Global markets weekly update

U.S.

Growth shares lead stocks lower

Most of the major benchmarks closed lower over the holiday-shortened week but rounded out a month of gains. In contrast to much of the month, small-caps performed better than large-caps, and value stocks held up better than growth shares. The technology-heavy Nasdaq Composite was especially weak, due in part to a sharp decline in cloud software provider Salesforce, which fell sharply after releasing first-quarter revenues that missed consensus estimates. Markets were shuttered Monday in observance of the Memorial Day holiday.

The catalysts for the week’s moves were arguably harder to detect than usual. Much of the week’s relatively light economic calendar came in roughly in line with expectations, most notably the Commerce Department’s personal consumption expenditure (PCE) price index report, released Friday morning. Core (less food and energy) PCE prices—widely considered the Federal Reserve’s preferred inflation gauge—rose 0.2% in April, down slightly from the previous two months and seemingly a period of calming inflation pressures following January’s 0.5% spike. 

Rising home prices and mortgage rates seem to weigh on sales

“Supercore” inflation—PCE services excluding energy and housing—which has lately become more of a focus because of the unusual dynamics of housing and rental costs—offered a more mixed picture, rising 0.3%, down a tick from March but a tick up from February’s increase. Separately, the Case-Shiller index of housing prices in major U.S. cities, reported Tuesday, rose 7.4% over the 12 months ended in March, the highest level since October 2022. 

The impact of the continued increase in home prices and mortgage rates was seemingly reflected in a 5.7% decline in mortgage applications over the previous week, the biggest drop since February. Pending home sales in April also slumped 7.7%, their biggest drop in over three years and well below expectations. 

Weak Treasury auctions raise concerns

One prominent factor weighing on sentiment, according to T. Rowe Price traders, appeared to be the Treasury Department’s midweek auctions of five- and seven-year notes, which were met with subdued demand (as indicated by the so-called bid-to-cover ratio). According to our traders, the weak sales raised concerns that funding the U.S. deficit will drive up yields at a time when the Fed appears to be in no rush to cut rates.

Our traders noted that Minneapolis Fed President Neel Kashkari may have contributed to a sell-off on Tuesday by saying, “I don’t think anybody has totally taken rate increases off the table. I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.” Generally, however, fixed income investors appeared to welcome the signs of stabilizing inflation, driving the yield on the benchmark 10-year U.S. Treasury note lower for the week.

Overall, our traders noted that fixed income markets were relatively subdued following the holiday weekend. In particular, our traders reported significantly below-average activity in the high yield segment as trading resumed after the holiday weekend. However, the broader macro backdrop weighed on the performance of below investment-grade bonds, which experienced weakness alongside rates and equities. In a reversal of the trend seen over the previous few weeks, high yield funds reported negative flows.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.46% lower as hotter-than-expected eurozone inflation increased uncertainty about policy easing by the European Central Bank (ECB) beyond June. Major stock indexes also fell over this period. France’s CAC 40 Index dropped 1.26%, while Germany’s DAX declined 1.05%. Italy’s FTSE MIB ended the week flat. The UK’s FTSE 100 Index lost 0.51%.

Eurozone inflation stronger than expected; jobless rate at record low

Headline inflation in the eurozone rose for the first time in five months, with the year-over-year increase in consumer prices ticking up to 2.6% in May from 2.4% in each of the previous two months. This reading exceeded a consensus estimate of 2.5%. Services inflation accelerated to 4.1% from 3.7% in April. Meanwhile, a measure of core inflation that excludes energy, food, alcohol, and tobacco prices increased to 2.9% from 2.7%.

The unemployment rate fell to a record low of 6.4% in April after coming in at 6.5% in each of the prior five months. The number of unemployed people decreased by 100,000 from the previous month to 10.998 million.

ECB’s Lane: Ready to cut rates—a bit

ECB Chief Economist Philip Lane signaled that borrowing costs would probably be lowered at the June 6 meeting. He told the Financial Times newspaper: “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.” However, the newspaper reported that Lane said the pace at which the central bank eases borrowing costs this year would depend on incoming economic data. “The best way to frame the debate this year is that we still need to be restrictive all year long,” he added. “But within the zone of restrictiveness we can move down somewhat.”

Bank of England mortgage approvals dip; Nationwide says house prices rebound

In the UK, net mortgage approvals for house purchases inched lower to 61,140 in April, below market expectations for 61,500. The Bank of England revised the number of mortgage approvals for March down to 61,260. 

The Nationwide Building Society’s house price index in May rose 0.4% sequentially, after falling in the previous two months. The index was 1.3% higher on a year-over-year basis.

Japan

Japan’s stock markets generated mixed weekly returns, with the Nikkei 225 Index falling 0.4% and the broader TOPIX Index gaining 1.1%. A downward revision to U.S. economic growth data increased the likelihood that the Federal Reserve may cut interest rates at least once before the end of this year, lending some support to risk appetite globally.

Continued speculation about further monetary policy normalization 

Investors’ focus remained firmly on the prospect and likely timing of further monetary policy normalization by the Bank of Japan (BoJ). The yield on the 10-year Japanese government bond (JGB) rose to 1.07%, from 1.00% at the end of the previous week, amid continued uncertainty about when the BoJ could next raise short-term interest rates. The central bank ended its negative interest rate policy in March, although Japan’s monetary policy remains among the most accommodative in the world.

Data widely expected to show that authorities intervened twice to prop up the yen

In the currency markets, the yen depreciated to around JPY 157.3 against the U.S. dollar, from about 157.0 at the end of the prior week. With the yen continuing to hover around 34-year lows, investors awaited monthly data (due to be released after the market’s close on Friday) on how much authorities spent on currency intervention during the period from April 26 to May 29. The data are widely expected to show that authorities stepped into the foreign exchange markets on two separate occasions late in the period to prop up the Japanese currency.

Inflation accelerates in Tokyo area but remains below BoJ’s target

The Tokyo-area core consumer price index, a leading indicator of nationwide trends, showed that the rate of consumer inflation accelerated in May to 1.9% year on year, in line with expectations and following an increase of 1.6% in April. Despite the acceleration, attributable largely to rising electricity bills, inflation remained below the BoJ’s 2% target, reducing pressure on the central bank to raise interest rates soon. Separate data showed that retail sales rose more than anticipated in April, with consumption buoyed by signs of rising wages, while industrial output unexpectedly fell over the same month.

China

Chinese equities were little changed after an unexpectedly weak manufacturing reading highlighted growth headwinds on the economy. The Shanghai Composite Index was broadly flat, while the blue chip CSI 300 gave up 0.6%. In Hong Kong, the benchmark Hang Seng Index lost 2.84%, according to FactSet. 

Manufacturing slips back into contraction

The official manufacturing purchasing managers’ index (PMI) fell to a below-consensus 49.5 in May from 50.4 in April, marking the first monthly contraction since February. The gauge lagged the 50-mark level, separating growth from contraction. The PMI’s subindexes for new orders and exports also declined. The nonmanufacturing PMI, which measures construction and services activity, slipped to a weaker-than-expected 51.1 from 51.2 in April amid slower construction growth. Separately, profits at industrial firms rose by 4% in April from a year ago and recovered from a 3.5% decline in March, according to the National Bureau of Statistics. Analysts said increased overseas demand and a government push for domestic companies to upgrade their aging equipment drove April’s increase.

Although both PMI readings underscored pockets of weakness in China’s economy, most economists believe that China will meet its growth target this year of around 5%. Earlier in the week, the International Monetary Fund upgraded its 2024 economic growth forecast for China to 5%, up from its April projection of 4.6%, following Beijing’s support measures and a stronger-than-expected first-quarter expansion.

On the policy front, officials in Shanghai announced measures to shore up homebuying demand in China’s largest city. Measures included lowering the minimum down payment ratio for home purchases, reducing the minimum interest rates on first home mortgages, and relaxing social insurance and income tax payment requirements for non-Shanghai residents. The easing of homebuying rules in Shanghai comes after the central government earlier in May rolled out a historic rescue package for China’s ailing property sector, which has emerged as a major growth headwind and left the economy dependent on exports.

Other Key Markets

Poland

Data show no reacceleration of inflation, but near-term interest rate cuts remain unlikely

Early in the week, the Polish government reported that inflation in May was measured at a year-over-year rate of 2.5%. This was below expectations of 2.9%, though it was slightly higher than April’s year-over-year rate of 2.4%.

According to T. Rowe Price credit analyst Ivan Morozov, the slight pickup versus April was due to fuel prices, while core inflation pressures softened below 4%. In month-over-month terms, Morozov believes that core inflation probably slowed to about 0.1% to 0.2%. He believes core inflation momentum is around an annualized rate of 4%.

Overall, Morozov believes the inflation data for May are favorable in the sense that they are not showing a reacceleration of inflation. Nevertheless, he believes the central bank will continue to refrain from interest rate cuts until sometime in 2025. 

South Africa

Central bank on hold amid elevated inflation expectations and uncertainty

On Thursday, the South African Reserve Bank’s monetary policy committee held its scheduled meeting and kept the key interest rate, the repurchase rate, unchanged at 8.25%. The decision was unanimous.

According to the post-meeting statement, policymakers noted that inflation outcomes “were worse than expected early in the year,” though they now predict that the inflation rate—which was recently measured at a rate of 5.2%—will stabilize around their 4.5% objective in the second quarter of next year. This is sooner than they previously expected. Nevertheless, policymakers acknowledged their concern about “elevated” inflation expectations, prompting them to focus on delivering on their inflation target “sooner rather than later, to re-anchor expectations.”

With both the risks to the growth outlook and inflation forecast risks appearing to be “balanced,” policymakers decided to leave the repurchase rate unchanged. The central bank currently predicts “a modest acceleration in growth, over the next few years, alongside a gradual stabilization of inflation at our target.” However, policymakers affirmed that uncertainty is “unusually elevated” at present and that future interest rate decisions “will continue to be data dependent, and sensitive to the balance of risks to the outlook.”