markets & economy  |  January 20, 2023

Global Markets Weekly Update


Investors weigh growing recession worries against waning inflation fears

The major indexes ended mixed for the week as recession fears appeared to weigh on sentiment. The narrowly focused Dow Jones Industrial Average performed worst and gave back a portion of its strong rally in the first two weeks of the year, while the technology-heavy Nasdaq Composite recorded a modest gain. Relatedly, dampening inflation fears helped growth stocks outperform, as the prospect of lower interest rates increased the implicit value of future earnings. Markets were closed on Monday in observance of the Martin Luther King, Jr. holiday.

Retail sales drop while producer price inflation falls to lowest level since April 2020

The week brought several additional signals that the economy was slowing significantly following the Federal Reserve’s aggressive rate hikes in 2022. Most notable may have been Wednesday’s report of a 1.1% drop in retail sales in December, which was roughly triple consensus estimates. A drop in sales at gas stations was partly at work, but Americans pulled back on sales of furniture, electronics, and other discretionary purchases. November sales data were also revised lower.

The upside of the weakening economy for investors was declining inflation pressures. The Labor Department reported that producer prices fell 0.5% in December, the biggest drop since early in the pandemic, as prices companies paid for goods, food, and especially energy all recorded declines.

Manufacturing contracts but workers remain in short supply

The week also brought news that industrial production fell by 0.7% in December, the most since September 2021, driven by a 1.3% drop in manufacturing output. For the fourth quarter, the industrial sector of the economy contracted at an annualized rate of 1.7%. Capacity utilization ended December at 78.8%, its lowest level of 2022 and well below both its long-term average (79.6%) and consensus expectations.

The job market remained unusually tight in this environment, however, with weekly jobless claims falling to their lowest level since April 2022. Housing starts and existing home sales also fell a bit less than expected.

Investors also reacted to the second week of major quarterly earnings reports, although the trickle of early reports was dominated by financial services firms. According to T. Rowe Price traders, the flow of reports was expected to pick up the following week, with companies representing roughly 27% of the S&P 500 Index’s market capitalization reporting results, up from a little over 4%. Shares in Goldman Sachs and insurer Travelers both fell sharply and dragged the broad indexes lower to start trading on Tuesday after reporting earnings misses.

Netflix’s earnings report on Friday, however, appeared to boost sentiment following news that it had added more subscribers than widely expected in the fourth quarter. Shares in Google parent Alphabet also pushed the broad indexes higher after the company announced plans to trim roughly 6% of its workforce.

Longer-term U.S. Treasury yields reach four-month lows

U.S. Treasuries posted positive returns as the yield on the benchmark 10-year note fell to its lowest intraday level in over four months before rising to end the week. (Bond prices and yields move in opposite directions.) Along with the week’s tepid economic data, the Bank of Japan’s commitment to yield curve control (see below) helped a rally in Treasuries on Wednesday. Meanwhile, municipals continued to enjoy ample demand in the face of limited new supply.

Light issuance also bolstered investment-grade corporate bonds, although banks were quick to come to market after reporting. Conversely, new deals seemed to drive most of the sales activity in the high yield market and were met with solid demand. The leveraged loan market was fairly quiet, although our traders noted that technical conditions for the loan asset class were generally supportive.

Index Friday's Close Week's Change % Change YTD
DJIA 33,375.49 -927.12 0.69%
S&P 500 3,972.61 -26.48 3.47%
Nasdaq Composite 11,140.44 61.28 6.44%
S&P MidCap 400 2,558.46 -22.45 5.27%
Russell 2000 1,867.34 -19.69 6.02%

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's presentation thereof.


Shares in Europe weakened after European Central Bank (ECB) policymakers signaled that they would still hike interest rates aggressively, reigniting fears of a prolonged economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended the week modestly lower. Major stock indexes were generally softer. Germany’s DAX Index fell 0.35%, France’s CAC 40 Index eased 0.39%, and Italy’s FTSE MIB Index was almost flat. The UK’s FTSE 100 Index declined 0.94%.

Lagarde, ECB minutes reaffirm hawkish policy stance

ECB President Christine Lagarde dismissed market speculation that a fall in energy prices would allow policymakers to slow the pace of monetary policy tightening. Speaking at the World Economic Forum in Davos, Switzerland, she said: “I would invite [financial markets] to revise their position; they would be well advised to do so.” She explained: “Inflation, by all accounts, however you look at it, is way too high. Our determination at the ECB is to bring it back to 2% in a timely manner, and we are taking all the measures that we have to take in order to do that.”

The minutes of the ECB’s December meeting—when the Governing Council raised key rates by half a percentage point—also suggested that forthcoming rate hikes might be higher. The minutes showed that a “large number” of members wanted to raise borrowing costs by 0.75 percentage point. These policymakers only backed the smaller increase once the remaining central bank governors agreed to maintain a hawkish stance.

UK inflation slows for second month; BoE’s Bailey suggests lower peak for rates

On a year-over-year basis, UK inflation slowed for a second consecutive month in December 2022. Lower gasoline prices were a key driver. The consumer price index (CPI) slipped to 10.5% from November’s 10.7% reading, according to the Office for National Statistics. The labor market also remained strong, with the unemployment rate still close to a record low in the three months to November. However, average wage growth (excluding bonuses) in the three months to November was 6.4% higher than a year earlier.

Bank of England (BoE) Governor Andrew Bailey said in a newspaper interview that a second consecutive month of slowing inflation could be “the beginning of a sign that a corner has been turned.” He also suggested that financial market expectations that rates would peak at 4.5% was not dissimilar to the bank’s view. “I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being, in our view, rather out of line.” Financial markets were pricing in interest rates peaking at about 5% in November. Bailey also said he still expected a “long, but shallow” recession in the UK this year.


Stock markets in Japan rose over the week, with the Nikkei Index gaining 1.66% and the broader TOPIX Index up 1.25%. Sentiment was supported by the prospect of China’s reopening boosting the global economy and hopes that the major central banks would slow the pace of their rate hikes amid some signs of waning inflationary pressures. Investors’ focus was on the Bank of Japan (BoJ), which left its monetary policy unchanged at its January meeting, having surprised markets in December by tweaking its yield curve control (YCC) framework. In the absence of further YCC modifications, the yield on the 10-year Japanese government bond (JGB) fell to 0.40% from 0.51% at the end of the previous week. The yen weakened to around JPY 129.81 against the U.S. dollar, from about JPY 127.88 the prior week, on the BoJ’s commitment to its ultra-loose stance.

No change in BoJ monetary policy; inflation forecasts raised

There was no change in the BoJ’s monetary policy at its January meeting—it maintained its ultralow rates and left its YCC framework unchanged—as had been widely expected. This was despite growing speculation about further policy change following December’s surprise YCC tweak, whereby the cap on the 10-year JGB yield was raised to 0.50%, from 0.25%.

The BoJ said that medium- to long-term inflation expectations had risen, albeit at a moderate pace relative to short-term ones, and raised its forecasts for the core CPI for fiscal years 2022 and 2023—which had also been widely anticipated. The central bank noted that risks to inflation are skewed to the upside, leaving open the possibility that forecasts would be revised up at the time of the next release in April. Japan’s core CPI rose 4% year on year in December, a 41-year high, as companies passed rising costs onto consumers. Producer prices also surged over the same period.

Possible downgrade in COVID categorization a step toward further normalization

In a sign that there could be a major shift in Japan’s pandemic restrictions, Prime Minister Fumio Kishida said that the legal status of COVID could be downgraded this spring to the same level as seasonal influenza. He indicated that the testing and quarantine requirements for foreigners entering Japan and the requirement to wear face masks to prevent the spread of the coronavirus would be reviewed. These steps could help invigorate the economy, which is still struggling to recover from the pandemic. Entry restrictions against travelers from China, where the pivot away from the country’s zero-COVID policy has led to a surge in infections, are likely to remain in place.


Chinese equities rallied for a fourth consecutive week ahead of a weeklong holiday following reports indicating better-than-expected economic growth. The Shanghai Composite Index rose 2.18%, and the blue-chip CSI 300 gained 2.63%. In Hong Kong, the benchmark Hang Seng Index added 1.41%, according to Reuters. China’s financial markets will be closed for the Lunar New Year break, which starts on January 21, and will reopen on Monday, January 30.

China’s gross domestic product rose 2.9% in the fourth quarter of 2022 and expanded 3.0% for the full year. The annual growth pace missed the official target of around 5.5% set last March and marked the second-worst year for economic growth after a pandemic-hit 2020 since 1976, the end of China’s decade-long Cultural Revolution. Still, both readings surpassed economists’ forecasts after Beijing abandoned its stringent pandemic restrictions and rolled out a slew of pro-growth policies toward the end of 2022.

Meanwhile, December indicators of industrial output and retail sales came in better than expected, while fixed-asset investment rose broadly in line with estimates.

For 2023, economists predict that China’s economy will recover close to 5% as infections subside and domestic demand accelerates. Most Chinese provinces have also set growth targets of above 5% this year, reflecting the government’s focus on prioritizing economic growth in 2023 through boosting consumption and investment.

In monetary policy news, the People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates unchanged for a fifth consecutive month. However, many analysts predict that the PBOC will resume easing measures in the near term after the central bank pledged in December to support a recovery in consumption.

China’s property market declines 

The value added by China’s property sector to the overall economy slumped 5.1% in 2022 from the prior year, according to data from the National Bureau of Statistics. Other data showed that new home prices fell 1.5% in December from a year earlier, the eighth straight month of year-on-year declines. Analysts polled by Reuters forecast that property sales in China would decline in 2023 for the second straight year but to a smaller extent compared with 2022 amid an expected recovery in economic activity later this year.

Other Key Markets


Stocks in Turkey, as measured by the BIST-100 Index, returned about 10.1%. On Wednesday, President Recep Tayyip Erdogan called for the presidential and general elections to take place on May 14, 2023—about one month earlier than the final deadline. The final decision will be made by the legislature but with Erdogan announcing the date, T. Rowe Price sovereign analyst Peter Botoucharov has little doubt that it will be approved.

On Thursday, the central bank decided to leave its key interest rate, the one-week repo auction rate, at 9.00%. The decision was widely expected. According to Botoucharov, the post-meeting statement had a small but potentially important change compared with recent statements. Central bank officials did not describe the current level of interest rates as being “adequate.” This could mean that further monetary loosening is possible or that the central bank—following the elections—could return to more orthodox policies (e.g., raising interest rates in response to elevated inflation). Even though the central bank held its key rate steady, Botoucharov notes that monetary conditions have been tightening in Turkey by way of higher lira deposit interest rates.


On Wednesday, Argentina’s economy minister, Sergio Massa, stated that the government intends to buy back about USD 1 billion in Argentine debt. As reported by Reuters, the buyback plan will target sovereign notes maturing in 2029 and 2030. This could mean—though it is unclear—that the government plans to repurchase bonds that are trading at depressed prices but whose face value is actually about USD 3 billion.

Critics suggest that this is an irresponsible move because Argentina probably does not currently have the reserves to be buying back debt—though Massa claimed that changes in economic projections should translate into higher reserves. Also, many note that the timing of this move is not ideal, given that there is a serious drought that could threaten the crucial, upcoming soy harvest. In addition, there could be a political angle to this proposal. Massa has made public his intention to be the Peronist candidate for president, so some suspect he is using this tactic to create some confidence in Argentina and signal that his tenure as economy minister has been successful.

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