MARKET ANALYSIS | 13/08/2021
U.S. equities gained ground with the market shrugging off the renewed spread of the coronavirus and its possible implications for future economic activity. In the S&P 500 Index, value stocks outperformed their growth counterparts. Most sectors advanced, led by materials. Energy stocks slipped on concerns that oil producers’ discipline on the supply side and worries that the upsurge in coronavirus infections could weigh on global demand. Information technology stocks also lagged, driven by the pullback in the semiconductors and semiconductor equipment industry, which came under pressure from concerns about potential weakness in memory prices.
Consumer and producer prices rise
In a somewhat light week for U.S. economic data releases, all eyes were on the latest inflation numbers from the Bureau of Labor Statistics. The consumer price index (CPI) increased by 0.5% sequentially in July, a deceleration from the 0.9% registered in June and the smallest month-over-month uptick since March. Core consumer price inflation, which excludes volatile food and energy costs, came in at 0.3%. This slowdown in the inflation rate appeared to align with the prevailing narrative that increases in consumer prices should prove transitory as the economy works through pandemic-related bottlenecks. However, the producer price index (PPI) increased by 1.0% sequentially for a second consecutive month. This uptick in PPI came in higher than many economists had expected.
U.S. Senate passes infrastructure spending bill
The Senate passed a roughly USD 1 trillion bipartisan infrastructure package, including about USD 550 billion in new spending, that aims to rebuild traditional transportation infrastructure, improve access to broadband internet in rural areas, and upgrade the electric grid and water systems. Senate Democrats also approved a USD 3.5 trillion budget resolution, the starting point for a reconciliation bill that would address administration priorities such as improving access to education and increasing support for families with children. The details remain in flux, but this package is likely to include measures that would increase corporate taxes.
U.S. Treasury yields tick up before retracing the move later in the week
Treasury yields climbed through most of the week, led by increases in long-maturity yields that helped steepen the Treasury yield curve. Comments from several Federal Reserve officials supporting a sooner-than-expected tapering of the central bank’s bond purchases appeared to spur selling activity earlier in the week, according to T. Rowe Price traders. On Friday morning, however, yields largely retraced their previous moves amid the release of a highly disappointing University of Michigan consumer sentiment survey.
Our traders noted that investment-grade corporate bonds weakened at the start of the week despite heightened overnight demand focused on longer maturities. Secondary trading volumes were relatively low but increased slightly as the week progressed. The level of new issuance in this market surpassed expectations. T. Rowe Price traders reported that the high yield bond primary calendar was very active, with issuers looking to bring new deals to the market before the pre-Labor Day slowdown.
Shares in Europe advanced as investors focused on the economic recovery and shrugged off worries about surging coronavirus infections in key markets and signs of slowing growth in Asia. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.25% higher. France’s CAC 40 Index gained 1.16%, Germany’s Xetra DAX Index advanced 1.37%, and Italy’s FTSE MIB Index climbed 2.51%. The UK’s FTSE 100 Index added 1.34% on strong corporate earnings and the British pound’s decline relative to the U.S. dollar. UK stocks tend to gain when the pound falls because many companies that are part of the index are multinationals with overseas revenues.
Core eurozone bond yields ended roughly level, rising into midweek and retreating on expectations that the European Central Bank could remain dovish for longer. Peripheral eurozone bond yields followed a similar pattern but weakened slightly. UK gilt yields also ended roughly unchanged, although yields rose toward the end of the week as data showed strong economic growth in the second quarter, fueling expectations that the Bank of England (BoE) might begin to withdraw its stimulus sooner.
Coronavirus cases stabilize in EU and decline in UK
The number of coronavirus cases in the European Union (EU) and European Economic Area was stable in the week ended August 8, although the number of deaths rose, according to the European Centre for Disease Prevention and Control. The agency predicted that the number of cases would fall in the coming week and that the number of deaths would continue rising. In the UK, the Office for National Statistics said that although the percentage of people testing positive for coronavirus in England “continued to be high,” estimates suggest “an overall decreasing trend over the past two weeks.” Health Secretary Sajid Javid said the government was preparing to offer booster jabs in the fall, although the Joint Committee on Vaccination and Immunization indicated that only a relatively small number would be vaccinated.
Meanwhile, the EU’s vaccination campaign has overtaken the U.S. in terms of administering first and second doses and should surpass the UK in the coming weeks, according to the Financial Times. The introduction of health passes for those who have been fully vaccinated so that they can visit bars, restaurants, public events, and venues sparked protests in Italy and France.
UK economy rebounds strongly; eurozone industrial production falls
The UK economy expanded by 4.8% sequentially in the second quarter, driven by a rise in household consumption as lockdown rules were lifted. The quarterly rate was below the BoE’s forecast for 5%. The level of gross domestic product is 4.4% below where it stood at the end of 2019, lagging other advanced economies. UK exports to the EU strengthened in June, rising 1.2% and exceeding the pre-Brexit level of December 2020 for a second month.
Industrial production in the eurozone fell 0.3% sequentially in June, as supply bottlenecks weighed on German factory output. Revised data from the EU’s statistics office pegged the sequential contraction in eurozone industrial production in May at 1.1%, down from the previous estimate of a 1.0% drop.
Japan’s stock market registered modest gains for the week, with the Nikkei 225 up 0.56% and the broader TOPIX Index finishing 1.40% higher. The country’s deteriorating coronavirus situation kept risk appetites in check as pressure grew on the government to tighten restrictions further. Ahead of the release of second-quarter economic growth data, Bloomberg noted expectations that Japan may have avoided a contraction, citing the country’s slow vaccination drive as a key factor. Against this backdrop, the yield on the 10-year Japanese government bond ticked up to 0.02%, while the yen was broadly unchanged at JPY 110.29 against the U.S dollar.
COVID-19 cases at a record high
The number of new coronavirus cases nationwide topped 18,000—a daily record. Tokyo has seen an alarming rise in infections, leading to calls to cut foot traffic in the capital by half from the level in early July and to strengthen measures to reduce crowds. According to the latest poll by Jiji news agency, 55.2% of respondents disapproved of Prime Minister Yoshihide Suga’s handling of the coronavirus crisis and only 25.7% gave him a passing grade. Suga is said to be reluctant to impose full lockdowns, likely to be unpopular with the public, ahead of a general election that is set to be held within the next three months.
Wholesale price inflation accelerates
Japanese wholesale prices rose in July at their quickest annual rate in 13 years, mainly due to rising import costs amid surging commodity prices. The corporate goods price index, which measures the price companies charge each other for their goods and services, was up 5.6% year over year, following a 5.0% increase in June.
Suga comments on Japan’s economic policy priorities
In an excerpt from an interview with Newsweek, Prime Minister Suga outlined some of the country’s economic policy priorities. He said that deregulation is key to making a breakthrough to the next stage of growth. For Japan to be a growth leader, green and digital themes will have to go hand in hand. On the former, Japan has set a target to go carbon-neutral by 2050—Suga asserts that measures to limit global warming should not be a constraint on economic activity and can generate new investment in innovation. On the latter, the government is establishing a “digital agency” that would play a leading role in the digitization of administrative procedures. There has been a long-standing delay in digitization in Japan, and various issues have come sharply into focus after the start of the pandemic. Suga also mentioned that digitization in the private sector will be expedited.
Chinese stocks recorded modest gains despite worries that increased government oversight of the country’s technology and private education industries would spread to other sectors. For the week, the large-cap CSI 300 Index added 0.5% and the benchmark Shanghai Composite Index gained 1.7%, according to Reuters. In the bond market, the yield on the 10-year government bond rose 6 basis points to 2.90%. The renminbi currency was unchanged relative to the U.S. dollar. The official trade-weighted currency index—which measures the renminbi’s value against a basket of foreign currencies—was close to a five-year high.
On Wednesday, China released a five-year blueprint calling for increased regulation affecting key parts of the economy. The document signaled Beijing’s intention to draft new laws covering national security, technology, monopolies, and education. In the technology sector, new legislation will cover areas such as online finance, artificial intelligence, big data, and cloud computing.
On the economic front, China reported that total social financing—a broad measure of new credit in the economy—rose 10.7% year over year in July, its slowest pace since February 2020 and down from 11% in June. Analysts attributed the latest month’s decline to a decrease in shadow banking activity and government bond issuance, though the latter was seen as a temporary drop due to calendar effects. Inflation trends were broadly unchanged in July, with a 9.0% year-over-year surge in the producer price index driven by higher commodity prices and a 1.3% increase in core CPI, which excludes food and energy.
China maintains “zero tolerance” coronavirus policy
Beijing has adhered to a “zero tolerance” policy of mass testing, tracing, and lockdowns in response to the delta coronavirus strain. Although new case numbers are low (191 reported on August 9), the cities of Nanjing, Wuhan, Yangzhou, and Zhengzhou have tested more than 90 million people. Some Chinese health experts have questioned the sustainability of a zero-tolerance approach given its large economic costs, including the risk that a return to strict local lockdowns could harm consumer confidence and delay a recovery in consumer services. Last year, China added 2.38 million manufacturing jobs but lost 9.16 million jobs in services, according to the National Bureau of Statistics employment data.
OTHER KEY MARKETS
Mexican equities, as measured by the S&P/BMV IPC Index, returned about 0.7% in local currency terms. As expected, the central bank raised its key interest rate to 4.50% from 4.25%. The decision was made by a split vote, with three policymakers favoring a rate increase while two preferred no change. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement from central bank officials was neutral—as opposed to dovish or hawkish—as the language closely mirrored that of the statement issued when the central bank started raising rates on June 24, even though policymakers continue to highlight the upside risks to inflation.
On this occasion, officials decided to include updated inflation forecasts—something that they will do on a per-meeting basis going forward, rather than waiting for the quarterly monetary policy report. According to Gifford, the inflation path was revised upward relatively substantially, particularly over the next couple quarters. However, even further out, policymakers do not expect consumer prices to reach their inflation target until the first quarter of 2023, which is three quarters later than what they previously envisioned.
Stocks in Chile, as measured by the S&P IPSA Index, returned about 3.2% in local currency terms.
Early in the week, President Sebastian Piñera announced additional fiscal stimulus to support households and create employment. The package includes an extension of direct household transfers, which were due to expire next month, just weeks before the November presidential elections. According to Finance Minister Rodrigo Cerda, the cost of the package is about USD 7 billion, or 2.3% of Chile’s gross domestic product (GDP).
Gifford notes that this new stimulus effort—which comes on the heels of a larger USD 12 billion (4% of GDP) fiscal package delivered in July—should limit the legislative momentum behind a new pension withdrawal proposal, which was intended to further bolster household finances.