Weekly recap
Weekly recap of world’s major stock markets; China, USA, Japan and Europe
U.S.
U.S. stocks go down at the start of 2024
Some of the strong gains made in stocks over the last few weeks were lost when investors moved their money into areas that did poorly in 2023, such as utilities, energy, consumer staples, and health care. However, the large-cap, tech-heavy Nasdaq Composite Index was hurt by a drop in Apple shares after an analyst rating. The Russell 2000 Index for small companies also dropped more than the market as a whole. Traders at T. Rowe Price said that trading rates were pretty low for most of the holiday-shortened week. On Monday, markets were closed for the New Year’s Day holiday.
At the start of trade in 2024, worries about geopolitics seemed to dampen spirits. Before the upcoming elections in Taiwan, Chinese President Xi Jinping said over the weekend that “the reunification of the motherland is a historical inevitability.” Reuters says that the official English version may have been less direct, saying “China will surely be reunified.” Investors also seemed worried about the possibility of tensions rising even more in the Red Sea, where Iran sent a warship and the US sank attacking ships armed by Houthi rebels from Yemen.
The shorter economic calendar this week showed a range of opinions about the economy’s strength going into the new year. Tuesday, S&P Global changed its estimate of December industrial activity to show that it had shrunk at the fastest rate since August. The Institute for Supply Management (ISM)’s similar measure, which came out on Wednesday, showed that factory activity picked up more than expected in the month. Both companies’ polls showed that the much bigger services sector continued to grow, though the ISM’s growth was much slower than expected.
Jobs signs that don’t match up
The week’s main labor market numbers mostly came as a pleasant surprise, but the underlying trends were less clear. The monthly nonfarm payroll report, which is very important, showed that businesses added 216,000 jobs in December, which was a lot more than what most people thought would happen. Average hourly wages stayed steady at 0.4% per month, which was a little higher than expected. The jobless rate also didn’t change from 3.7% to what was expected. The rate of people working dropped suddenly to 62.5%, which is the lowest it has been since February. The Non-Manufacturing Employment Index from the ISM also dropped sharply into decline territory. It reached its lowest point since July 2020.
Stock prices and bond rates changed after the jobs reports came out Friday morning. This may have been because the reports sent mixed messages. At the end of the week, the yield on the benchmark 10-year U.S. Treasury note went up and crossed over 4% for the first time since the middle of December. (Yields and bond prices go in different ways.)
A calm beginning to the year for cities and towns
The market for tax-free municipal bonds got off to a slow start to the year with few new issues and few resale trades. Our traders said that even though coupons were paid out on January 1, buyers seemed to be taking their time reinvesting their cash.
During most of the week, U.S. investment-grade business bonds lost value. At the beginning of the year, there was a lot of issues, but not as much as most people thought would happen. Most of the debt that was issued had shorter terms or was less sensitive to changes in interest rates. Even though there was a lot of interest in new deals, sellers were willing to pay a higher yield premium than on Treasuries throughout the week. Our dealers thought that this trend was caused by too much supply, a weaker macro tone, and the risk of repricing.
Also, high yield bonds were not doing as well because they lost some of the gains they made in the last two weeks of December. Our traders told us that the primary market will be very busy until January. Some figures say that as much as $25 billion will be issued. Early in the year, the bank loan market was less active. However, our traders noticed that activity in the loan primary market started to pick up, with deals mostly involving refinancing and repricing.
Europe
The pan-European STOXX Europe 600 Index finished the week 0.55% lower in local currency. This was the first weekly loss in seven weeks, as hopes for an early interest rate cut faded. Most of the major stock averages went down. The DAX in Germany fell 0.94% and the CAC 40 Index in France fell 1.62%. The FTSE MIB in Italy, on the other hand, barely managed to gain 0.29%. The FTSE 100 Index in the UK shrank by 0.56%.
As traders lowered their hopes for a quick rate cut, the yields on European government bonds went up strongly. The yield on the standard 10-year German bund went up to more than 2.1%, and in Italy, the yield on the 10-year government bond ended the week above 3.8%. The return on the 10-year gilt in the UK was almost 3.8% at the end of the year.
In December, prices rise in the Eurozone.
In December, inflation rose again in the eurozone, which made it less possible that the European Central Bank would cut rates soon. A first estimate showed that annual consumer price growth rose to 2.9% from 2.4% in November, which was the lowest level in two years. This was because the government cut back on subsidies for food, gas, and energy. While food and energy prices are more unpredictable, a measure of core inflation dropped from 3.6% to 3.4%.
The German job market stays strong.
Seasonally adjusted, the number of unemployed Germans rose by 5,000 to 2.703 million in December. This was much less than the 20,000 rise that FactSet polled analysts to expect. The yearly adjusted unemployment rate went up a little to 5.9%.
Some signs that the UK house market is getting better
In the last month of 2023, demand for loans to buy homes continued to rise, though it started out slowly. The Bank of England says that mortgage approvals rose from 47,890 in November to just over 50,000 in December. A study by mortgage lender Halifax found that home prices went up 1.1% month-over-month. This was due to lower mortgage rates and hopes that borrowing costs would go down.
Japan
Japan’s stock markets were mixed during the week that was cut short for the New Year holiday (buying started again on Thursday). The Nikkei 225 Index fell behind the TOPIX Index. After a deadly earthquake on January 1 in Japan’s Noto Peninsula in the Hokuriku region and a number of aftershocks, the market didn’t do very well.
The terrible toll on people’s lives—more than 90 had died and hundreds more were still missing—was matched by the terrible toll on the economy, with major damage to infrastructure that could stop manufacturing and other supply lines. A lot of semiconductor companies are in the area that was hit the hardest by the earthquake, and some people think that this could cause delays in the restart of nuclear power plants across Japan. Even so, the effects of the earthquake are still being studied, but early figures show that the big effects on the economy are likely to be small. Governor of the Bank of Japan (BoJ), Kazuo Ueda, said that the central bank would fully back the economy after the disaster.
An earthquake could change how monetary policy is made.
After the earthquake, there was talk that the Bank of Japan might not be able to leave its negative interest rate policy for a while longer because they need to figure out how the earthquake affected the economy. The value of the yen dropped sharply, from around 141 at the end of last week to around 145 to the U.S. dollar. While this was good for Japan’s exports, it was bad for investors in general when the minutes of the U.S. Federal Reserve’s December meeting showed that rate cuts were likely to happen later than what markets were pricing in. The difference in interest rates between the US and Japan is a big reason why the yen is weak. The 10-year Japanese government bond’s yield stayed about the same over the short week, at 0.61%.
Even though there were worries that the BoJ might put off changing its policy, Ueda said that Japan had moved away from its long time of low growth and low inflation in 2023. He hoped that more work would be made toward getting wage and price increases that are equal. He has said before that the spring “shunto” wage talks are very important and that the key is to see if wages keep going up, which would cause more price rises for services.
China
China Stocks fell because people are still worried about the country’s economy. The CSI 300 lost 2.97% and the Shanghai Composite Index lost 1.54%. FactSet says that the Hong Kong standard Hang Seng Index went down by 3%.
The December economic figures continued to paint a mixed picture of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.0 in December, marking the third month in a row that it fell. This was due to faster drops in both new orders and exports. The nonmanufacturing PMI went up from 50.2 in November to 50.4 in December. This was because more building work made up for less service work. Readings above 50 mean that there was improvement from the previous month.
In other news, the private Caixin/S&P Global survey of manufacturing activity rose above expectations to 50.8 in December from 50.7 in November. This was the highest number since August. The private Caixin poll of service activity found that it hit its highest point since July and was higher than expected. The People’s Bank of China injected RMB 350 billion into the property market through its Pledged Supplemental Lending program, which is a low-cost funding program for policy-oriented banks. This was the bank’s latest move to support the property market. Between 2014 and 2019, the controversial tool was used a lot as a way for the government to get money to rebuild shantytowns. China’s 10-year government bond yield fell to 2.54% in the morning of Thursday, January 4. This was the lowest level since April 2020, and it happened because the central bank’s support for cash made people think it would cut interest rates this year to help growth.
More proof of China’s property slump made worries about a key growth area even stronger. The China Real Estate Information Corp. says that sales of new homes by the country’s top 100 developers fell 34.6% in December compared to the same month last year. This was more than the 29.6% drop seen in November. China’s economy is still being hurt by the housing downturn, which is caused by falling home prices, building delays, and builder defaults.
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