward monetary policy. As a result, they agreed to reduce rates by 25 basis points, a smaller reduction than the 50-basis-point cuts in May. They also emphasized that they are “constantly assessing incoming macroeconomic data” as well as “the outlook for inflation and developments in the risk environment” and that they will make future interest rate decisions “in a cautious and data-driven manner.”

Turkiye (Turkey)

Erdogan may be seeking political normalization

In the wake of the local elections in March—in which President Recep Tayyip Erdogan’s Justice and Development Party experienced a decrease in voter support—T. Rowe Price sovereign analyst Peter Botoucharov believes that the process of political normalization appears to be a key part of Erdogan’s policies, and importantly seems to have taken priority over involvement in economic policymaking. Earlier in the week, the President called for an end of domestic political tensions and hoped for a “constructive, positive, and unifying political atmosphere.” This follows several Erdogan meetings with opposition leaders in which they exchanged views on social, economic, and geopolitical issues. 

The ultimate motives for this rapprochement are not fully clear: it could be a desire to change the constitution so that Erdogan can run again for President or an attempt to create rivalry between opposition parties. However, Botoucharov believes that any moves toward a more democratic society would be beneficial for Turkey.

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