United States
Throughout the week, there were indications that the Federal Reserve was likely to raise interest rates in the future, which had a negative impact on market sentiment. In his testimony before Congress on Wednesday and Thursday, Fed Chair Jerome Powell expressed the belief that raising interest rates by the end of the year would be appropriate, a sentiment shared by most policymakers. The Fed’s Summary of Economic Predictions further revealed expectations of two more quarter-point rate hikes in the coming year, although futures markets were sceptical about this outcome. Additionally, the news of rate hikes by the Bank of England and Norway’s central bank, Norges Bank, added to concerns about rising interest rates.
Economic data released during the week deepened worries that the tightening monetary policy could lead the U.S. into a recession. S&P Global reported on Friday that U.S. manufacturing activity had declined to its lowest level since December, falling below consensus estimates. The report also highlighted that suppliers were reducing prices at the fastest pace since the height of the pandemic lockdown in May 2020, likely in response to weak demand. While Fed Chair Powell assured Congress that the labour market remained strong, weekly jobless claims reached 264,000, matching the previous week’s revised figure, marking the highest level since October 2021. However, the housing sector showed unexpected resilience, with housing starts reaching their highest level in over a year and exceeding expectations.
Longer-term U.S. Treasury yields remained relatively stable, trading within a narrow range throughout the week. Municipal bonds performed well, benefiting from robust demand for higher-yielding new issuances. Additionally, sales of recently acquired assets from distressed banks by the Federal Deposit Insurance Corporation (FDIC) received strong bids, contributing to the positive performance of the municipal bond market.
Europe
Concerns about a potential recession in Britain and the eurozone, fuelled by the anticipation of further interest rate hikes, led to a 2.93% decline in the pan-European STOXX Europe 600 Index. The situation was exacerbated by China’s disappointing economic recovery and hawkish remarks from U.S. Federal Reserve Chair Jerome Powell. Major stock indexes faced difficulties, with Germany’s DAX dropping 3.23%, France’s CAC 40 Index sliding 3.05%, Italy’s FTSE MIB losing 2.34%, and the UK’s FTSE 100 Index declining 2.37%.
Recession fears prompted a decrease in European government bond yields. Purchasing manager surveys revealed a significant slowdown in private sector business activity, impacting 10-year German bond yields. French and Swiss yields also experienced declines. In the UK, the economic outlook darkened as the Bank of England (BoE) accelerated the pace of interest rate increases, weakening the 10-year government bond yield.
Unexpectedly, the BoE raised its key interest rate by half a percentage point to 5.0%, the highest level since 2008. The Monetary Policy Committee (MPC) voted 7-2 to intensify policy tightening following stronger-than-expected inflation data. The MPC stated that recent data indicated a persistent inflationary trend. Annual consumer price growth remained unchanged at 8.7% in May for the fourth consecutive month, while core inflation reached a 31-year high of 7.1%.
Norway’s central bank raised its key interest rate by 0.5 percentage points to 3.75%, the highest level since 2008, and hinted at another hike in August to curb inflation that is significantly above the target. The Swiss National Bank increased its benchmark interest rate by a quarter percentage point to 1.75%, marking the fifth consecutive increase, and did not rule out the possibility of further rate hikes.
Although Eurozone business output experienced a sixth consecutive month of growth in June, it nearly stagnated, indicating a potential weakening in the economy following the earlier recovery this year. According to purchasing managers’ survey data from S&P Global, the HCOB Flash Eurozone Composite Purchasing Managers’ Output Index fell to a five-month low of 50.3 in June from 52.8 in May, with a level above 50 denoting expansions.
In May, German producer prices recorded their slowest pace of increase since July 2021, suggesting a potential easing of inflation. Annual producer prices rose by 1.0%, down from 4.1% in April. Additionally, the Ifo Institute predicted a 0.4% contraction in the German economy for 2023, surpassing the 0.1% forecast made in March.
Japan
Japan’s stock markets pulled back from their 33-year highs, with the Nikkei 225 Index declining 2.7% and the broader TOPIX Index finishing the week 1.6% lower. Some of the declines were attributed to profit-taking after the markets’ strong performance year-to-date. The release of Japan’s robust core consumer inflation data for May dampened sentiment and sparked speculation that the Bank of Japan (BoJ) might revise its inflation forecasts upward in July. However, BoJ board member Seiji Adachi’s comments seemed to rule out any immediate adjustments to the central bank’s yield curve control policy at the upcoming meeting, although the BoJ has acknowledged the possibility of surprise measures.
The 10-year Japanese government bond yield declined to 0.36% from 0.41% in the previous week, as domestic yields faced downward pressure due to the BoJ’s commitment to maintaining ultra-loose monetary policy. This stance diverged from the tightening stance of other major central banks, which are considering further rate increases in the year’s second half.
The yen weakened against the U.S. dollar, reaching around JPY 143.1 compared to JPY 141.8 previously. This decline approached levels that prompted intervention by Japanese policymakers in the foreign exchange market late last year to halt the yen’s depreciation. Finance Minister Shunichi Suzuki expressed close monitoring of foreign exchange rates and emphasized the undesirability of sharp currency fluctuations. While market forces and fundamental factors influence USD-JPY levels, Suzuki emphasized the importance of stable movement.
China
Following a holiday-shortened week, Chinese stocks experienced a retreat as investor confidence dwindled due to the absence of stimulus measures amid a sluggish post-pandemic recovery. The Shanghai Stock Exchange Index declined by 2.3%, while the blue-chip CSI 300 dropped by 2.51%. In Hong Kong, the benchmark Hang Seng Index recorded its largest drop in three months, falling by 5.74%. Mainland China’s financial markets were closed Thursday through Friday for the Dragon Boat Festival holiday, while the Hong Kong Exchange was closed Thursday and resumed trading on Friday.
No significant indicators were released in China during the week. However, mounting evidence pointing to a loss of momentum in the country’s recovery raised fresh concerns about the economic outlook. Lacklustre results in recent weeks have prompted economists at several major banks to revise downward their 2023 growth forecasts for China. The country is grappling with declining export demand, a prolonged slump in the housing market, and weak business and consumer confidence.
Chinese banks reduced their one- and five-year loan prime rates by 10 basis points, in line with expectations. This marks the first reduction since August 2022, following the People’s Bank of China’s (PBOC) cut in last week’s medium-term lending facility rate. According to Bloomberg, while the rate decrease aligns with the PBOC’s actions, some analysts had anticipated a larger reduction of 15 basis points in the five-year rate.
Market indices
|
Index |
Weekly Index |
Year to Date |
||
|
Currency |
Local |
Sterling Pound |
Local |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
-2.33% |
-2.33% |
2.20% |
2.20% |
|
US |
|
|
|
|
|
S&P 500 Index |
-0.59% |
-1.38% |
13.91% |
7.81% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-2.37% |
-2.76% |
13.04% |
9.09% |
|
Asia |
|
|
|
|
|
Hang Seng Index |
-5.00% |
-5.61% |
-0.67% |
-6.31% |
|
MSCI World |
-1.22% |
-1.75% |
12.37% |
6.35% |
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