Global markets weekly update

Major U.S. stock indexes finished the holiday-shortened week higher. Smaller-cap indexes performed best, with the S&P MidCap 400 and Russell 2000 indexes climbing 2.85% and 3.52%, respectively, followed by the Dow Jones Industrial Average, which advanced 2.30%. The S&P 500 Index and Nasdaq Composite both closed at all-time highs for the second week in a row. U.S. markets closed early Thursday and were closed Friday in observance of the Independence Day holiday, and T. Rowe Price traders noted that the week included several fairly quiet trading sessions heading into the long weekend.

Much of the focus during the week centered around the progress of the Trump administration’s reconciliation bill, which was narrowly passed by the Senate on Tuesday and by the House of Representatives on Thursday afternoon. Trade-related headlines also continued to flow during the week, with President Donald Trump announcing a trade deal with Vietnam on Wednesday and making comments around negotiations with several other trade partners ahead of the upcoming July 9 tariff deadline, when the 90-day pause on reciprocal tariffs is expected to end.

On the economic data front, the Labor Department reported that the U.S. economy added 147,000 jobs in June, ahead of economists’ estimates and up from May’s upwardly revised reading of 144,000. The unemployment rate ticked lower to 4.1%, while average hourly earnings grew 0.2% month over month.

The report came as a welcome surprise following Wednesday’s weaker-than-expected data from payroll processing firm ADP, which showed private payrolls contracted by 33,000 in June against estimates for a gain of around 115,000. This was the first negative reading since March 2023 and was driven by “a hesitancy to hire and a reluctance to replace departing workers,” according to Nela Richardson, chief economist at ADP.

Elsewhere, the Labor Department reported on Tuesday that job openings rose to 7.8 million in May, up from April’s reading of 7.4 million and the highest level since November. Accommodation and food services had the largest increase in openings, followed by finance and insurance. Initial jobless claims for the week ended June 28 also came in better than expected at 233,000, down 4,000 from the prior week’s revised level.

Activity in the U.S. manufacturing sector contracted for the fourth consecutive month in June, according to a report from the Institute for Supply Management (ISM). The ISM’s manufacturing purchasing managers’ index (PMI) was 49%, up from May’s reading of 48.5% and just shy of estimates for 49.1% (readings below 50% indicate contraction). According to Susan Spence, chair of the ISM Manufacturing Business Survey Committee, “activity slowed its rate of contraction, with improvements in inventories and production the biggest factors in the 0.5-percentage-point gain.”

Meanwhile, the services sector returned to growth after contracting for the first time in 11 months in May, registering a June PMI reading of 50.8%. The rebound was largely attributed to improvements in business activity and new orders. The Prices Index eased 1.2 percentage points from May but remained solidly in expansion territory—indicating rising prices—with a reading of 67.5%, the second-highest reading since November 2022 and the seventh consecutive month above 60%.

U.S. Treasuries were little changed through Wednesday as yields fluctuated in response to the week’s mixed economic data. On Thursday morning, yields across most maturities increased in response to the better-than-expected jobs report.

Investment-grade corporate bonds posted positive returns amid a light week of new issuance, and all of the week’s new issues were oversubscribed. High yield bonds also generated positive returns, and T. Rowe Price traders noted that high yield market sentiment was generally firm as equities traded higher amid generally favorable macroeconomic conditions. Our traders also noted that the issuance calendar was active as issuers sought to take advantage of the positive sentiment ahead of the U.S. holiday.

In local currency terms, the pan-European STOXX Europe 600 Index was roughly flat over the four days ended Thursday. Major stock indexes posted mixed returns. France’s CAC 40 Index gained 0.82% over these trading sessions, Germany’s DAX gave back 0.41%, and Italy’s FTSE MIB advanced 0.51%. The UK’s FTSE 100 Index tacked on 0.28%.

Headline annual inflation in the eurozone ticked up to the European Central Bank’s (ECB’s) 2.0% target in June after hitting an eight-month low of 1.9% in May. Core inflation, which excludes volatile food and energy prices, held at 2.3%. However, the year-over-year increase in services costs, which policymakers monitor closely, rose to 3.3% from 3.2%.

Meanwhile, the labor market in the euro area remained strong. The seasonally adjusted jobless rate rose to 6.3% in May from a record low of 6.2% in April, coming in just below the 6.4% from the same time last year.

ECB President Christine Lagarde reacted to the inflation data at the central bank’s annual forum in Sintra, Portugal, by saying that the ECB’s target had been reached—cooling expectations for further interest rate cuts this year. Later, she said: “It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.” She added: “Our work is not done, and we need to remain vigilant.”

The UK Nationwide house price index fell 0.8% in June after rising 0.4% in the preceding month. Year over year, home prices were 2.1% higher. Nationwide said it expected prices to rise over the summer, when demand for houses is usually strongest.

Bank of England (BoE) data suggested that the housing market was recovering from a momentary downturn that occurred after the end of a tax break in April. Net mortgage approvals for home purchases, a key indicator of future borrowing, rose to 63,032 in May from an upwardly revised 60,656 in April and well above the 59,750 forecast by economists in a Reuters poll.

Japan’s stock markets lost ground over the week through Thursday, with the Nikkei 225 Index falling 0.91% and the broader TOPIX Index down 0.41%. Signs that progress in U.S.-Japan trade negotiations was stalling weighed on sentiment. The yen benefited from broad-based dollar weakness, strengthening to around JPY 143.8 against the U.S. dollar from about JPY 144.6 at the end of the previous week. The yield on the 10-year Japanese government bond rose to 1.45% from the prior week’s 1.43%.

Investors’ focus was on the latest developments in the bilateral trade negotiations between the U.S. and Japan—in the absence of an agreement, a 24% reciprocal tariff on Japanese imports is due to be reinstated by the U.S. on July 9. U.S. President Donald Trump spoke of imposing a 30% to 35% tariff if the two countries fail to reach a deal by the deadline, which his administration is unwilling to extend. Japan has reportedly continued to insist on the removal of all tariffs, notably on its key auto and auto parts industries, while the U.S. side is said to be pushing for Japan to import more U.S. agricultural products.

Among firms, specifically Japan’s big manufacturers, business sentiment unexpectedly improved slightly in the three months to June, as shown by the Bank of Japan’s closely watched quarterly “tankan” survey. The index rose to +13 in June, up from +12 in March and ahead of market expectations of +10. A positive number indicates that more firms are optimistic about recent business conditions than are pessimistic. However, over the coming three months, big manufacturers expect business confidence to fall.

Investors looked ahead to Japan’s Upper House election on July 20, which is expected to lead to some political uncertainty in the short term. In the October 2024 Lower House election, the ruling Liberal Democratic Party, together with its coalition partner the Komeito party, lost its majority—and some investors are preparing for such an outcome in July’s election. Dissatisfaction with Prime Minister Shigeru Ishiba’s government has stemmed largely from cost-of-living issues.

Mainland Chinese stock markets rose for the week ended Thursday. The onshore benchmark CSI 300 Index rose 1.18% and the Shanghai Composite Index added 1.08% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index shed 0.88%.

A handful of indicators offered a mixed snapshot of China’s economy. The official manufacturing purchasing managers’ index improved in June to 49.7 from May’s 49.5 reading, China’s statistics bureau reported Monday. The latest manufacturing PMI reading captured the first full month after the U.S. and China agreed in May on a 90-day pause in their tariff war, which led to a temporary rebound in trade. Though the gauge stayed below the 50.0 reading that separates growth from contraction, it beat economists’ forecasts and raised doubts about whether Beijing would step up stimulus measures in the near term.

A private survey showed that the services side of the economy remained under pressure, however. The Caixin China General Services PMI fell to 50.6 in June, a nine-month low, from May’s 51.1 reading, missing forecasts. Despite remaining in expansionary territory, June’s growth pace was the softest since last September as the pace of new business growth slowed, Caixin said in a statement. A gauge of employment fell for the third time in the past four months as service providers remained cautious about hiring.

On Tuesday and Wednesday, Poland’s central bank held its two-day monetary policy meeting, and policymakers surprised investors by deciding to reduce the key interest rate, the reference rate, from 5.25% to 5.00%. Other interest rates controlled by the central bank were also reduced by 25 basis points (0.25%).

According to the post-meeting statement, policymakers once again deemed the global backdrop for economic activity and inflation as being “subject to uncertainty” due to trade policies and other factors. Turning to the Polish economy, central bank officials noted that enterprise sector employment in May was lower than it was one year ago and that annual wage growth in the national economy and in the enterprise sector showed signs of slowing.

According to their latest projections, policymakers believe that inflation will be slightly lower than previously expected in the next couple of years and that economic growth will be slightly higher. In addition, central bank officials forecast that consumer price index inflation in the months ahead “will fall below the upper bound for deviations” of the central bank’s inflation target. They used this as the justification for their decision to reduce interest rates at this time.

Late last week, the Colombian central bank’s Board of Directors held its regularly scheduled policy meeting, and policymakers decided to keep the monetary policy interest rate at 9.25%. However, the decision was not unanimous. While four of the seven directors voted to keep rates steady, two directors voted for a 50-basis-point (0.50%) rate cut, while one favored a 25-basis-point (0.25%) cut.

In their post-meeting statement, policymakers noted that annual headline inflation and core inflation edged lower between April and May. However, they also noted that inflation expectations remain above the central bank’s 3% target, indicating that “convergence toward the target is perceived to be slower than previously anticipated.”

In addition, policymakers observed that economic growth “has accelerated,” leading the technical staff to upgrade their full-year growth forecast for the economy. Further, central bank officials acknowledged that the expected increase in this year’s fiscal deficit “and beyond…limits the scope for further monetary policy easing.” As a result, the majority of Board members voted to keep rates unchanged, reflecting a “cautious approach” to monetary policy.