September 2021 / MONTHLY MARKET REVIEW
Global Markets Monthly Update
- Global equity markets recorded gains as investors welcomed strong corporate earnings and improving economic conditions.
- Fixed income returns were muted as major central banks began discussing the first steps in normalizing monetary policy.
- The spread of the delta variant of the coronavirus appeared to slow the rebound, particularly in Japan, but investors seemed encouraged by further vaccination progress.
Stocks recorded gains in August, lifting the large-cap and Nasdaq Composite indexes to new highs. The S&P 500 Index rose slightly over 3% in total return (including dividends) terms and marked its seventh consecutive month of gains. Financials and communication services shares led the gains, rising more than 5%, while energy shares lagged, falling slightly over 2%. Growth stocks outpaced their value counterparts, except among small-caps. A strong second-quarter earnings season appeared to be one factor in the market’s advance. According to FactSet, overall profits for the S&P 500 rose nearly 90% in the quarter versus the year before, the best showing in over a decade, with roughly 87% of firms topping analyst expectations.
Treasury Yields Rise Modestly as Inflation Remains Elevated
Fixed income returns were mostly negative overall as longer-term Treasury yields increased modestly from multi-month lows. High yield and other risk-sensitive issues fared best. Investors appeared to react to statements from Federal Reserve (Fed) officials suggesting that the central bank might begin tapering its monthly purchases of long-term securities sooner than expected, removing some downward pressure on long-term interest rates.
Inflation worries may have also contributed to the increase in yields. Consumer inflation moderated a bit, but producer prices jumped 1.0% in July on the back of a similar gain the previous month. In a speech at the end of the month, Fed Chair Jerome Powell acknowledged the spike in inflation but stated that it was “so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy.”
Job Market Continues to Strengthen, but Retail Sales Growth Cools
The flip side of higher inflation was robust consumer demand and continued economic strength. Stocks rose early in the month after the Labor Department reported that employers had added 943,000 jobs in July, well above consensus estimates and the best showing since strict lockdowns were eased in the summer of 2020. Wage gains were also strong, and the unemployment rate fell much more than expected to 5.4%, a new pandemic-era low. Weekly jobless claims declined throughout most of the month and also reached a pandemic-era low.
Stocks retreated briefly at mid-month after the Commerce Department reported that retail sales slumped 1.1% in July, although from an upwardly revised June base. Much of the decline was concentrated in auto sales, which fell 3.9% as consumers balked at high prices and automakers struggled with the ongoing global semiconductor chip shortage and other supply issues.
The promise of more fiscal stimulus further boosted growth expectations. The Senate passed a roughly USD 1 trillion bipartisan infrastructure package, including about USD 550 billion in new spending, that aims to rebuild traditional transportation infrastructure, improve access to broadband internet in rural areas, and upgrade the electric grid and water systems. Senate Democrats also approved a USD 3.5 trillion budget resolution, the starting point for a reconciliation bill that would address administration priorities, such as improving access to education and increasing support for families with children.
Pfizer Vaccine Gets Full FDA Approval
The latest wave in the coronavirus pandemic—which took hospitalizations to record levels in some parts of the country with low vaccination rates—seemed to weigh only modestly on sentiment. Investors appeared to be reassured by signs that consumers were largely undeterred, with spending continuing to increase on dining out and other leisure activities, although airlines reported some weakening in travel demand. Stocks added to their gains late in the month after the Food and Drug Administration (FDA) fully approved the Pfizer-BioNTech COVID-19 vaccine.
European shares rose for a seventh consecutive month on strong corporate earnings and hopes that central banks’ accommodative policies and coronavirus vaccination programs would continue to support an economic recovery.
Coronavirus Cases Stabilize in EU but Rise in UK
The number of coronavirus cases in the European Union (EU) and European Economic Area stabilized, although the number of deaths rose, according to the European Centre for Disease Prevention and Control. The Centre said it expected the trend in cases to remain stable into September but forecast that hospital admissions and deaths would increase. In the UK, the number of people in private residential households testing positive for the coronavirus climbed to 862,100 in the week ended August 20, according to the Office of National Statistics (ONS). Hospital admissions of those with COVID-19 rose by 4.6% in the week ended August 28, according to Public Health England.
Meanwhile, the European Union’s vaccination campaign has overtaken the U.S. in terms of administering first and second doses and was expected to soon surpass the UK according to the Financial Times. Protests broke out in Italy and France after the introduction of health passes that enable those who have been fully vaccinated to visit bars and restaurants and attend public events.
Eurozone Inflation Outpaces UK
Inflation in the eurozone increased 2.2% in July—up from 1.9% in June and slightly higher than the European Central Bank’s 2% target. Rising energy costs drove the increase. However, inflation in the UK cooled from June’s levels. The annual consumer price index (CPI) increase fell to 2.0% in July from 2.5% in June, according to the ONS. The ONS noted that the decline was partially a result of changing base effects, as the supply shortages in some categories at the beginning of the pandemic had begun to ease by last summer.
BoE Says “Modest Tightening” Is Possible
The Bank of England (BoE) said that “some modest tightening of monetary policy over the forecast period is likely to be necessary” should the economy evolve broadly in line with the bank’s central projections. The BoE, which left its monetary policy and quantitative easing program unchanged at its latest meeting, now expects interest rates to rise from 0.1% to 0.2% in 2022 and to 0.5% in August 2024. The central bank also raised its forecast for inflation, which it expects to peak at 4% either late in 2021 or in early 2022. T. Rowe Price International Economist Tomasz Wieladek said the BoE’s more hawkish language and higher inflation forecast suggest it may raise interest rates at a faster pace than priced in by the market.
The UK economy expanded by 4.8% sequentially in the second quarter, driven by a rise in household consumption, official data showed. The quarterly rate was below the BoE’s forecast for 5%.
Japanese equities rose in August, with the Nikkei 225 and the broader TOPIX indexes both gaining around 3% in local currency terms, slightly ahead of their developed market peers. The yield on the 10-year Japanese government bond was broadly unchanged at 0.02%, while the yen fell slightly to JPY 110.0 (from 109.7 at the end of July) against the U.S dollar.
Japan’s deteriorating coronavirus situation kept risk appetite in check. More than 70% of the population was under a state of emergency after the government expanded the measures to eight more prefectures, due to last until September 12. Already having to contend with waning public support for his government’s handling of the coronavirus crisis, Prime Minister Yoshihide Suga faced competition to remain leader of the ruling Liberal Democratic Party (LDP), with former foreign minister Fumio Kishida formally announcing his candidacy and other candidates expressing their interest. (Suga announced he would withdraw from the race soon after the quarter ended.) The LDP leadership election is scheduled for September 29, ahead of a general election set to be held by November 28.
Japanese Economy Returned to Growth in the Second Quarter
On the economic front, Japan’s gross domestic product (GDP) expanded by an annualized 1.3% in the second quarter, ahead of consensus estimates. It followed a 3.7% contraction in the prior quarter. Growth momentum was marginally positive despite pandemic headwinds; the main driver was domestic private demand, helped by strength in private consumption, capital spending, and residential investment, which offset the drag from net exports and inventories. The rebound in Japan’s GDP has been much weaker, however, than that seen in the other major developed economies, highlighting the country’s struggles to contain the pandemic.
Consumer Price Data Show Japan’s Economy in Deflation for 12 Months
Japan’s core CPI, which includes oil but excludes fresh food, fell 0.2% in July from a year ago, as lower mobile phone charges remained a big drag despite support from rising energy prices. The fall was due in part to a change in the base year for the CPI that gives a heavier weighting to mobile phone charges. This marked the 12th straight month of declining core consumer prices, highlighting the challenges the Bank of Japan faces in meeting its 2% inflation target.
Survey Signals Sharp Drop in Services Output; Expansion in Manufacturing Softened
Business activity in Japan’s large services sector shrank at the fastest pace in August since May 2020 (when Japan’s economy went through a deep coronavirus slump): The au Jibun Bank Flash Japan Services Business Activity Index fell to 43.5 from 47.4 in July. Survey respondents saw new business inflows contract and export demand deteriorate, highlighting the increasingly heavy toll a recent wave of COVID-19 infections is taking on the economy.
Meanwhile, expansion in the manufacturing sector softened slightly in August: The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) fell to 52.4 from 53.0 in July. New order inflows saw a sustained increase, and manufacturers were confident that demand would continue to increase. Severe disruption to supply chains hampered the receipt of inputs for production, however.
Chinese stocks firmed in August amid a raft of new government regulations centered on the technology sector. U.S. dollar-denominated Chinese shares eked out a slight gain, while domestic currency A shares added roughly 1.0%, according to MSCI. Investors appeared to avoid sectors impacted by the new regulations and pivoted to sectors with strong government support—including semiconductors, electric vehicles, and green energy—according to T. Rowe Price Asia-based traders.
The spread of the coronavirus delta strain that appeared in Nanjing in July weighed on investor sentiment. New cases were recorded in half of China’s 33 provinces, including a cluster in Wuhan, the city from which the coronavirus emerged in 2019. In response, China restricted domestic travel and imposed lockdowns across the country, dampening its near-term economic outlook.
Bond market yields rose but ended August broadly unchanged. The yield on China’s 10-year sovereign bond ended at 2.86%. The renminbi currency was flat against the U.S. dollar.
Monthly economic data released for July suggested slowing momentum in China’s economy. The official composite PMI reading fell to 48.9 in August from 52.4 in July due to restrictions following the delta variant outbreak. July trade data showed strong performance, with two-year average growth of 12.9% for exports and 12.8% for imports. Analysts said that China’s strong year-to-date growth has been driven by exports as domestic demand has yet to fully recover from the health crisis.
Inflation remained subdued, with the CPI rising 1.0% in July from a year ago, despite a larger-than-expected rise in the producer price index (PPI). The PPI, seen as a proxy for factory gate inflation, surged 9.0% in July from a year earlier, driven by rising commodity prices.
Regulatory Crackdown Intensifies
China’s government issued a range of new regulations that impacted a range of industries, including internet platforms, private education, data privacy and protection, online gaming, video streaming, food delivery, ride hailing, pharmaceuticals, and alcohol. Many of the new industry regulations reflect Beijing’s broad five-year reform plan to govern China by the “rule of law,” a key objective of President Xi Jinping.
The regulatory crackdown appears to address a range of societal problems in China. These include spiraling housing and education costs, poor worker conditions in the “gig” economy, and social issues related to online gaming, entertainment industry excesses, and livestreaming content. Beijing also plans to propose new rules that would ban domestic companies with large amounts of consumer data from going public in the U.S., The Wall Street Journal reported on August 27.
Signs of Stabilization in Peru
Stocks in Peru, as measured by MSCI, returned 0.25% in U.S. dollar terms versus 2.65% for the MSCI Emerging Markets Index. It was the first full month of President Pedro Castillo’s administration, and Peruvian assets—following several months of losses—stabilized somewhat due to several developments.
At the beginning of the month, investors were encouraged by news that Pedro Francke was sworn in as finance minister. Francke’s candidacy for the position had been in question after he left Castillo’s July 28 inauguration early following the selection of Guido Bellido as prime minister and a cabinet filled with other far-left candidates. Bellido is a member of the Peru Libre party and has close ties to party leader Vladimir Cerron, both of whom are under criminal investigation. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, Francke—who is a former World Bank economist—represents a moderate voice within the cabinet. While Francke said that he will govern independently of party politics, it’s unclear whether he will have much of a mandate given how central the economy and public finances are to Castillo’s policy platform. Castillo aspires to have a “social” and “moral” economy combined with a very large increase of the budget.
Investors were also relieved by news reports that the Castillo administration invited Julio Velarde, who has been the head of the central bank for 15 years and is considered one of Peru’s top economists, to remain at the helm. While this would represent a continuation of de facto central bank independence, Gifford notes that having a reputable central bank governor and a moderate finance minister may not be enough to guarantee macroeconomic stability given Castillo’s left-leaning cabinet. In addition, the Peruvian central bank decided on August 12 to raise its key short-term interest rate from 0.25% to 0.50%.
Near the end of the month, Castillo’s cabinet received approval by Peru’s unicameral legislature by way of a confidence. While this will help to avoid governability concerns in the near term, Gifford believes that policy uncertainty will likely continue given the left-leaning cabinet and some controversial people in Castillo’s inner circle of advisors.
Mexican Stocks Outperform
Stocks in Mexico, as measured by MSCI, returned 5.59% in U.S. dollar terms and outperformed the MSCI Emerging Markets Index.
On August 12—on the heels of a report showing inflation in July was elevated but not as bad as some expected—the Mexican central bank raised its key interest rate from 4.25% to 4.50%. The decision was not unanimous, with three policymakers favoring a rate increase and two voting for no change. According to Gifford, the post-meeting statement from central bank officials seemed neutral—as opposed to dovish or hawkish—as the language closely mirrored that of the statement issued when the central bank started raising rates on June 24, even though policymakers continued to highlight the upside risks to inflation.
A few weeks later, the central bank released the minutes to the policy meeting. Gifford considered the minutes marginally dovish, with policymakers agreeing that inflation pressures are mostly transitory and that their decision to raise interest rates was a preventive adjustment intended to avoid second-round effects and the contamination of inflation expectations. Gifford also noted that one of the three officials who voted for a rate increase was becoming less hawkish by suggesting that the tightening cycle is nearly over.
As the month ended, the central bank issued its quarterly inflation report. According to Gifford, the central bank’s main observations were that most price pressures are being driven by external factors, such as supply shocks, and that economic slack and a strong peso exchange rate are offsetting factors. Gifford believes that the Fed’s monetary policy decisions could become a significant factor that influences Mexican policymakers’ interest rate decisions.
Major Index Returns
Total returns unless noted
As of 8/31/21
Figures shown in U.S. dollars
|U.S. Equity Indexes||July||YTD|
|Dow Jones Industrial Average||1.50||17.04|
|Nasdaq Composite (Principal Return)||4.00||18.40|
|Global/International Equity Indexes|
|MSCI Emerging Markets||2.65||3.07|
|MSCI All Country World||2.53||16.24|
|Bloomberg Barclays U.S. Aggregate||-0.19||-0.69|
|Bloomberg Barclays Global Aggregate Ex‑USD||-0.61||-3.57|
|Credit Suisse High Yield||0.53||4.66|
|J.P. Morgan Emerging Markets Bond Global||0.91||0.45|
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended August 31, 2021. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Barclays, MSCI, Credit Suisse, Dow Jones, and J.P. Morgan (see Additional Disclosures).
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