Global Markets Weekly Update

U.S.

Large-cap indexes move back to record highs

The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite climbed to record highs during the week, with the Dow crossing the 40,000 threshold for the first time. As inflation and interest rate worries appeared to dissipate, growth stocks outperformed, perhaps due in part to the lower implied discount placed on future earnings. 

Inflation breaks streak of upside surprises

The major factor supporting sentiment appeared to be Wednesday’s release of the Labor Department’s April consumer price index (CPI), which came in at or modestly below expectations, in contrast to hotter-than-expected prints over the preceding three months. Headline prices rose 0.3% in April, a tick below expectations, while core (less food and energy) prices rose 0.3%, as expected. Inflation remained concentrated in services prices, especially transportation services costs, which rose 0.9% over the month and 11.2% over the past year.

Thursday’s retail sales figure also appeared to impress investors—if through the lens of bad news for the economy being treated as good news for stocks and inflation. The Commerce Department reported that retail sales were flat in April versus consensus estimates of a 0.4% gain, while downwardly revising its estimate of March sales lower, from +0.7% to +0.6%. The data included some evidence that consumers were pulling back on discretionary spending, with sales at non-store (mostly online) retailers falling 1.2%, while sales at restaurants and bars continued to moderate—and even fell slightly when taking account of higher prices (retail sales data are not adjusted for inflation).

Long-term U.S. Treasury yields fall on growth and inflation news

The downside inflation and growth surprises helped drive the yield on the benchmark 10-year U.S. Treasury note to its lowest level in over a month at midweek. (Bond prices and yields move in opposite directions.) The tax-exempt municipal bond market absorbed another heavy week of new issuance, with the new deals generally seeing strong demand. According to our traders, this busy primary calendar, coupled with uncertainty ahead of midweek inflation data releases, appeared to limit activity in the secondary market.

According to our traders, spreads initially widened in the investment-grade bond market before tightening in the latter half of the week. Issuance was front-end heavy with few issues oversubscribed. High yield bonds also benefited from the rate moves, and our traders noted that trade volumes picked up following the encouraging inflation data. Below investment-grade funds reported positive flows.

Our traders reported that the leveraged loan market was mostly unchanged as the market digested the slightly softer-than-anticipated CPI print and weaker-than-expected retail sales report. They noted that most primary market deals were refinancing- or repricing-based transactions. 

Europe

In local currency terms, the pan-European STOXX Europe 600 Index rose 0.42% but slipped from the record high hit during the week. Cautious comments from European Central Bank (ECB) members appeared to cool optimism about the extent to which monetary policy might ease this year. Major stock indexes were mixed. Germany’s DAX fell 0.36%, while France’s CAC 40 Index declined 0.63%. Italy’s FTSE MIB advanced 2.14%. In the UK, the FTSE 100 Index finished modestly lower.

UK pay growth still strong, but Wieladek says looser labor market means June rate cut possible

The annual rate of pay growth, excluding bonuses, was unchanged at 6% in the three months through March, which was slightly higher than forecast. In the private sector, regular pay growth came in at 5.9%, slightly less than expected by the Bank of England, which monitors the measure. The labor market, however, appeared to slacken. The main unemployment rate rose to 4.3%, while job openings declined for a 22nd consecutive month. 

T. Rowe Price European Economist Tomasz Wieladek believes that, overall, the data tentatively support a reduction in interest rates in June, as a transition to a looser labor market appears now to be underway. However, he cautions that policymakers will need to digest a few more data releases before deciding whether to ease rates.

ECB policymakers advocate caution on rate path

ECB policymakers Francois Villeroy de Galhau, Madis Muller, and Martins Kazaks indicated that a rate cut is likely in June but that the path thereafter is uncertain. Executive Board member Isabel Schnabel told the Nikkei newspaper that the current data did not justify another reduction in July, in part because the disinflation process appears to have slowed significantly. Belgian central bank Governor Pierre Wunsch told the Handelsblatt newspaper “the first half a percentage point of interest rate cuts is close to a no brainer” but slower policy easing by the Federal Reserve could delay further moves. He stressed that he was not backing a second rate cut in July. 

Eurozone industrial output rises for second month

Eurozone industrial production rose for a second month running in March, increasing 0.6% sequentially. However, the stronger-than-expected reading was driven by a jump in Ireland’s output, a data point that historically has been quite volatile.

Japan

Japanese equities finished the week higher, with the Nikkei 225 Index gaining 1.5% and the broader TOPIX Index up 0.6%. This was despite a backdrop of economic weakness and a range-bound yen on expectations of U.S. interest rate cuts in contrast to tentative hawkishness on the part of the Bank of Japan (BoJ), the latter also sending Japanese government bond (JGB) yields modestly higher.

Economic growth contracts more than expected

Investors appeared to shrug off weakness in Japan’s economy, as signaled by a weaker-than-expected first-quarter gross domestic product print—a 2.0% annualized contraction on the previous three-month period—which was driven in part by the negative impact on growth of the earthquake that hit the Noto peninsula in January, as well as the suspension of some auto production activity. Other areas of weakness included capital expenditure and external demand, while, conversely, strength in public demand and private inventories lent support.

Yen range-bound amid expectations of reduced interest rate differential

The yen finished the week broadly unchanged in the high-JPY 155 range against the USD. This was within the context of expectations that the U.S. Federal Reserve could cut interest rates twice this year, while the BoJ is widely anticipated to embark on further monetary policy normalization—thereby leading to a reduced interest rate differential between the two economies. Such an eventuality could lend support to the yen, which continues to languish at historic lows despite investors converging around the view that Japanese authorities recently intervened twice in the foreign exchange markets to prop up the currency. 

BoJ reduces bond purchases, exerting modest upward pressure on yields

The yield on the 10-year JGB rose to 0.94%, from 0.91% at the end of the previous week. Upward pressure on yields was at least temporarily exerted by hawkish signals from the BoJ, as it reduced the amount of JGBs it offered to buy in a regular purchase operation. However, a reduction in purchases had been widely anticipated, which meant that the rise in yields was only modest.

China

Chinese equities were little changed after the central government unveiled on Friday a historic rescue package to stabilize the country’s ailing property sector. The Shanghai Composite Index was broadly flat, while the blue chip CSI 300 added 0.32%. In Hong Kong, the benchmark Hang Seng Index gained 3.11%, according to FactSet. 

The People’s Bank of China (PBOC) lowered the minimum down payment ratio by 5% to 15% for first-time buyers and to 25% for second home purchases in an attempt to ignite demand. The PBOC also said that it would scrap the nationwide floor level of mortgage rates and allow cities to make their own decisions on what mortgage rates to charge. Under a so-called re-lending program, the central bank said it would extend RMB 300 billion in low-cost funds to a select group of state-owned banks to lend to local state-owned entities for the purchase of unsold homes. 

The unprecedented support package came as data showed no sign of turnaround in China’s yearslong housing crisis. New home prices in China fell by 0.6% month on month in April, according to the statistics bureau, marking the 10th straight monthly decline and the steepest drop since November 2014. Real estate investment fell a higher-than-expected 9.8% in the January-to-April period from a year earlier, following a 9.5% drop in the first quarter.  

Inflation data showed that deflationary pressure continued to weigh on China’s economy. China’s consumer price index rose 0.3% in April from a year ago, accelerating from March’s 0.1% increase and marking the third consecutive positive reading. However, the producer price index fell 2.5% from a year ago compared with a 2.8% drop in March.  

Other data also showed an uneven recovery for China’s economy. Industrial production rose an above-forecast 6.7% in April from a year earlier, accelerating from March’s 4.5% increase. However, fixed-asset investment and retail sales both increased less than expected, underscoring anemic domestic demand. The urban unemployment rate fell to 5.0% from 5.2% in March. 

Other Key Markets

Hungary

Broader inflation dynamics could enable more central bank rate cuts

Late in the previous week, the Hungarian government reported that the year-over-year inflation rate in April was measured at 3.7%, which was in line with expectations. Also, core inflation momentum in April slowed to 0.4% month over month versus 0.8% in March. 

According to T. Rowe Price credit analyst Ivan Morozov, overall core inflation momentum seems to have stabilized around 4% (annualized rate based on monthly inflation readings) and is being driven by services prices. He believes that current fuel price trends suggest that inflation readings for May could be below the central bank’s forecasts and that broader inflation dynamics could enable the central bank to continue cutting interest rates in the months ahead. 

Argentina

Easing inflation allows central bank rate cut, though real rates remain deeply negative 

Early in the week, the Argentine government reported that inflation in April was measured at a month-over-month rate of 8.8% and a year-over-year rate of 289.4%. While the data were in line with expectations, T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that the month-over-month rate is the first one below 10% since President Javier Milei was inaugurated in December 2023. Also, this week, the central bank responded to the continued easing of inflation with a 10-percentage-point reduction in its key interest rate from 50% to 40%. Nevertheless, “real” (inflation-adjusted) interest rates remain deep in negative territory.

Gifford believes that the current monetary strategy of policymakers is to inflate away peso-denominated liabilities on the central bank’s balance sheet while containing inflation expectations by anchoring the currency via foreign exchange (FX) controls. Whether this is sustainable is debatable, though Milei recently expressed his belief in public that the country is “very close” to lifting FX controls.