Weekly recap
Weekly recap of world’s major stock markets; China, USA, Japan and Europe
U.S.
As earnings season begins, US stocks resume their upward trend.
Over the week, stocks rose, with large-cap growth firms and the technology-heavy Nasdaq Composite Index outperforming the overall market. Several IT titans, including Facebook parent Meta Platforms and chipmaker NVIDIA, saw significant rises. As oil prices fell early in the week, energy equities underperformed. The nation’s four major banks—JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo—reported fourth-quarter results on Friday, marking the unofficial start of earnings season. Markets were set to close the following Monday in celebration of Martin Luther King, Jr. Day.
Consumer inflation surprises to the upside, while producer inflation surprises to the downside.
The week’s light economic calendar saw data releases that were largely in line with expectations, although investors appeared to pay extra attention to inflation statistics. Following the release of consumer price inflation statistics by the Labor Department on Thursday morning, stocks dipped slightly. Headline prices grew 0.3% in December, a tad more than predicted, but core prices (excluding food and energy) rose 0.3%, in line with expectations. Core prices grew 3.9% in 2023 overall, the weakest 12-month rate since mid-2021.
Friday morning’s producer price data was slightly more optimistic. In December, headline wholesale prices declined 0.1%, marking the third consecutive monthly decline. Prices climbed 1.0% in 2023 overall, but core prices rose 1.8%, less than projected and below the Federal Reserve’s overall inflation target of 2.0%.
As the new year began, the labor market appeared to be in fine health. According to the Labor Department, 202,000 workers registered for unemployment benefits in the previous week, well below forecasts and the lowest level since mid-October, while 1.83 million filed continuing claims, also the lowest level since October.
Consumers and business owners are becoming less pessimistic.
Two recent studies found that both small business owners and consumers were pessimistic about the economy, albeit slightly less so than in recent months. In January, the RealClearMarkets/TIPP Economic Optimism Index remained negative, but it surged to its highest level since April. The surge in investor optimism was especially noticeable, most likely reflecting the market’s great performance in December. The NFIB Small Business Optimism Index also increased faster than predicted, reaching its highest level since July.
The slight upside surprises in consumer inflation statistics did not sway fixed income investors, with the yield on the benchmark 10-year US Treasury note sliding back below 4% over the week. (Trends and bond prices move in different directions.) While Treasury auction sizes remained steady, the Federal Reserve Bank of New York’s utilization of reverse repurchase agreements (or reverse repos) fell to its lowest level in a year on Thursday, according to our traders. Reverse repos incentivize banks to deposit funds with the Fed, draining assets from the banking system and dampening growth and inflation. This could imply that the Fed’s quantitative tightening program, a contractionary weapon, would shortly slow and eventually terminate.
Short-maturity municipal bond yields have risen, according to our dealers. In terms of muni market technicals, reinvestment cash from January coupon payments offset an increase in new issuance, and the new offerings that did enter the market were well received.
Our traders stated that the high yield bond market seemed overall firmer amid widespread risk-on attitude and a rebound in equities ahead of the release of consumer pricing data. They observed that the higher-than-expected consumer inflation figures had no impact on investors, and that the deals that came to market were favorably accepted.
Europe
The pan-European STOXX Europe 600 Index closed the week barely changed in local currency terms, as traders assessed the risk of interest rates remaining higher for longer than originally thought. The major stock market indices were mixed. The DAX in Germany rose 0.66%, the CAC 40 in France rose 0.60%, and the FTSE MIB in Italy rose somewhat. The FTSE 100 Index in the United Kingdom lost 0.84%.
European government bond rates had a tumultuous week as dovish statements from European Central Bank (ECB) policymakers were countered by market expectations for a near-term interest rate drop. The 10-year German government bond yield concluded the week around 2.2%. In the United Kingdom, the yield on the benchmark 10-year government bond increased as statistics showed that the British economy grew somewhat faster than predicted in November.
Lagarde of the ECB believes the worst of the inflation war is largely past.
ECB President Christine Lagarde stated on French television that she believes “the worst part is behind us” in the fight to reduce inflation. She also claimed that interest rates had most likely peaked. “I think that rates, barring any further shocks or unexpected data, will not continue to go up,” she went on to say. “And if we win our fight against inflation, and if we are certain that inflation will indeed be at 2%, at that point rates will start to go down.” She did not, however, explain when these rate reduction would take effect.
Eurozone figures suggest that the economy is still slowing.
Official figures showed that the labor market remained resilient in the face of an economic slump. In November, the eurozone unemployment rate was 6.4%, down from 6.5% in October. However, there are some indications that the labor market is correcting. Total hours worked reduced slightly in the third quarter, the first time this has happened since the end of 2020, while employment vacancies have been declining in recent months. In the meantime, retail sales volumes fell 0.3% sequentially in November after increasing 0.4% in October.
Germany’s industrial output fell 0.7% sequentially in November, owing in part to a drop in manufacturing orders. On a seasonally adjusted basis, new orders increased by 0.3% month over month, falling short of forecasts.
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
Over a holiday-shortened week (they were closed on Monday), Japan’s stock markets posted robust gains, with the Nikkei 225 Index climbing 6.6% and the broader TOPIX Index rising 4.2%. The continuation of highly stimulative monetary policy, as well as yen weakness, which encouraged Japan’s exporters, aided the indices’ surge to their greatest levels in nearly 34 years.
Meanwhile, the yen fell below JPY 145 against the US dollar, its lowest level in over a month, after a strong US inflation report dampened expectations about how soon the Federal Reserve may decrease interest rates. During the week, the 10-year Japanese government bond yield meandered at 0.6%, unable to find a distinct direction.
The continuation of extremely stimulative monetary policy is supported by economic news.
Investors looked to be lowering their expectations that the Bank of Japan (BoJ) will soon reverse its negative interest rate policy. The likelihood of near-term policy normalization had already diminished in the aftermath of the catastrophic earthquake in Japan’s Noto Peninsula, the consequences of which the central bank was still assessing this week.
The most recent economic data releases appeared to be in favor of monetary policy continuity. The headline wage growth rate dropped considerably in November, while the Tokyo core consumer price index, a leading indicator of national pricing trends, climbed 2.1% year on year in December, the smallest rate since June 2022 and down from 2.3% in November. The Bank of Japan has emphasized repeatedly that it will continue ultra-accommodative monetary policy until it sees a sustained rise in inflation driven by wage growth.
Prime Minister Fumio Kishida recently stated that the government would mobilize all of its programs to ensure that disposable income growth exceeds price increases. Rengo, Japan’s largest trade union federation, stated it is critical to secure salary hikes for the second year in a row during this year’s spring strike, and at a level even higher than in the round of discussions held in 2023.
China
Chinese equities fell as statistics revealed that China’s deflationary cycle had continued into December, prompting hopes for stronger government support in 2024. The Shanghai Composite Index fell 1.61%, while the CSI 300 fell 1.35%. According to FactSet, the benchmark Hang Seng Index in Hong Kong lost 1.76%.
The consumer price index declined 0.3% year on year in December, the third monthly decline, following a 0.5% drop in November as reduced hog prices continued to weigh on food prices. The producer price index fell 2.7% year on year, compared to 3% in November, and was the 15th monthly reduction. Some observers expect China’s central bank to reduce its key policy rate and pump more cash into the financial system at its upcoming policy meeting, as persistent deflation weighs on the economy.
In other economic news, China’s exports increased by a better-than-expected 2.3% year on year in December, following a 0.5% increase in November. Exports to Europe and Southeast Asia increased, while shipments to the United States declined after a brief increase in November. Imports increased by 0.2% in December, following a 0.6% fall in November. The stronger December statistics were most likely enhanced by the low base effect of China’s pandemic lockdowns in the previous year, which hampered economic activity. The overall trade surplus increased to USD 75.34 billion, up from USD 68.39 billion in November. However, as global demand declined, China’s exports fell 4.6% in 2023, the country’s first annual decline in seven years.
In global news, Chinese officials imposed fresh penalties against five US defense firms in reaction to the US’s most recent weapons shipments to Taiwan. The local assets of US corporations were frozen, and domestic organizations were barred from initiating any dealings with them. The decision was widely interpreted as punishment for the US State Department’s approval of an estimated USD 300 million in possible military sales to Taiwan in December.
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