Weekly Market Recap
Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and Political Backdrop
The most highly anticipated event of the week may have been the Labor Department’s Wednesday morning release of the consumer price index (CPI) for March. Stocks jumped on the news that the CPI rose only 0.1%, a tick below expectations, bringing the year-over-year rate to 5.0%, the slowest pace since May 2021. The stock indexes fell back later in the day, however, attributed in part to comments from Federal Reserve (Fed) Bank of Richmond President Thomas Barkin, who stated that “there is still more to do” in calming inflation.
Thursday brought further encouraging inflation news on the producer side, suggesting that better prices might be in the pipeline for consumers. The core (excluding food and energy) producer price index declined 0.1% in March, marking the first decrease in the prices businesses pay for inputs since the height of the pandemic shutdowns in April 2020.
EXM Capital Chief U.S. Economist Bleri Uruçi acknowledges that the week’s data suggest encouraging progress in curbing inflation, but she believes the reports are not yet consistent with the Fed being able to cut rates substantially by the end of the year, as many investors seem to expect. Shortly before the end of trading Friday, the CME Fedwatch Tool indicated that futures markets were pricing in a roughly 46% chance on the federal funds rate ending the year at least 50 basis points (bp) below its current target range of 4.75% to 5.00%, and a roughly 78% chance that the target would be at least 25bp lower. While the recent banking turmoil has tightened credit conditions and may cause the Fed to pause in its rate-hiking cycle, Uruçi believes policymakers would only consider cutting rates after seeing a dramatic deterioration in the labour market and signs that a recession is imminent.
The week’s other data arguably brought little evidence of either. Weekly jobless claims rose to 239,000, a bit more than consensus estimates, but remained below their levels through most of March. While March retail sales fell more than expected, this nominal decline partly reflected cuts in some prices – such as a 4.6% decline in the price of gasoline. According to the study’s chief researcher, the University of Michigan’s preliminary gauge of consumer sentiment rose surprisingly. According to the study’s chief researcher, rising optimism among lower-income Americans fuelled the increase, but this was partly offset by worsening attitudes among those with higher incomes.
On a seasonally adjusted basis, eurozone industrial production in February rose 1.5% sequentially and 2.0% year over year, which was stronger than expected. Higher output of capital goods and nondurable consumer goods were key drivers. However, in March, retail sales volumes fell 0.8% sequentially, matching forecasts, official data showed. Meanwhile, a Sentix index of investor morale rose in April, resuming an upward trend that was interrupted in March.
France’s Constitutional Council (the equivalent of the US Supreme Court) ruled that a law to increase the pension age was valid, raising the prospect of more public protests.
The UK economy appeared to be on course to defy a Bank of England (BoE) forecast for a recession in the first quarter, official data indicated. GDP remained flat month over month in February. This result was slightly below expectations, as strikes weighed on public services. However, the revision to January’s GDP figure indicated that the economy expanded 0.4% that month. Even so, the International Monetary Fund (IMF) still predicted that the UK’s economy would shrink 0.3% in 2023, a projection that was less than its previous forecast.
Kazuo Ueda was sworn in as the new Bank of Japan (BoJ) governor on 9 April. At his first press conference, Ueda issued a series of dovish remarks that supported market sentiment. He said that, because a policy of negative interest rates had been the basis of current strong monetary easing, it was appropriate to continue it on the assessment that the central bank’s 2% inflation target had not been achieved. Once the BoJ sees the target as truly achievable, policy normalisation can be pursued. He added that, given the economic, price, and financial environment, it is also appropriate to continue with the current yield curve control framework.
However, sounding more hawkish, Ueda asserted that the side effects need to be considered and the impact of ultra-easy policy from a long-term perspective may need to be reviewed. Whether the BoJ conducts a comprehensive review will be discussed and decided at future policy board meetings. Finally, he cautioned against behind-the-curve policy decisions.
The IMF revised downward its projection for Japan’s 2023 economic growth to 1.3% from 1.8% in January. It attributed this to weak economic performance over the final quarter of last year, with sluggish business investment having a knock-on effect. Currency volatility also played a role.
Inflation eased for the second straight month in March. China’s consumer price index rose 0.7% in March from a year earlier, down from a 1% rise the previous month. Core inflation, which excludes volatile food and energy prices, rose to 0.7% in March from 0.6% in February. The producer price index slid 2.5%, the lowest since June 2020 and its sixth straight monthly decline, according to Reuters.
The latest data trailed the government’s CPI target of around 3% growth this year and raised expectations that the People’s Bank of China (PBOC) would step up stimulus measures to support the economy. The yield on China’s 10-year government bond dropped to the lowest level since last November as traders priced in the possibility of further monetary easing. Many economists predict that the PBOC may cut the policy rate for its short- and medium-term lending facilities to boost loan growth and spur investment, Bloomberg reported. New bank loans totalled RMB 3.89 trillion in March, more than double February’s RMB 1.81 trillion, according to PBOC data, reflecting higher credit demand after Beijing’s unwinding of COVID restrictions led to a pickup in economic activity. New loans totalled an all-time high of RMB 10.6 trillion in the year’s first quarter.
On the trade front, China’s exports unexpectedly rose 14.8% in March from a year ago, surprising analysts who had forecast a decline and marking the first increase since September. Imports fell a less-than-expected 1.4%.
Australia’s employment rose by 53,000 in March after the 64,000 increase in the prior month, beating market consensus of 20,000. Moreover, the increase was driven entirely by full-time works, which rose 72,000 in the month. The participation rate rose to 66.7%, holding the unemployment rate flat at 3.5%. The rise should be put in the context of the strong lift in labour supply from immigration, which appears to have been well absorbed so far. The Reserve Bank of Australia (RBA) may have more work to do to restrain demand.
Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.3% (8.8% YTD).
In the US, the S&P 500 Index closed 0.8% higher (8.3% YTD), as investors weighed slowing growth signals against signs that inflation pressures were receding a bit more than expected. Materials and industrials shares outperformed within the S&P 500 Index. Technology shares lagged, weighed down in part by a decline in graphics and artificial intelligence chipmaker NVIDIA, which continued a recent retreat from a 52-week high. Trading was exceptionally thin early in the week, which may have reflected closed markets in Europe following the Easter holiday.
Volumes picked up but remained muted for much of the week, as investors waited for the unofficial start of quarterly earnings season on Friday, kicked off by reports from banking giants JPMorgan Chase, Wells Fargo and Citigroup. All three topped consensus estimates, seemingly helped in part by customers moving deposits from smaller, regional banks, which have come under scrutiny following the collapse last month of Silicon Valley Bank and New York-based Signature Bank. At the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have contracted 6.5% on a year-over-year basis in the first quarter. Despite the banking turmoil, earnings in the financials sector were expected to increase moderately.
Small-caps outperformed large-caps, and value stocks ended ahead of growth stocks. Over the week, Russell 1000 Growth Index returned 0.5% (14.3% YTD), Russell 1000 Value Index 1.2% (2.3% YTD) and Russell 2000 Index 1.5% (1.6% YTD). The technology-heavy Nasdaq Composite gained 0.3% (16.1% YTD).
In Europe, the MSCI Europe ex UK Index firmed 2.0% (12.2% YTD) as recession fears waned. Major stock indexes posted gains. Germany’s DAX Index put on 1.3% (13.5% YTD), France’s CAC 40 added 2.7% (16.4% YTD) and Italy’s FTSE MIB increased 2.4% (18.3% YTD). Switzerland’s SMI was up 1.6% (8.0% YTD). The euro strengthened versus the US dollar, ending the week at USD 1.10 for EUR, up from 1.09.
In the UK, the FTSE 100 tacked on 1.8% (7.0% YTD) and the FTSE 250 rallied 2.5% (2.9% YTD). The British pound was little changed versus the US dollar, ending the week at USD 1.24 for GBP.
Japanese equities gained over the week. The Nikkei 225 Index jumped 3.5% (10.2% YTD), the broader TOPIX Index increased 2.7% (7.9% YTD) and the TOPIX Small Index moved up 2.7% (7.2% YTD). Sentiment was boosted by prominent investor Warren Buffett saying that his company, Berkshire Hathaway, would increase its investments in Japan. Dovish comments from new BoJ Governor Kazuo Ueda and subsequent yen weakness also supported risk assets. Ueda dampened expectations of a sudden major monetary policy change but signalled that a revision of the central bank’s large-scale easing stance could be considered in the near future. The yen weakened to JPY 133.8 against the US dollar, from 132.2 the prior week. The yield on the 10-year Japanese government bond was broadly unchanged at 0.46%, on anticipated monetary policy continuity under Ueda.
In Australia, the S&P ASX 200 climbed 2.0% (6.7% YTD), reaching its highest level in five weeks and 6.8% above its March low. After the four-day Easter break, the ASX 200 Index played catch up to the US market on Tuesday and rallied again towards the end of the week on the back of softening US CPI data. While March employment came out stronger than expected, Australian government bond yields only rose modestly over the week, reflecting the market’s belief that the bar for a quick shift back to RBA hikes is high. The Australian dollar strengthened against the US dollar by 1.5% after the job market report.
Emerging Markets and other Markets
MSCI Emerging Markets Index closed 1.4% higher last week (5.1% YTD), with a positive contribution to performance from the stock markets of Taiwan, India, South Korea and Brazil and a mixed contribution to performance from those of China.
Chinese stocks were mixed after a volatile week as softer-than-expected inflation dampened investor sentiment. While new loans and trade data surprised to the upside, it was not enough to offset broader concerns about the strength of the economic recovery. The Shanghai Stock Exchange Index added 0.3% (8.1% YTD) but the blue-chip CSI 300 Index lost -0.8% (5.7% YTD). In Hong Kong, the benchmark Hang Seng Index advanced 0.5% (3.8% YTD).
In Turkey, President Recep Tayyip Erdogan and the ruling AK Party recently published their official Election Declaration ahead of the 14 May general and presidential elections. According to EXM Capital sovereign analyst Peter Botoucharov, the majority of their high-level, long-term, socio-political, and growth-oriented economic targets are similar to the plans announced by the opposition, National Alliance, including a commitment to seek consensus on comprehensive legislative reforms.
However, there are three main differences. First, Erdogan pledged to keep the current presidential government system based on the current constitution. In contrast, the opposition is looking to remove some of the presidential powers. Second, the ruling AK Party wants to build its foreign policy on the so-called Axis of Türkiye based on “peace, stability, multilateralism, and humanitarian diplomacy.” This would be an extension of the “Blue Homeland” doctrine, whereby Türkiye aspires to be a dominant maritime power in the eastern Mediterranean Sea. Third, the top domestic priority of the incumbent government would be to secure a “safe environment” for the country where each citizen lives peacefully. Botoucharov believes this implies that the AK Party’s election campaign is likely to target areas where the National Alliance is vulnerable, such as opposition candidates who are under investigation or who may have alleged links to militant organisations.
In Hungary, Hungary’s government reported that inflation in March was 25.2%, which was slightly stronger than expected. According to EXM Capital sovereign analyst Ivan Morozov, the upside surprise was driven by an increase in core prices.
Morozov, however, believes that the underlying price trend suggests that there is disinflation (a slowing in the rate of rising prices) in the economy, albeit at a modest pace, and that disinflation should start to accelerate in a few months. However, given stubbornly high inflation and the central bank’s goal of bringing it back down to its 3% target, Morozov believes that policymakers are unlikely to reduce the central bank’s key interest rate – currently at 13% – this year.
Fixed Income Markets
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.6% (2.8% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.6% (3.4% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index 0.2% (2.8% YTD).
Bond investors seemed to interpret Friday’s data as giving the Fed room to lift rates further, resulting in a rise in longer-term US Treasury yields. The 10-year Treasury yield increased 12bp for the week, up from 3.40% to 3.52% (down -36bp YTD). The 2-year Treasury yield rose 12bp, from 3.98% to 4.10% (down -33bp YTD).
European government bond yields rose as investors weighed the prospects of more policy tightening by the European Central Bank (ECB). Yields on 10-year German government bund advanced 26bp, up from 2.18% to 2.44% (down -13bp YTD), with some policymakers supporting a 50bp rate hike if warranted by inflation data. Yields on 10-year French sovereign bonds also moved higher.
In the UK, yield on the 10-year gilt increased 23bp over the week, up from 3.43% to 3.66% (no change YTD).
Trading and new issuance remained generally subdued in both the US investment-grade and high yield corporate bond markets.