United States
The performance of major benchmarks exhibited significant variability, influenced by concerns about the banking industry and recession, which had a greater impact on value stocks and small-caps. In contrast, large-cap growth stocks benefited from falling interest rates. Financials continued to underperform for the third consecutive week. The small real estate sector was impacted by concerns about the effects of the regional banking system stresses on the commercial real estate market, where regional banks are the primary lenders.
Despite the banking turmoil, the economic data for the week suggests that the economy still had significant momentum. The weekly jobless claims remained close to their lowest levels in five decades. The S&P Global Composite Index, which measures current services and manufacturing activity, experienced a significant increase from 50.1 to 53.3, indicating private sector growth at the fastest pace since last May. According to the index, new orders also rose for the first time since September. S&P Global’s chief economist noted that the data indicated annualised GDP growth of nearly 2%, painting a more positive picture of economic resilience than in previous months.
The Commerce Department also released data on core capital goods orders, excluding aircraft and defence orders and serving as a crucial indicator of business investment. The orders increased by 0.2% in February, exceeding a Bloomberg survey estimate for a decline of the same magnitude.
The upside surprises in the data appeared to increase the yield on the benchmark 10-year U.S. Treasury note from a six-month intraday low on Friday morning, although the yield finished the week slightly lower. Tax-exempt municipal bonds remained relatively unchanged throughout the week due to volatility in the Treasury market, which reduced trading volumes.
Europe
Despite weakness in bank stocks, shares in Europe made gains. The pan-European STOXX Europe 600 Index increased by 0.87% in local currency terms. Major stock indexes in Italy, France, Germany, and the UK also saw advances, with Italy’s FTSE MIB climbing by 1.56%, France’s CAC 40 Index gaining 1.30%, Germany’s DAX advancing by 1.28%, and the UK’s FTSE 100 Index adding 0.96%.
The STOXX Europe 600 Index saw a resumption of the sharp decline in bank stocks towards the end of the week due to renewed concerns about the financial sector’s health. This slide negated earlier gains following the news that UBS Group had agreed to purchase Credit Suisse in a deal facilitated by Swiss authorities. Although no specific headlines triggered the drop, traders reported that the market focus seemed to have shifted towards concerns about banks with exposure to commercial real estate.
The Bank of England (BoE) increased interest rates to 4.25% from 4.00%, marking the 11th consecutive hike. Minutes from the meeting revealed that before the vote, the Financial Policy Committee informed policymakers that the “UK banking system maintains robust capital and strong liquidity positions” and that “the UK banking system remains resilient.” Financial markets anticipate further rate increases as inflation shows no signs of easing. Consumer prices rose to 10.4% in February year-over-year, exceeding consensus expectations.
The latest macroeconomic data indicates a resilient UK economy, with a purchasing managers’ survey suggesting a potential return to growth in Q1. S&P Global’s Composite Purchasing Managers’ Index (PMI), which measures activity in manufacturing and services, recorded an expansion in business activity for the second consecutive month in March. Furthermore, retail sales volumes increased by 1.2% in February, representing the largest monthly gain since October.
In March, the eurozone’s business activity expanded faster than anticipated, propelled by robust growth in the services sector. S&P Global’s preliminary reading of the eurozone composite PMI reached a 10-month high of 54.1 in March, up from the previous month’s 52. This outcome was significantly above the 50 level, distinguishing growth from contraction, for the third month running, and surpassed economists’ consensus projection of 51.9 in a FactSet survey. Nevertheless, manufacturing activity dropped across many countries, especially Germany, primarily due to increased supplier delivery times.
Japan
Japan’s stock markets had a mixed performance for the week, with the Nikkei 225 Index up by 0.19% while the broader TOPIX declined by 0.21%. Investor concerns about the global banking sector somewhat eased after the Bank of Japan and five other major central banks announced coordinated action to ease strains in global funding markets. As expected, the U.S. Federal Reserve raised interest rates, but its indication of a possible pause in hikes during the banking crises strengthened the yen, which finished the week at around JPY 130.6 against the U.S. dollar.
In economic data, the core consumer price index in Japan rose by 3.1% YoY in February, down from January’s over four-decade high of 4.2%, due mainly to government electricity subsidies. To support low-income households and respond to the rise in energy prices, the government endorsed plans to add over JPY 2 trillion to existing inflation relief measures.
In terms of sectors, Japan’s services sector saw solid improvement due to government support and an uptick in Chinese tourism, while the manufacturing sector contracted, with both output and new orders falling. The Bank of Japan noted in its March meeting that while recent price rises call for a possible revision of its accommodative monetary policy, it needs to carefully consider and discuss the effects on financial markets and a wide range of economic entities before any policy change.
China
Chinese equities posted gains on the back of expectations that the country’s central bank will continue its accommodative stance amid the ongoing global banking turmoil. The Shanghai Stock Exchange Index rose by 0.46%, while the blue-chip CSI 300 increased by 1.72% in local currency. Meanwhile, the Hang Seng Index in Hong Kong climbed by 2.03%.
For the seventh consecutive month, the People’s Bank of China (PBOC) left its one-year and five-year loan prime rates (LPR) at 3.65% and 4.3%, respectively. The LPRs are based on interest rates offered by 18 banks to their best customers and are published monthly by the PBOC. The move was widely anticipated after the central bank left its medium-term lending facility (MLF) unchanged the previous week and announced an unexpected 25-basis-point cut in the reserve requirement ratio for most banks, interpreted as a measure to support the economy.
China’s fiscal revenues fell by 1.2% in the first two months of 2023 from a year earlier, while expenditures increased by 7%. Revenue from state land sales, a significant source of direct funds for local governments, dropped by 29%, reflecting the persisting weakness in the housing market, despite the government’s efforts to support the sector.
Although China’s economic indicators have improved in recent months, with consumption and infrastructure investment rebounding from pandemic lockdowns, many analysts predict that policymakers will maintain an accommodative stance due to the global growth outlook being strained by turmoil in the banking industry.
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