United States
Stocks ended the week with modest gains as trading remained relatively subdued in anticipation of the Federal Reserve’s policy meeting and rate announcement the following Wednesday. Notably, the S&P 500 Index entered bull market territory, surging more than 20% from its mid-October lows. The week also saw broad market gains, with small-cap stocks outperforming large-cap stocks and value shares outperforming growth stocks. Additionally, an equally weighted S&P 500 Index outperformed its capitalisation-weighted counterpart for the first time in eight weeks, marking the most significant margin since late March.
During the week, several influential investment conferences, and events, such as the Paris Air Show and conferences on energy and consumer stocks, influenced market sentiment. Apple’s annual developer’s conference grabbed headlines as the world’s most valuable public company unveiled a virtual reality headset, its first significant new product in years. The device’s price of USD 3,500 garnered an adverse reaction from investors, but the stock recovered some of its losses later in the week. Oil prices initially rose on Monday morning after Saudi Arabia announced a unilateral production cut over the previous weekend but ultimately closed the week lower.
While the economic calendar for the week was relatively light, it seemed to support investor sentiment, even though concerns about a potential recession persisted. The Labor Department’s report on Thursday revealed a significant jump in weekly jobless claims to 261,000, surpassing expectations and reaching the highest level since October 2021. Surprisingly, continuing shares unexpectedly fell, hitting their lowest level in nearly four months. TechnoMetrica Market Intelligence and Investor’s Business Daily’s overall economic optimism index remained relatively stable. Still, the gauge measuring Americans’ outlook for the next six months dropped to its lowest level since November.
On Tuesday, data indicated a substantial contraction in the services sector. However, investors found solace in the continued decline of service prices, which have remained relatively stable compared to moderating prices for goods, food, and energy. The Institute for Supply Management’s gauge of fees paid for services reached its lowest level since May 2020, while the gauge measuring overall activity in the services sector dropped to 50.3, suggesting sluggish growth (levels above 50 indicate expansion).
Europe
The pan-European STOXX Europe 600 Index closed 0.46% lower in local currency terms as investors exercised caution ahead of central bank meetings in Europe and the U.S. Major stock indexes in the region had mixed performance. Germany’s DAX declined by 0.63%, while France’s CAC 40 Index fell by 0.79%. In contrast, Italy’s FTSE MIB gained 0.35%. The UK’s FTSE 100 Index experienced a loss of 0.59%.
European Central Bank (ECB) officials indicated that borrowing costs are likely to increase again in June, although there was less consensus on implementing rate hikes in the following months. ECB President Christine Lagarde and Bundesbank chief Joachim Nagel reiterated their hawkish stance, emphasising the absence of easing signs in underlying price pressures. However, Dutch central bank Governor Klaas Knot seemed to align with the less hawkish policymakers. While recognising the necessity of rate hikes, Knot dropped his previous insistence on increases in June and July, advocating for a step-by-step approach based on mounting evidence of the effectiveness of tighter monetary policy. According to an ECB survey, median consumer expectations for eurozone inflation in the coming year decreased to 4.1% in April from 5.0% in March.
Revised data revealed that the eurozone economy contracted by 0.1% sequentially in both the first quarter of this year and the final three months of 2022, meeting the technical definition of a recession. Additionally, flat retail sales in April indicated weak consumption in the eurozone. Germany’s industrial sector continued to deteriorate, with factory orders unexpectedly declining by 0.4% compared to March, while industrial output grew by 0.3% sequentially, falling short of economists expectations of a 0.5% increase, as per FactSet’s poll.
In the UK, the two largest mortgage lenders, Halifax and Nationwide Building Society, reported a significant drop in house prices in April, signalling a potential slowdown in the market’s recovery. Nevertheless, the Royal Institution of Chartered Surveyors noted improvement in its May housing market survey, with main measures for house prices, new inquiries, and sales agreements showing month-over-month improvement, albeit still remaining in negative territory.
Japan
Japan’s stock markets experienced a positive week, reaching new 33-year highs. The Nikkei 225 Index surged by 2.4%, while the broader TOPIX Index saw a gain of 1.9%. An upward revision to Japan’s first-quarter economic growth bolstered investor sentiment, attributed to robust corporate investment. Additionally, hopes were high that the services sector, benefiting from the recovery of inbound tourism, would drive further expansion.
The Japanese yen remained near a six-month low against the U.S. dollar, trading in the JPY 139 range. The divergence in monetary policies between the dovish Bank of Japan (BoJ) and other major central banks, which are largely in tightening mode, continued to weigh on the Japanese currency. The weak yen continued to benefit Japan’s exporters and made local assets more attractive to foreign investors. Japanese financial authorities expressed close monitoring of currency market movements and readiness to respond appropriately, without ruling out any available options if necessary.
The 10-year Japanese government bond yield increased to 0.43% from 0.41% at the previous week’s end. The yield remained within a broad range ahead of the BoJ’s upcoming June 15–16 monetary policy meeting. Expectations of adjustments to the central bank’s yield curve control framework diminished to some extent as BoJ Governor Kazuo Ueda reiterated the bank’s commitment to patiently pursue monetary easing until the sustainable achievement of the 2% price stability target, accompanied by wage increases. Ueda emphasised that there is still a considerable distance to reach that target, and uncertainties surround the inflation outlook.
Revised figures released by the Cabinet Office indicated that Japan’s economy grew more than initially estimated in the first quarter of 2023. Gross domestic product (GDP) expanded by an annualised 2.7% quarter on quarter, surpassing the initial reading of 1.6% and exceeding economists’ expectations. The upward revision was largely attributed to robust corporate investment, as businesses increased their spending despite concerns about a global slowdown, particularly in China.
China
Chinese equities experienced mixed performance as the latest inflation data raised concerns about the country’s faltering post-pandemic recovery. The Shanghai Stock Exchange Index edged up by 0.04%, while the blue-chip CSI 300 declined by 0.65% in local currency terms. In contrast, Hong Kong’s benchmark Hang Seng Index extended the previous week’s gains by 2.32%.
The May inflation figures highlighted increasing deflation risks that weigh on China’s economy, which is grappling with weak domestic and overseas demand, a sluggish property market, and high youth unemployment. China’s consumer price index rose by 0.2% in May compared to the same period last year, slightly higher than April’s 0.1% expansion but still marking a 26-month low. Core inflation, which excludes volatile food and energy prices, slowed to 0.6% from the previous month’s 0.7%. The producer price index suffered a worse-than-expected decline of 4.6%, accelerating from a 3.6% drop in April and representing the weakest reading since May 2020.
Despite these concerns, the private Caixin/S&P Global survey of services activity indicated solid growth, with a reading of 57.1 in May, up from April’s 56.4. This marked the fifth consecutive monthly expansion since pandemic restrictions were lifted in December. The Caixin survey of manufacturing activity released the previous week also unexpectedly rose to 50.9 in May. These optimistic indicators from the Caixin data countered the official manufacturing Purchasing Managers’ Index (PMI), which contracted for the second consecutive month in May. PMI readings above 50 indicate growth compared to the previous month.
In terms of trade, China’s exports declined by 7.5% in May compared to the previous year, falling short of estimates and marking the first decline in three months as global demand weakened. Imports also shrank by 4.5%, exceeding forecasts.
The latest data has raised expectations that the People’s Bank of China (PBOC) will introduce additional support measures to bolster growth. Economists predict that the PBOC may reduce the reserve requirement ratio and interest rates later this year to stimulate demand, as evidence shows that the post-pandemic recovery is losing momentum.
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