Weekly recap
Weekly recap of world’s major stock markets; China, USA, Japan and Europe
U.S.
China Sees Halting of Price Declines After Six-Month Period.
Stocks were mostly lower for the week due to upside surprises in inflation data and signs of moderating consumer spending. The Dow Jones Industrial Average held up best among major indexes, reaching a record high on Wednesday before falling back to end the week.
Energy shares outperformed due to higher oil prices, while technology shares lagged due to weakness in NVIDIA and other chipmakers. T. Rowe Price traders noted that markets started quiet as investors awaited the release of consumer inflation data on Tuesday. The Labor Department’s CPI rose 0.4% in February, but core prices (less food and energy) rose a tick more than expected by 0.4%.
Rising Input Expenses Pose Challenges for Producers.
Producer inflation surprises in February caused concern as the producer price index (PPI) rose 0.6%, double consensus estimates and the most in six months. Core producer prices rose only 0.3%, slightly more than expected. Headline producer prices were up 1.6% year-over-year, well above expectations and at the highest level since September. This weighed on hopes that low inflation or deflation in producer prices would eventually flow down to consumer prices.
The stock market’s reaction to the inflation data may have been mitigated by surprising weakness in retail sales report. Retail sales rose 0.6% in February, but missed expectations due to an increase in gasoline prices. Online sales declined 0.1%, and sales at restaurants and bars increased 0.4%, suggesting growing consumer caution. The University of Michigan’s survey of consumer sentiment indicated a modest decline in consumer expectations.
Investor Jitters as Yields Rise on Latest Inflation Data
The bond market responded to inflation surprises with the yield on the 10-year Treasury note reaching its highest intraday level since February 27. Municipals outperformed Treasuries, with large deals performing well due to strong demand from retail investors.
Investment-grade issuance was heavy at the start of the week and oversubscribed. High yield bond investors viewed the CPI number as manageable due to high cash balances and limited new issuance. However, the market turned lower along with equities amid macro headwinds following the release of PPI data.
Europe
The bond market responded to inflation surprises with the yield on the 10-year Treasury note reaching its highest intraday level since February 27. Municipals outperformed Treasuries, with large deals performing well due to strong demand from retail investors.
Investment-grade issuance was heavy at the start of the week and oversubscribed. High yield bond investors viewed the CPI number as manageable due to high cash balances and limited new issuance. However, the market turned lower along with equities amid macro headwinds following the release of PPI data.
UK Labor Market Shows Signs of Relaxation; GDP Growth Accompanies.
The UK’s unemployment rate rose from 3.8% to 3.9% in the three months through January, while wage growth fell to 6.1%, the lowest level since mid-2022. The economy showed signs of recovery in the second half of 2023, with GDP increasing 0.2% sequentially in January, boosted by retailing and wholesaling expansion. Bank of England Governor Andrew Bailey stated that the UK is “near or at full employment” and experiencing an unusual pattern of disinflation with full employment, reducing concerns about a potential wage-inflation spiral.
Analyst Wieladek Projects ECB to Reduce Rates Come June, with Further Cuts Ahead.
Latvian central banker Martins Kazaks has suggested that rate cuts are imminent and that inflation is being defeated. ECB policymakers, including Villeroy de Galhau, Robert Holzmann, and Pierre Wunsch, have also suggested an interest rate cut may be needed by June. T. Rowe Price European Economist Tomasz Wieladek believes the ECB will prefer to cut interest rates in June and may reduce borrowing costs at subsequent meetings this year. While there are risks of service inflation, policymakers will focus on slowing wage growth.
The UK economy improved in November.
The UK economy gained 0.3% in November, reversing a 0.3% decline in October, mainly to significant improvements in services and manufacturing. This month-over-month increase in GDP exceeded the FactSet poll of analysts’ consensus prediction of a 0.2% increase. Nonetheless, the economy suffered for three months through November, falling 0.2% due to widespread weakness in the industrial sector.
Japan
Japan’s stock markets experienced a negative return, with the Nikkei 225 Index losing 2.5% and the TOPIX Index down 2.1%. The Bank of Japan (BoJ) is expected to end its negative interest rate policy soon, with the highest average wage rises for labor union members since the early 1990s. Economists are now expecting a March or April interest rate hike. The BoJ’s ultra-accommodative policy has impacted the yen, affecting large-cap exporters and causing the yen to weaken. The yield on the 10-year Japanese government bond rose to 0.79%, reaching its highest level in three months, as the BoJ adjusts its monetary policy settings.
Revised Analysis: Japan’s Economy Shows Strength, Avoids Recessionary Downturn.
BoJ Governor Kazuo Ueda expressed a downcast outlook for Japan’s economic recovery, stating that while the economy is moderately recovering, some data shows weakness. However, early economic growth figures showed that Japan avoided a technical recession in the final quarter of last year, with gross domestic product expanding 0.1% in Q4 2023, compared to a previous contraction of 0.1%. This equated to a 0.4% annualized expansion versus a prior fall of 0.4%.
China
Chinese stocks rose due to the government’s recent market stabilization measures, boosting investor confidence despite a weak economic outlook. The Shanghai Composite Index gained 0.28%, while the CSI 300 added 0.71%. In Hong Kong, the Hang Seng Index rallied 2.25%. China’s consumer price index rose by 0.7% in February, marking the first positive reading since August 2023. However, the producer price index fell by 2.7%, the longest streak of declines since 2016.
Investors remain cautious about a trough to deflation as China grapples with weak domestic demand. The People’s Bank of China injected RMB 387 billion into the banking system via its medium-term lending facility, resulting in a net withdrawal of RMB 94 billion from the banking system.
The State Council pledged to increase spending by at least 25% by 2027 to encourage consumers and businesses to replace old equipment and goods. This plan is seen as a crucial step for Beijing to meet its 2023 economic growth target of 5%.
Real Estate Sector Struggles as Property Prices Extend Drop
China’s new home prices fell 0.3% in February for the eighth consecutive month, indicating no signs of a turnaround in the country’s property crisis. Moody’s lowered China Vanke’s credit rating to junk from investment-grade, further undermining confidence in the property sector. The State Council pledged to increase spending by at least 25% by 2027 to encourage consumers and businesses to replace old equipment and goods, benefiting sectors like industry, agriculture, transport, education, and healthcare. This is seen as a crucial step for Beijing to meet its 2023 economic growth target of 5%.
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