United States
The focus of the week’s economic data was the May CPI release. According to reports, headline inflation was 8.6 % from a year ago, exceeding consensus estimates. The headline CPI in May was also higher than the 8.3 % reading in April, disappointing investors who had expected price increases to slow. Core CPI, which excludes food and energy, increased by 6% year on year, exceeding consensus expectations as well.
Initial jobless claims spiked to their highest level since mid-January last week despite signs of an otherwise strong employment picture, as stated by the Labour Department last Thursday. The rise in claims comes less than a week after the Bureau of Labour Statistics reported that nonfarm payrolls increased by 390,000 in May, considerably better than expected. Companies have continued to hire despite rising worries that the US economy could be headed for a shallow recession as inflation flares and global supply chains remain clogged.
Oil prices rose for the week before falling on Friday, resulting in a modest gain for the week and some support for energy sector stocks. Losses in the tech-heavy Nasdaq Composite were greater than those in other markets, as higher interest rates reduced the appeal of companies that may not generate meaningful earnings for some time.
Treasury yields in the United States rose sharply following the release of the CPI, with yields on short- and intermediate-term maturities rising sharply. The European Central Bank’s hawkish policy signals, combined with weak demand for the Treasury Department’s sale of new 10-year notes, pushed US government debt yields higher.
According to reports, municipal bonds slumped through most of the week, with yields increasing in intermediate and long-maturity segments. Meanwhile, reinvestment proceeds from June bond maturities and coupon payments flowed to shorter-term issues, anchoring the short-maturity segment of the yield curve.
The investment-grade corporate bond market saw a surge in new issuance. The primary calendar exceeded expectations for the week, and the new deals were met with generally strong demand. Later in the week, the market took on a risk-off tone, and investment-grade corporates fell alongside equities.
The EU/UK
The Bank of England is expected to raise interest rates for the fifth time since December, the longest streak in 25 years, and is expected to continue in the coming months as inflation approaches double digits. While Britain is expected to have the world’s weakest economy in 2023, investors and most economists expect the Bank of England to raise interest rates by a quarter-point next Thursday. This would raise the Bank Rate to 1.25 %, its highest level since January 2009, when the global financial crisis sunk the British economy.
British Prime Minister Boris Johnson saw off a challenge to his leadership, winning 59% of the votes in a ballot held by the members of parliament of his conservative party. Johnson has come under fire for holding parties in the prime minister’s office during coronavirus lockdowns in the UK.
European stocks fell sharply after the European Central Bank (ECB) said it might raise interest rates faster than expected after July when it plans to end its ultra-easy monetary policy. The pan-European STOXX Europe 600 Index fell 3.95 % in local currency. The DAX Index in Germany fell 4.83 %, while the CAC 40 Index in France fell 4.60 %. The FTSE MIB Index in Italy fell 6.70 % on concerns about the country’s ability to manage its national debt load without the assistance of the central bank
Core Eurozone government bond yields, jumped, mostly in response to the ECB policy meeting, which markets perceived as more hawkish. Peripheral Eurozone and UK government bond yields broadly tracked core markets. The ECB indicated that it intends to begin raising its key deposit rate, which is currently at -0.5 %, by a quarter-point in July to contain record inflation. The central bank stated, If the medium-term inflation outlook persists or worsens, a larger increment will be appropriate at the September meeting. The ECB also confirmed that it would end net bond purchases under its asset-purchase program on July 1.
The ECB lowered its outlook for economic growth and raised its projection for inflation, which it now sees staying above the 2% target over the three-year forecast period. Inflation is expected to accelerate to 6.8% in 2022 compared with 2.6% last year before declining to 3.5% in 2023 and 2.1% in 2024. The ECB called for the economy to expand by 2.8% this year, down from its previous forecast of 3.7%. The central bank’s projections show economic growth slowing to 2.1% in 2023 and 2024.
japan
Growth in Japan’s producer prices slowed in May, to 9.1% from a year earlier compared with 9.8% in April, suggesting that the government’s efforts to ease the pain of rising prices, including increased fuel subsidies, were having some impact.
Japan’s reopening to tourism provided a further boost. In the fixed income markets, the 10-year Japanese government bond yield rose to 0.25% from 0.23% at the end of the prior week. Meanwhile, Yen’s weakness continued to boost Japan’s exporters—the currency finished the week at around JPY 133.9 against the US dollar (from the previous week’s JPY 130.8), continuing to hover around two-decade lows.
The Bank of Japan (BoJ), Japan’s Ministry of Finance, and Japan’s Financial Services Agency issued a joint statement expressing concern about the Yen’s rapid depreciation. Earlier last week, BoJ Governor Haruhiko Kuroda told a Financial Times conference that no central bank, including the BoJ, has a target exchange rate. He also stated that, with Japan’s economic growth still falling short of pre-pandemic levels, he further stated that the BoJ must extend its support for economic activity by continuing with current monetary easing. The country’s desire to reach the 2% inflation target was hindered largely due to inflationary pressures that had been brought about by rising energy costs, covid cases, and geopolitical instabilities.
Producer price growth in Japan slowed in May to 9.1 % from a year earlier, compared to 9.8 % in April, indicating that the government’s efforts to alleviate the pain of rising prices, such as increased fuel subsidies, were having an effect. However Japanese cabinet proposed to introduce fiscal and economic policy programs that aim to redistribute income, raise economic growth, and foster the growth of start-up companies. Another important focal point will be green transformation including decarbonization efforts to boost Japan’s economic growth prospects over the medium term.
China
China’s stock market rose on hopes of looser monetary policy and signs that Beijing was relaxing its years-long crackdown on the technology sector. The Shanghai Composite Index rose 2.7 %, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose about 3.7 %.
The Chinese 10-year government bonds ended the week unchanged at 2.82% from the previous week. This was due to an anticipation of the new US inflation data, which would determine interest rate increases by the federal reserve. A further increase narrows out the attractiveness of Chinese assets as a tightening policy by the US would narrow interest rate differentials on both Chinese and US Government debt yields.
In May, exports increased by double digits, while imports increased for the first time in three months as factories reopened and supply chain issues improved. Last month, China’s trade surplus increased to a higher-than-expected USD $78.76 billion, up from USD $51.12 billion in April. The private Caixin services purchasing managers’ index increased to 41.4 in May, up from 36.2 in April. Despite the monthly improvement, the index remains well below the 50-point threshold that separates growth from contraction, as coronavirus lockdowns and other constraints weighed on the services sector.
In May, bank lending in China increased more than expected, and overall credit growth accelerated, reflecting policymakers’ efforts to reverse the country’s coronavirus-driven slump. Consumer inflation also stayed subdued, raising expectations that China’s central bank will roll out more stimulus to support the economy.
Weekly Market Indices
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Weekly Index |
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YTD Index |
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Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
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UK |
|
|
|
|
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|
FTSE 100 Index |
-2.83% |
-2.83% |
0.98% |
0.98% |
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US |
|
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S&P 500 Index |
-5.04% |
-3.66% |
-17.76% |
-9.75% |
||
|
EU |
|
|
|
|
||
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Euro Stoxx 50 |
-4.88% |
-5.21% |
-14.56% |
-13.18% |
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Asia |
|
|
|
|
||
|
Nikkei 225 Index |
-0.23% |
-0.97% |
-3.36% |
-9.34% |
||
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Hang Seng Index |
3.71% |
5.35% |
-5.54% |
-2.96% |
||
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MSCI Emerging Markets Index |
0.37% |
0.92% |
-10.40% |
-5.16% |
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