markets & economy | MAY 26, 2023
Global Markets Weekly Update
Benchmarks end mixed as investors watch debt ceiling negotiations
The major benchmarks ended mixed as investors watched carefully for signs of progress in negotiations over raising the federal debt ceiling. The technology-heavy Nasdaq Composite outperformed and ended the week up 23.97% for the year-to-date period—a stark contrast to the 0.16% decline of the narrowly focused Dow Jones Industrial Average over the period. Similarly, the Russell 1000 Growth Index ended up 20.75% over the period, while the Russell 1000 Value Index—heavily weighted in the struggling financials sector—was down 1.64%. Markets were scheduled to be closed on Monday, May 29, in observance of Memorial Day.
Relatedly, alongside the debt ceiling negotiations, the signal event in the week may have been Thursday’s 24% jump in the shares in chipmaker NVIDIA, which took the company’s market capitalization to roughly USD 963 billion by the end of the week and made it the sixth most highly valued public company in the world. Shares rose after the company beat consensus first-quarter earnings expectations by a wide margin and raised its profit outlook. The large move in such a heavily weighted stock reverberated throughout the major benchmarks—one of T. Rowe Price’s traders remarked that Thursday was among the most remarkable sessions he had witnessed in the last 25 years.
“X-date” draws near
Debt ceiling negotiations resumed after President Joe Biden returned from Japan at the start of the week, but markets headed downward as signs emerged that little progress was being made. The S&P 500 Index fell 1.1% on Tuesday, its biggest drop since the start of the month, following reports that some Republicans in the House of Representatives were questioning the urgency of the deadline set by U.S. Treasury Secretary Janet Yellen for when the government would become unable to meet its obligations—the so-called x-date. On Thursday, the Federal Reserve released revised data showing that the Treasury’s General Account had dwindled to USD 49.5 billion by Wednesday—USD 18.9 billion less than a week before and USD 752.2 billion below its level a year ago.
Signs of renewed momentum in the talks seemed to spur a market rally on Friday, however. The Wall Street Journal reported that the two sides were nearing a two-year spending deal that also extended the debt ceiling over the same period. Republican House Speaker Kevin McCarthy also told reporters that his White House counterparts were being “very professional, very knowledgeable.”
Inflation gauge remains stubbornly high while consumers continue to spend
Friday’s gains may have been capped by some discouraging inflation data. The core (less food and energy) personal consumption expenditures (PCE) price index, considered the Federal Reserve’s preferred inflation gauge, rose by 0.4% in April, a tick above expectations. On a year-over-year basis, the index rose by a notch to 4.7%, indicating no progress in bringing inflation down since the start of the year. Meanwhile, the Commerce Department reported that personal spending had jumped 0.8% in April, roughly double consensus expectations and supported by increases in spending on both goods and services.
The signs of a resilient consumer and persistent inflation pressures led to a jump in short-term U.S. Treasury yields, with the yield on the two-year note hitting its highest level in over two months. Reflecting debt ceiling worries, the yield on the one-month Treasury bill hit 6.02% at the end of the week, its highest level since its introduction in 2001.
According to our traders, continued sales of municipal bonds by the Federal Deposit Insurance Corporation (FDIC)—assets acquired following recent bank failures—weighed on the municipal bond market. In the investment-grade corporate bond market, our traders noted that the front-loaded week of issuance was adequately subscribed to before new issues slowed down as we approached the long weekend, while regional bank issues continued to rebound.
Meanwhile, the high yield market saw lower-than-average volumes throughout the week. Commercial mortgage-backed securities outperformed other types of credit, Treasuries, and the broad U.S. high-grade aggregate index. Our traders noted that volumes lightened over the week, but overall supply remained robust and met with solid demand.
|Index||Friday's Close||Week's Change||% Change YTD|
|S&P MidCap 400||2,442.85||-13.04||0.51%|
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 fell on signs that the economic outlook may be worsening and continued uncertainty over U.S. debt ceiling talks. In local currency terms, the pan-European STOXX Europe 600 Index slid 1.59%. Major stock indexes also weakened. Germany’s DAX declined 1.79%, France’s CAC 40 Index dropped 2.31%, and Italy’s FTSE MIB tumbled 2.93%. The UK’s FTSE 100 Index lost 1.67%.
European government bond yields broadly climbed on concern that central bank policymakers would extend their policy tightening to cope with persistent inflationary pressures. The yield on the benchmark 10-year German government bond settled above 2.5%. Spain’s and Italy’s sovereign bond yields also rose. In the UK, robust core inflation data fueled a broad sell-off in the bond markets, with the yield on the benchmark 10-year UK government bond heading toward 4.3%.
German economy in recession, business confidence declines
The German economy lapsed into recession in the first quarter, according to official figures. Gross domestic product shrank 0.3% in the three months through March, a downward revision from an early estimate of zero growth that reflected a sizable drop in household consumption. Germany’s economy contracted 0.5% in the final three months of last year. Meanwhile, German companies became more uncertain about the year ahead, with the Ifo Institute’s business confidence index falling in May for the first time in seven months.
Eurozone PMI expands for fifth straight month, but optimism weakens
A survey of purchasing managers compiled by S&P Global showed that business output in the eurozone grew for the fifth month running in May, although the pace slackened somewhat as weakness in manufacturing offset another strong month of services activity. Optimism about the economic outlook slipped further from February’s 12-month high amid increasing concern about weaker customer demand and higher interest rates.
ECB policymakers hint at extended period of higher rates
European Central Bank (ECB) policymakers echoed ECB President Christine Lagarde’s view that interest rates would need to rise further and stay high to curb inflation in the medium term. Bank of Spain Governor Pablo Hernandez de Cos said policy tightening still had “some way to go” and that “interest rates will have to remain in restrictive territory for an extended period of time to achieve our objective in a sustained manner over time.” Banque de France Governor Francois Villeroy de Galhau said: “I expect today that we will be at the terminal rate not later than by summer.”
UK inflation slows less than forecast; IMF now sees no recession
Inflation slowed in April to an annual rate of 8.7% from 10.1% in March, as the surge in energy prices that occurred last year fell out of the annual comparison. However, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose to a 21-year high of 6.8% from 6.2%. The result fueled market expectations for a 13th consecutive interest rate hike in June.
The International Monetary Fund (IMF) revised its forecast for the UK economy, predicting that resilient demand and falling energy costs would help it to grow 0.4%. Its projection from April had called for UK gross domestic product to shrink 0.3%.
The Nikkei 225 benchmark touched a 33-year high early in the week before finishing just below the 31,000 mark. Upbeat economic data and encouraging signals regarding the U.S. debt ceiling helped propel the Nikkei 225 to its highest close since July 1990. The broader TOPIX index finished the period slightly lower.
Japanese manufacturing activity expanded for the first time in seven months in May. The services sector also reported robust growth, as the return of domestic and international tourism fueled a record rise in business activity. In the afterglow of such strong purchasing managers’ index (PMI) numbers, investors shrugged off data showing that Japan’s core machinery orders fell for a second straight month in March.
Dollar strengthens versus yen
Hawkish comments from the Fed during the week added to speculation that U.S. rates will remain higher for longer. Meanwhile, Governor Kazuo Ueda reconfirmed the Bank of Japan’s ultra-loose monetary policy stance until inflation sustainably hits its 2% target. These divergent paths pushed the U.S. dollar to a six-month peak against the Japanese currency, trading in the higher JPY 139 range by Friday’s close.
Japanese sovereign bond yields drifted higher for most of the week but were limited by the knowledge that the central bank has no imminent plans to tweak its yield curve control policy. Benchmark yields did spike noticeably on Friday, moving above 0.45% on news that U.S. lawmakers were getting closer to an agreement to raise the debt ceiling. By Friday’s close, 10-year government bond yields had settled around 0.41%.
Chinese stocks fell after a batch of disappointing indicators in recent weeks pointed to a flagging economic recovery. The benchmark CSI 300 Index fell 2.4%, its biggest weekly drop since the five days ended March 10 and erasing all its gains this year, according to Bloomberg. In Hong Kong, the benchmark Hang Seng Index fell below the psychologically key 19,000-point level to its lowest close since December in a holiday-shortened trading week.
No major indicators or policy measures were released in China during the week. But mounting evidence that the country’s post-pandemic recovery is losing momentum has raised concerns about the economic outlook. Most recently, industrial output, retail sales, and fixed asset investment all grew at a weaker-than-expected pace in April, while weak credit growth indicators also pointed to sluggish domestic demand.
Chinese banks kept their one- and five-year loan prime rates steady for the ninth straight month, as expected, after the People’s Bank of China (PBOC) left its one-year policy loan rate unchanged earlier in May. However, speculation is growing that the central bank will ease policy to shore up the economy. The yield on China’s 10-year government bond dropped to a six-month low of 2.70% last week, according to Bloomberg, as traders increased their bets on monetary easing by the PBOC in the near term.
Geopolitical risks also dampened risk appetite after Beijing said it would ban Chinese companies from buying products from Micron Technology, citing security risks it uncovered in a review of the U.S. chipmaker’s products. The ban announced on May 21 applies to domestic telecom firms, state-owned banks, and other companies behind China’s information infrastructure. The Chinese ban on Micron was seen as China’s most significant retaliation to date in response to U.S. controls on certain technology exports.
Other Key Markets
On Tuesday, as was broadly expected, the National Bank of Hungary (NBH) reduced its depo rate—the interest rate paid on optional reserves—by 100 basis points, from 18.00% to 17.00%. The NBH also reduced the overnight collateralized lending rate, from 20.5% to 19.5%. This interest rate is considered the upper limit of an interest rate “corridor” for the central bank base rate, which remained at 13.0%. The lower limit of the corridor is the overnight deposit rate, which remained at 12.5%.
In their post-meeting statement, policymakers cited “the persistent improvement in risk perceptions” as the reason for their actions. T. Rowe Price credit analyst Ivan Morozov believes that this could be a central bank gesture in response to the government’s efforts to procure more European Union funds that had previously been suspended.
Nevertheless, Morozov sees the central bank remaining vigilant in its efforts to bring inflation down, and he believes the NBH is unlikely to reduce the base rate anytime soon. Policymakers expressed their belief that it is “necessary to maintain the current level of the base rate over a prolonged period, which will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner.” That said, Morozov would not be surprised to see additional depo rate cuts in the months ahead, as long as the forint remains fairly stable in the foreign exchange market against the euro.
Turkish assets were pressured during the week week by news that Sinan Ogan, who won only about 5% of the votes in the first round of the presidential election, was endorsing President Recep Tayyip Erdogan in the second round to be held on Sunday, May 28. Considering that Erdogan won approximately 49.5% of the votes in the first round, the additional voter support stemming from this endorsement increases the likelihood of the incumbent’s victory over National Alliance candidate Kemal Kilicdaroglu.
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