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January 2023 / 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 rise on “soft landing” hopes

Stocks resumed their winning streak, as investors appeared to welcome some hopeful signals that the economy might skirt a recession in 2023. Consumer discretionary stocks were especially strong, thanks partly to a big jump in Tesla shares over the week following a favorable outlook from CEO Elon Musk. The typically defensive consumer staples, health care, and utilities segments lagged. Relatedly, value stocks underperformed growth shares.

T. Rowe Price traders noted that the strong start to the week on Monday was due in part to an article over the weekend by Nick Timiraos, a Wall Street Journal reporter known as the “Fed Whisperer” for accurately predicting previous turns in Federal Reserve policy. Timiraos cited recent comments from Fed governor Christopher Waller, previously an advocate for aggressive rate hikes, in which he highlighted “ample evidence” of slowing demand and said that he would support a quarter-point rate increase at the Fed’s next two-day policy meeting concluding February 1. Our traders also noted recent statements from Treasury Secretary Janet Yellen, who said she was encouraged that falling energy and easing supply chain bottlenecks were cooling global inflation.

Mixed inflation signals

The week’s inflation data were arguably a little less encouraging, however. On Monday, S&P Global reported that its composite gauge of current manufacturing and services sector activity climbed to 46.6, up from 45.0 in December (readings below 50.0 indicate contraction). While a positive surprise, the report also showed that input prices increased in January, breaking a seven-month streak of declines. The increase occurred despite manufacturing input purchases pulling back the most since May 2020, as firms worked through bloated inventories. 

Indeed, inventory accumulation appeared to provide an unexpected—although temporary—boost to growth in the final quarter of 2022. The Commerce Department reported on Thursday that the U.S. economy expanded at an annualized rate of 2.9% in the quarter, beating consensus estimates of around 2.6%. The price index in the report also surprised moderately on the upside, rising 3.5%. Despite the upside surprise, T. Rowe Price Chief U.S. Economist Blerina Uruçi still expects a moderate recession later in 2023.

Friday’s important inflation data came in right in line with expectations, seeming to help foster a modest rally to end the week. The Fed’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index rose 4.4% over the year ended in December, still above the Fed’s 2% long-term inflation target, but well below its 5.4% peak in February 2022 and the slowest pace in 14 months. Friday also brought news that consumer spending decreased 0.2% in December, a tick more than expected, providing further evidence that Americans were balking at paying higher prices.

Earnings see hit from slowing economy

The gains came despite another arguably disappointing week of earnings reports, with companies representing roughly 20% of the S&P 500 Index market capitalization reporting results. Microsoft, the second-most heavily weighted stock in the index, fell sharply after the company reported a larger-than-expected decline in earnings and a slump in revenues that it expects to continue into 2023. Other weak performers included IBM and Intel.

While the mixed economic data failed to have a major impact on the Treasury market—the yield on the benchmark 10-year U.S. Treasury note increased moderately over the week—the positive prints seemed to support the investment-grade and high yield bond markets, according to our traders. (Bond prices and yields move in opposite directions.) The municipal bond market was mostly calm with increased inflows but light new issuance, while bank loans enjoyed solid demand in a generally “risk-on” environment.

Index Friday's Close Week’s Change % Change YTD
DJIA 33,978.08 602.59 2.51%
S&P 500 4,070.56 97.95 6.02%
Nasdaq Composite 11,621.71 481.27 11.04%
S&P MidCap 400 2,619.45 60.99 7.78%
Russell 2000 1,911.46 44.12 8.53%

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.

Europe

Shares in Europe rose as some encouraging economic data points helped to overcome concerns about the pace of monetary policy tightening. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.67% higher. Major stock indexes also advanced. Italy’s FTSE MIB Index gained 2.56%, France’s CAC 40 Index climbed 1.45%, and Germany’s DAX Index added 0.77%. The UK’s FTSE 100 Index posted a modest loss.

French and Swiss bond yields rebounded from midweek lows after European Central Bank (ECB) Governing Council member Klaas Knot called for half-point interest rate increases at the next two policy meetings. In the UK, benchmark 10-year yields hovered near recent highs ahead of a Bank of England policy meeting. 

ECB hawks keep up pressure to “stay the course”

ECB President Christine Lagarde, Knot, and fellow Governing Council member Ollie Rehn repeated their recent calls for “significant” rate increases in February and March. However, Executive Board member Fabio Panetta told Germany’s Handelsblatt newspaper that there was too much economic uncertainty to unconditionally pre-commit to a specific policy course beyond February. He added: "Inflation is still too high, but recent developments suggest that we can fend off the risks of second-round effects and bring down inflation by continuing to adjust our policy rates in a well-calibrated, non-mechanical way.”

Eurozone business activity improves, confidence rises...

Business activity in the eurozone unexpectedly stabilized in January after contracting for six months, raising hopes that the bloc might avoid a recession. An early reading of the composite Purchasing Managers’ Index (PMI), which measures manufacturing and services output, rose to 50.2 from 49.3 in December 2022, according to S&P Global. PMI readings greater than 50 indicate expansion.

Consumer confidence in the eurozone strengthened in January, according to the European Commission. The consumer confidence index rose to -20.9. Although analysts had predicted a stronger increase, the figure was still the highest since last February. Meanwhile, investor morale in Germany also picked up at the start of the year, thanks to easing inflation and an improved outlook, the Ifo Institute said.

...but PMI surveys indicate UK output fell to a two-year low

Business activity in the UK fell to its lowest level in two years in January, as service sector output dropped, according to PMI surveys conducted by S&P Global. The S&P Global/CIPS flash UK composite output index came in at 47.8—down from 49.0 in December. However, optimism on the outlook for the year rose, apparently reflecting hopes of a turnaround in global economic conditions and easing cost pressures, S&P Global said.

Japan

Japan’s stock markets rose over the week, with the Nikkei 225 Index registering a 3.12% gain and the broader TOPIX Index up 2.90%. Sentiment was boosted by the U.S. economy registering a solid, albeit slower, growth rate ahead of expectations over the final quarter of 2022, with a 2.9% expansion raising hopes of a soft landing. Investors’ focus was also on Tokyo core consumer price inflation, a leading indicator of nationwide trends, which rose 4.3% year on year in January, exceeding the Bank of Japan’s (BoJ’s) 2% inflation target for the eighth straight month and adding pressure on the central bank to tighten its ultra-loose monetary policy.

The yield on the 10-year Japanese government bond (JGB) rose to 0.47% from 0.40% at the end of the previous week. The yen weakened slightly, to around JPY 129.91 against the U.S. dollar, from about JPY 129.56 the prior week.

BoJ to examine effects of yield curve control modification

Published during the week, the Summary of Opinions at the BoJ’s January 17–18 Monetary Policy Meeting concluded that it is necessary for the central bank to take some time to examine the effects that the modification of yield curve control decided at its December meeting has on market functioning. (The BoJ expanded the range of 10-year JGB yield fluctuations to half a percentage point on either side of the 0.0% target level in December.)

There has been upward pressure on long-term interest rates, and the distortions on the yield curve have not dissipated; however, it may take some time for market functioning to recover. The BoJ stated that it is appropriate to continue with monetary easing at this point, although it is necessary to examine this at some point in the future and assess the balance between positive effects and side effects. 

Speculation about a BoJ monetary policy pivot is rife. Japan’s Prime Minister Fumio Kishida said during the week that he would likely nominate the new BoJ governor in February. Incumbent Haruhiko Kuroda’s term ends in April, which many anticipate could mark a turning point in the central bank’s trajectory away from its dovish monetary policy stance, which has left it an outlier as other central banks worldwide have been raising interest rates.

Private sector returns to growth; divergence between services and manufacturing remains

Japan’s private sector activity returned to growth in January, but there remained a divergence between services and manufacturing, according to the latest PMI data. Activity in the services sector expanded moderately, with the government’s travel subsidy program and relaxation of COVID restrictions providing a tailwind. Conversely, the health of the manufacturing sector deteriorated, as subdued demand weighed on output and new orders.

China

Financial markets in mainland China were closed for the Lunar New Year holiday, which started January 21, and will reopen on Monday, January 30. The Hong Kong stock exchange resumed trading on Thursday, and the benchmark Hang Seng Index gained 2.96% for the holiday-shortened week. China’s domestic activity picked up significantly during the weeklong holiday, fueling optimism about a faster-than-anticipated economic recovery as people enjoyed the break from pandemic restrictions. Approximately 95.9 million trips were taken via road, rail, air, and waterways in the first four days of the holiday, or a daily average of 24 million trips compared with 18.6 million over the 2022 break, according to Ministry of Transport data.

Total box office sales reached RMB 3.62 billion, ahead of sales reported in the prior-year period and above pre-pandemic levels. Meanwhile, outbound air tickets more than quadrupled for the full year, while hotel bookings doubled. The offshore gambling hub of Macau received more than 71,000 visitors from mainland China and Hong Kong on Monday, marking the highest one-day total since the start of the pandemic.  

However, spending by Chinese consumers is expected to remain restrained in the near term as the country recovers from three years of pandemic restrictions. Household bank deposits grew by a record RMB 17.8 trillion in 2022 as the pandemic kept people home, according to China’s central bank. Some analysts have estimated that as little as RMB 1.5 trillion will be spent on consumption, which could keep a lid on the economic recovery. 

Weaker demand for Chinese goods 

Shipping cancellations at China’s largest ports have increased amid weaker overseas demand. Cancellation rates from Asia are estimated to reach 31% over the coming weeks, compared with 23% last year and 16% in 2021, the Financial Times reported, citing supply chain data provider Drewry. While cancellations around the Lunar New Year are normal, this year’s rate will be “exceptionally elevated” as external demand wanes. 

China’s exports have declined for three consecutive months due to pandemic-related disruptions across the country and softer external demand as many economies have slowed. Although Beijing rolled back pandemic restrictions in December, rising infections continued to disrupt activity. 

Other Key Markets

Hungary

On Tuesday, Hungary’s central bank held its regularly scheduled policy meeting and decided to leave its base interest rate at 13.0%. Policymakers also decided to leave the overnight collateralized lending rate at 25.0%. This interest rate is considered the upper limit of an interest rate “corridor” for the base rate. The lower limit of the corridor is the overnight deposit rate, which remained at 12.5%.

However, according to T. Rowe Price credit analyst Ivan Morozov, the outcome of the meeting was hawkish, as policymakers decided to raise the reserve requirement rate to 10% from 5% and to introduce weekly discount bill auctions starting February 1. Both of these measures are intended to drain liquidity from the banking system and the economy, which is struggling with an inflation rate near 25%. Based on comments from Deputy Governor Barnabas Virag—that monetary policy needs to be driven by patience—and on the post-meeting statement, in which policymakers claim that it may be “necessary to maintain tight monetary conditions over a prolonged period,” Morozov believes that the central bank is in no hurry to cut rates.

Brazil

Stocks in Brazil, as measured by the Bovespa Index, returned 0.36%. On Tuesday, the government reported that inflation from mid-December to mid-January increased at a month-over-month rate of 0.55%. This was slightly stronger than expected. 

According to T. Rowe Price sovereign analyst Richard Hall, a major factor that contributed to inflation pressures was increased costs in the communications category, such as cable, internet, and telephone landlines. This is due to an increase in a state-level sales tax in most Brazilian states, so Hall believes that it should be a one-off factor. However, he was a bit surprised that electricity and gasoline costs did not seem to be affected by that tax increase.  

Overall, Hall believes that this latest inflation reading was fairly similar to the one for December, which showed a general disinflation trend outside of some idiosyncratic categories. However, he does note that core services inflation seems to have moved back up a bit.  

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This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision. T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation, or a solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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