Global Markets Weekly Update: March 01, 2024 (2024)

Stocks end mostly higher following favorable inflation news

Most of the major benchmarks ended the week higher, with the Nasdaq Composite joining the S&P 500 Index in record territory for the first time in over two years. The month also closed a strong February, with the S&P 500 marking its strongest beginning two months of the year since 2019, according toThe Wall Street Journal. The week’s gains were also broad-based, with an equal-weighted version of the S&P 500 Index modestly outperforming its more familiar market capitalization version. For the year-to-date period, however, the capitalization-weighted version of the index remained ahead by 409 basis points (4.09 percentage points), reflecting the outperformance of large, technology-oriented growth stocks.

The defining event of the week in terms of market sentiment appeared to be Thursday’s release of the Commerce Department’s core (less food and energy) personal consumption expenditures (PCE) price index. The index rose 2.8% for the 12 months ended in January, in line with expectations, but the report appeared to calm concerns over the Labor Department’s earlier release of its consumer price index, which showed core prices rising by 3.9%, above expectations of around 3.7%. The core PCE price index is generally considered the Federal Reserve’s preferred gauge of overall inflation pressures.

While stocks jumped on the inflation news, it appeared to have a limited impact on the tone of Fed communications. T.RowePrice traders noted that 12 Fed policymakers were scheduled to deliver speeches over the week, and all seemed to echo the recent narrative that they were in no rush to cut interest rates. Indeed, according to the CME FedWatch Tool, futures markets ended the week pricing in only a slightly higher chance of a rate cut over the next two policy meetings—24.6% versus 23.4% the week before.

Manufacturing sector surrenders recent momentum

The rest of the week’s heavy economic calendar arguably surprised modestly on the downside. Most notably, and Institute for Supply Management’s (ISM’s) gauge of manufacturing activity came in substantially below expectations, falling from an 18-month high of 49.1 in January back to 47.8 in February. (Readings above 50 indicate expansion.) Durable goods offered a more reassuring picture, however, rising 0.1% in the month when the volatile defense and aircraft sectors are excluded. An upside surprise came in February personal incomes, which jumped 1.0% in February, the biggest gain in a year.

The reassuring PCE data and downside ISM report helped push the yield on the benchmark 10-year Treasury note to its lowest intraday level since February 13 by the end of the week. (Bond prices and yields move in opposite directions.) U.S. Treasuries also generated positive returns as yields decreased amid a healthily digested Treasury supply concession. Intermediate- and long-term rates fell more than short-term rates. Tax-exempt municipals received an additional boost from light issuance.

Corporate bond issuance sets new record in February

Conversely, in the investment-grade corporate bond market, spreads widened throughout the week as the sector struggled with heavy supply. February saw over USD 150 billion in new issuance, a record-breaking amount. Our traders noted that issuance was oversubscribed on Monday, however, despite the backup in spreads. Our traders reported subdued trading activity in the high yield market early in the week, although the core PCE price data release helped credit spreads tighten.

U.S. Stocks

^{This chart is for illustrative purposes only and does not represent the performance of any specific security.Past performance cannot guarantee future results.}

^{Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell®is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T.RowePrice’s presentation thereof.}

In local currency terms, the pan-European STOXX Europe 600 Index ended little changed but remained near record highs. Sticky inflation data prompted investors to reassess the magnitude and timing of interest rate cuts by the European Central Bank in 2024. Major stock indexes were mixed. Germany’s DAX rose 1.81%, while Italy’s FTSE MIB advanced 0.71%. France’s CAC 40 Index lost 0.41%, and the UK’s FTSE 100 Index gave back 0.31%. European government bond yields ended broadly higher.

Eurozone inflation declines less than expected; economic sentiment worsens

Both headline and core inflation slowed less than expected in February. Annual consumer price growth in the eurozone slowed marginally to 2.6%. Core inflation decelerated to 3.1%, which was above the consensus estimate of 2.9%.

The European Commission’s economic sentiment indicator declined unexpectedly to 95.4 in February. In the industrial sector, confidence remained broadly stable amid weak production expectations and a possible bottoming out of a drop in new orders. But confidence worsened in the services sector due to lower demand. Selling price expectations eased in both goods and services.

German inflation slows again, retail sales weaken, unemployment remains elevated

In Germany, annual consumer price growth continued to decelerate in February, slowing to 2.7%. However, core inflation and prices of services rose. Private consumption remained weak, with retail sales falling 0.4% sequentially in January, after dropping 0.5% in December. The seasonally adjusted unemployment rate hovered at 5.9% in February—its highest level in more than two years.

Pickup in UK housing market continues

The Nationwide Building Society said its house price index rose 0.7% sequentially in February and 1.2% year over year, marking the first annualized increase since January 2023. The Bank of England said mortgage approvals rose to 55,227—the highest level since October 2022, when the budget plans of former Prime Minister Liz Truss sparked a crisis in the bond market.

Japanese stocks had another strong week, with the Nikkei 225 gaining around 2.1%, hovering around a new record high and taking February’s gains to about 10.0%. The TOPIX also rose, finishing the week about 1.8% higher.

The monetary policy backdrop remained highly accommodative, with Bank of Japan Governor Kazuo Ueda stressing that it was too early to conclude that the central bank had met its 2% inflation target in a sustained manner and continuing to signal that prices rising in tandem with wages was a precondition for any shift in its stance. Consumer inflation, as measured by the core consumer price index, slowed in January to 2.0% year on year from the previous month’s 2.3%.

Historic yen weakness continues to provide favorable backdrop for share price gains

Although the yen was broadly unchanged for the week (starting and ending at around JPY150.5 against the U.S. dollar), historic weakness in the Japanese currency provided a favorable backdrop for share price gains, particularly in the case of Japan’s exporters, due to the revenues they derive from overseas. The yield on the 10-year Japanese government bond moved little during the period, settling at approximately 0.71%.

Manufacturing deteriorates while services sector remains key driver of economy

On the economic data front, the latest purchasing managers’ index (PMI) data showed that the deterioration in manufacturing conditions worsened over the month of February, amid weakness in both domestic and foreign (notably Chinese) demand. This was in contrast with a stronger services sector, which is a bigger driver of Japan’s economy.

Stocks in China rose on hopes that Beijing may boost monetary easing measures to stimulate growth. The Shanghai Composite Index gained 0.74%, while the blue chip CSI 300 added 1.38%. In Hong Kong, the benchmark Hang Seng Index gave up 0.82%, according to FactSet.

Manufacturing activity remains in contraction

February’s economic data continued to paint a mixed outlook for China. The official manufacturing purchasing managers index fell to 49.1 in February from 49.2 in January—remaining below the 50-mark threshold separating growth from contraction—due to declines in production and exports. Seasonal factors also contributed to weakness as factories were closed for the Lunar New Year (LNY) holiday from February 10 to February 19. The nonmanufacturing PMI rose to a better-than-expected 51.4 from 50.7 in January. On the other hand, the private Caixin/S&P Global survey of manufacturing activity edged up to 50.9 in February, beating expectations and marking its fourth month of expansion.

Property sales extend declines

The value of new home sales by the country’s top 100 developers slumped 60% in February from the prior-year period, accelerating from January’s 34.2% drop, according to the China Real Estate Information Corp. Sales fell 20.9% from the previous month, a drop that analysts attributed to a sales drought during the LNY holiday.

The latest results showed no letup in China’s property crisis despite Beijing’s efforts to salvage the troubled sector, which increased pressures on policymakers to ramp up support. On Friday, Chinese banks approved more than RMB 200 billion of development loans to be issued under the government’s whitelist mechanism, which aims to inject liquidity into the real estate market to fund unfinished residential projects.

Hungary

Central bank lowers interest rates “at a temporarily faster pace”

On Tuesday, the National Bank of Hungary (NBH) held its regularly scheduled meeting and reduced its main policy rate, the base rate, from 10.00% to 9.00%. The NBH also reduced the overnight collateralized lending rate—the upper limit of an interest rate “corridor” for the base rate—from 11.00% to 10.00%. In addition, the central bank lowered the overnight deposit rate, which is the lower limit of that corridor, from 9.00% to 8.00%. These 100-basis-point rate cuts are larger than the central bank’s 75-basis-point rate reductions at the end of January.

According to the central bank’s post-meeting statement, policymakers characterized disinflation as being “strong and general in the Hungarian economy,” noting that the domestic inflation rate in January was among the lowest in the Central Eastern European region. However, they expect “two opposing factors” to affect inflation in the months ahead: “The impact of the increase in excise duties on fuel will raise headline inflation, while underlying inflation will continue to moderate.”

Nevertheless, policymakers justified their decision to lower the base rate “at a temporarily faster pace” by repeating last month’s observations that disinflation has been “stronger than expected” and that “external and domestic demand pressures remain persistently low.” Also, central bank officials again noted that the improving current account balance has improved the country’s risk perception “despite a volatile global sentiment.”

Brazil

Disinflation trend on track; rate cuts likely to continue

On Tuesday, the Brazilian government issued its mid-month inflation report for February, which showed that inflation was a little lower than expected. According to T.RowePrice sovereign analyst Richard Hall, the underlying details of the report were mixed, as there was some reduction in industrial prices, but services inflation extended an uptick in December and January.

Still, Hall believes that the disinflation trend remains on track, though the pace of disinflation is slower than he expected a few months ago due to the increase in services inflation. As a result, he believes that the central bank is prepared to continue reducing its key interest rate, the Selic rate, over the next few months—though the size of rate cuts could depend on the trajectory of inflation.