United States
The week saw mixed results for major indexes, with the technology-heavy Nasdaq Composite performing well due to a surge in Alphabet’s stock following the announcement of its new artificial intelligence-based search platform. Conversely, the Dow Jones Industrial Average struggled, hindered by Disney’s report of declining subscribers to its streaming platform, Disney+. Financial stocks also underperformed due to ongoing concerns about certain regional banks.
Although the economic calendar was relatively light, there was much anticipation surrounding inflation data. The Labor Department reported that headline consumer prices had risen 4.9% over the year ending in April, just below consensus expectations and the slowest pace in two years. Core inflation, which excludes volatile food and energy prices, rose 5.5%, in line with expectations. However, “supercore” inflation, a rumoured preferred gauge of the Federal Reserve, rose only 0.1%, the lowest reading in almost three years.
Despite this data, Fed officials did not seem to alter their inflation and interest rate expectations. New York Fed President John Williams reiterated that he did not anticipate a rate cut later this year, in contrast to the three rate cuts priced into futures markets by January 2024. As of the end of the week, investors were only pricing in a 0.7% chance that the Fed would keep rates steady through the end of 2023.
There were also concerns about banking stresses, tightening credit conditions, and the upcoming deadline to increase the debt ceiling before the U.S. Treasury Department exhausts its “extraordinary measures” to pay the government’s obligations. U.S. Treasury Secretary Janet Yellen warned that the deadline could come as early as June 1.
Europe
The STOXX Europe 600 Index ended the week largely unchanged in local currency terms, with gains earlier in the week eroded as the market digested the prospect of further rate increases by the European Central Bank (ECB). Major European indices delivered mixed results. The CAC 40 Index in France fell 0.24%, while Germany’s DAX eased 0.30%. The UK’s FTSE 100 Index declined 0.31%. ECB President Christine Lagarde noted in an interview with the Nikkei newspaper that the central bank had acted deliberately and decisively to combat inflation but acknowledged that more work was needed. She cautioned that “factors that can cause significant upside risks to the inflation outlook” exist and that “uncertainty about the path of inflation is still high, so we have to be extremely cautious about these potential risks.”
Lagarde’s remarks echoed the hawkish views expressed by policymakers since the quarter-point rate hike last week. According to Tomasz Wieladek, the ECB could lift its deposit rate above the market’s expected peak of 3.50%. Strong inflationary pressures are supportive of short-term rate hikes, in his opinion. Wieladek believes that service inflation, a key focus for the Governing Council, will likely remain elevated due to fundamental factors. However, he also suggested that the ECB may hold off if the US cannot make headway in debt ceiling discussions.
In March, German manufacturing orders shrank 10.7% sequentially on a seasonally and calendar-adjusted basis, more than anticipated, indicating that the economy may be headed for a recession.
The Bank of England (BoE) lifted its key interest rate by a quarter point to 4.25%, the highest level since 2008, with policymakers voting 7-2 in favour of the move. The central bank also raised its inflation forecast, acknowledging it had underestimated the strength and persistence of food price increases. The updated projections now predict inflation to slow to 5.1% by year-end instead of the 3.9% predicted in February. The BoE also revised its economic growth forecast, forecasting zero growth in Q2 instead of a 0.7% contraction.
Official data indicated that the UK economy grew 0.1% in Q1, narrowly avoiding a forecast recession. However, gross domestic product unexpectedly dropped 0.3% sequentially in March, with declines across the services sector, according to the statistics office
Japan
Japan’s stock markets rose during the week, supported by strong corporate earnings, with the Nikkei 225 Index up 0.8% and the broader TOPIX Index up 1.0%. However, concerns about China’s economic growth and the potential for a US debt ceiling default affected sentiment. Wage growth remained sluggish in March, supporting the Bank of Japan’s (BoJ’s) dovish stance, and the 10-year Japanese government bond yield fell to 0.39%. BoJ Governor Kazuo Ueda said the central bank plans to end yield curve control and shrink its balance sheet once sustainable and stable 2% inflation is achieved. However, it expressed concerns about sustainability of wage growth. Data showed that Japanese workers’ nominal wages grew 0.8% YoY in March, while real wages fell 2.9% from the previous year.
The BoJ aims to achieve its price stability target along with wage increases. The BoJ’s April meeting concluded that the spring “shunto” labour-management wage negotiations saw favourable developments, but whether these will continue next year is uncertain.
China
During the first week of trading after the Labour Day holiday, Chinese equities declined, with the Shanghai Stock Exchange Index falling 1.86%, the blue-chip CSI 300 dropping 1.97%, and Hong Kong’s Hang Seng Index declining 2.11%. The country’s consumer price index (CPI) in April rose only 0.1% from a year ago, lower than March’s 0.7% increase, indicating weak demand-driven inflation in the economy. The producer price index also fell by 3.6%, more than anticipated, marking the lowest reading since May 2020 and raising concerns about deflation. In April, new bank loans decreased to RMB 719 billion, indicating lower credit demand. These indicators suggested that China’s central bank would probably ease policy soon to support the economy, which has been losing momentum since the post-pandemic rebound.
China’s exports in April increased by 8.5% YoY, lower than March’s 14.8% growth, while imports fell 7.9%, emphasizing growth concerns following disappointing manufacturing and services activity readings from the previous week. China’s 10-year government bond yield fell to its lowest level since November 2020 as traders anticipated further monetary easing. China’s official manufacturing Purchasing Managers’ Index also unexpectedly contracted in April for the first time since December 2020.
Market indices
|
| Local Currency | Sterling Pound | ||
| Index | Last week | YTD | Last week | YTD |
| UK |
|
|
|
|
| FTSE 100 | -0.12 | 2.87 | -0.12 | 2.87 |
| US |
|
|
|
|
| S&P 500 | -0.15 | 11.97 | 1.13 | 7.66 |
| Europe |
|
|
|
|
| Euro stoxx 50 | -0.47 | 15.74 | -0.59 | 13.3 |
| Asia |
|
|
|
|
| Nikkei 225 | 1.51 | 12.7 | 2.49 | 5.02 |
| Hang Seng | -3.19 | 3.87 | -1.89 | -0.56 |
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