Global Markets Weekly Update

U.S.

Small-caps and tech stocks outperform in quiet week

Most major U.S. stock indexes posted gains in a light news week during what seemed to be a bit of a lull in market activity ahead of second-quarter earnings reports, according to T. Rowe Price traders. Small-cap companies and information technology stocks performed best, with growth stocks outpacing their value cousins. Index provider FTSE Russell was due to rebalance its series of Russell indexes after the close on Friday, so some of the week’s activity may have stemmed from positioning adjustments by investors tracking those indexes.

Good news boosts banks

The banking sector featured prominently in the headlines and drove the KBW Bank Index, a common benchmark for the sector, to a strong performance. Early in the week, media reports said that the Federal Reserve (Fed) is considering significantly lighter additional capital requirements for banks than regulators originally proposed in the wake of the regional banking crisis in March 2023. This good news was followed by the Fed’s announcement that all 31 of the large U.S. banks that the central bank assessed in its latest round of stress testing remained above their minimum capital levels, potentially allowing them to return capital to shareholders in the form of dividends and buybacks.  

Core PCE inflation slows

On Friday morning, the Bureau of Economic Analysis released May data for the core personal consumption expenditures (PCE) price index, which showed that prices excluding food and energy rose 0.1% from April. Core PCE is the Fed’s preferred measure of inflation, so markets welcomed the deceleration from April’s upwardly revised 0.3% pace as an indication that a September Fed rate cut is more likely.

U.S. Treasury yield curve steepens

Yields on longer-term Treasuries increased over the course of the week. Heightened expectations for a September Fed rate cut led to a slight decrease in short-term Treasury yields, resulting in a steeper yield curve. According to our municipal bond traders, tax-exempt munis had a quiet start to the week as a busy new issue calendar appeared to weigh on trading volumes in the secondary market. Municipal bond yields increased on Wednesday amid heavy issuance and rising Treasury yields.

Investment-grade corporate bond issuance was in line with weekly expectations, and most new issues were oversubscribed. Regional bank bonds were notable outperformers, benefiting from the news about regulators potentially imposing lighter requirements for additional capital. In the high yield bond market, a couple of company-specific developments influenced investor sentiment amid the somewhat mixed macro backdrop, according to T. Rowe Price high yield traders. They also noted that positive flows industrywide contributed to favorable technical conditions for the asset class, as did moderate issuance.   

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.72% lower amid heightened political uncertainty in France as the snap election called by President Emmanuel Macron approaches. Major stock indexes were mixed. Germany’s DAX rose 0.40%, Italy’s FTSE MIB fell 0.46%, and France’s CAC 40 Index lost 1.96%. The UK’s FTSE 100 Index eased 0.89%.

Eurozone government bond yields rose ahead of inflation prints in the eurozone and the U.S. Comments from European Central Bank officials leaning toward a more cautious approach to cutting interest rates this year added upward pressure on yields. The yield spread between French and German debt widened ahead of France’s election, which is scheduled for June 30. UK yields also climbed ahead of the UK elections on Thursday, July 4. Upward revisions to the UK’s first-quarter gross domestic product also appeared to contribute to the move.

Inflation slows in France and Spain

Slower increases in fuel and food prices drove the harmonized rate of inflation lower in France and Spain in June, according to preliminary data. In France, the annual rate fell to 2.5% in June from 2.6%; in Spain, inflation dropped from just over a one-year high of 3.8% to 3.5%.

German jobless rate goes up; business and consumer conditions weaken

A rise in unemployment and an unexpected deterioration in business confidence highlighted the German economy’s difficulty in overcoming stagnation. The jobless rate rose to 6.0% in June, the highest level in just over three years, from 5.9% in May. The Ifo think tank’s business confidence indicator weakened to 88.6 in June from 89.3 in May as expectations in manufacturing and trade worsened. Even though the country is holding the European Championship for soccer this month, consumers grew more cautious overall, expressing more willingness to save and less willingness to spend, according to GfK. The firm’s Consumer Climate Indicator dropped to -21.8 for July from a revised -21.0 in June.

Eurozone confidence data mixed

Confidence data in the eurozone were mixed in June. The European Commission’s economic sentiment indicator ticked lower to 95.9, which was below the 96.2 forecast by analysts in a FactSet poll. Service providers, industrial companies, retailers, and constructors grew gloomier amid signs of weaker demand. In contrast, consumers were marginally less pessimistic. A final reading of the consumer confidence indicator confirmed an increase to -14.0, the highest reading since February 2022.  

Japan

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.6% and the broader TOPIX Index up 3.1%, as historic weakness in the yen continued to support the country’s export-heavy industries. The Japanese currency hovered around its lowest levels in 38 years, falling to around JPY 160.6 against the USD from JPY 159.7 at the end of the previous week. 

Despite heightened expectations that authorities would again step in to stem the yen’s sharp decline, which has been driven by the wide U.S.-Japan interest rate differential, only verbal intervention was forthcoming—Finance Minister Shunichi Suzuki reasserted the view that excessive volatility in the currency market is undesirable and that authorities would respond appropriately to such moves. Separately, as part of an annual reshuffle that could affect how Japan communicates its currency policy, it was announced that Atsushi Mimura would become the country’s top foreign exchange diplomat on July 31.

The yield on the 10-year Japanese government bond rose to 1.06%, from 0.97% at the end of the prior week, on growing anticipation of further monetary policy tightening by the Bank of Japan (BoJ). The central bank is due to detail plans to taper its massive bond buying at its July meeting, aimed at restoring market functioning. Some market participants are also factoring in a possible interest rate hike, while others question whether the BoJ would announce two major initiatives at the same meeting. 

On the economic data front, investors focused on the Tokyo-area core consumer price index print for June, which showed that inflation rose 2.1% year on year, more than consensus expectations and accelerating from 1.9% in May. The increase was driven primarily by services inflation and fanned speculation about BoJ policy normalization, as the central bank aims to reach its 2.0% inflation target in a sustainable manner. Separate data releases showed that both retail sales and industrial production grew by more than anticipated in May.

China

Chinese stocks weakened as a light economic calendar and concerns about the slowing economy curbed risk appetite. The Shanghai Composite Index and the blue chip CSI 300 Index both recorded slight declines for the week, while Hong Kong’s benchmark Hang Seng Index slid 1.5%, according to FactSet. 

Industrial profits at large companies edged up 0.7% in May from a year earlier, the National Bureau of Statistics reported, down from April’s 4% gain. Analysts attributed the earnings improvement to higher commodity prices, which boosted profits for mining companies. However, the month-on-month decline reflected sluggish consumption amid China’s prolonged property downturn and persistent deflationary pressure. Looking ahead, investors will watch out for China’s official purchasing managers’ index, to be released on Sunday, followed by the private sector Caixin factory survey on July 1.

Foreign selling also contributed to the week’s declines. Global funds sold about RMB 49.4 billion of onshore shares via trading links with Hong Kong in June through last Wednesday, Bloomberg reported, putting China’s market on track for its first monthly outflow since January. The selling pressure from overseas investors comes as many Chinese companies have disappointed investors with lower-than-expected quarterly earnings, underscoring the economy’s weak growth outlook.  

Other Key Markets

Czech Republic

On Thursday, the Czech National Bank held its scheduled monetary policy meeting and surprised investors with a larger-than-expected 50-basis-point cut in its main policy rate, the two-week repo rate, from 5.25% to 4.75%. Policymakers also reduced the discount rate, which acts as a floor for short-term rates, from 4.25% to 3.75% and the Lombard rate, which acts as a ceiling for short-term rates, from 6.25% to 5.75%. The decision was not unanimous, however. While five Bank Board members supported the 50-basis-point cuts, two members voted for 25-basis-point reductions.

According to T. Rowe Price credit analyst Ivan Morozov, the larger-than-expected rate cuts may reflect policymakers’ reaction to recent weakness in macroeconomic data, the downside inflation surprise in May, and strengthening of the Czech currency in May. As for future rate cuts, Morozov would not be surprised to see the central bank slow the pace of monetary easing. Policymakers explicitly noted in their post-meeting statement that, as interest rates gradually approach neutral levels (neither stimulative nor restrictive), “the Bank Board is likely to slow the pace of moderation of monetary policy restriction at the meetings ahead or keep rates unchanged for some time. The reason why no further major rate cuts should be expected is that the Bank Board sees inflationary risks in the outlook.”

Türkiye (Turkey)

On Thursday, Turkey’s central bank held its scheduled monetary policy meeting. As expected, the central bank kept its key interest rate, the one-week repo auction rate, at 50.0%.

According to the post-meeting statement, policymakers noted that the “decline in the underlying trend of monthly inflation registered a temporary pause in May.” While slowing domestic demand remains at inflationary levels, policymakers specified other factors that are sustaining broad inflationary pressures, such as “the high level of and the stickiness in services inflation, inflation expectations, geopolitical risks, and food prices.” They attributed their decision to keep interest rates unchanged to the “lagged effects” of previous monetary policy tightening and reiterated their pledge to maintain tight monetary conditions “until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.”