U.S. and International Equities
U.S. stocks ended the week higher as growth sectors led the advance. Year-to-date, growth have outperformed as some investors believe the slowing economy will cause the Federal Reserve to pivot. In addition, positive advancements surrounding artificial intelligence has helped these sectors advance, even as some investors question elevated valuations.
The markets had been struggling for direction, before this week’s 1.6% increase. The S&P 500 Index had not experienced a weekly move of 1% higher or lower during the last six weeks, the longest such streak since 2019. The latest Bank of America global fund manager survey shows that allocations to bonds are at a 14-year high, with cash levels up to 5.6% amid persistent recession concerns.
The German blue chip DAX index is near an all-time high as inflation conditions, while high, are improving. In addition, Japan’s TOPIX Index reached a new 33-year high this week. LPL Research believes that the Japanese equity market has become more attractive recently, both on its own merit and as a relative play in a slow global growth environment. The TOPIX has returned 13% year to date in yen and 9% in U.S. dollars, both ahead of the 8% gain for the S&P 500.
Fixed Income Mixed
The Bloomberg Aggregate Bond Index finished lower as bond prices declined while yields increased. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, ended the week lower.
The Treasury released its monthly TIC data on foreign transactions and holdings of U.S. securities for March, showing foreign investors purchased $35.6 billion long-term Treasuries over the month. Regionally, net buying was concentrated in the Euro-area and emerging markets, with the largest outflows emanating from China and Japan.
Energy prices finished higher this week as global economic sentiment has improved. Natural gas prices have finished higher for the second consecutive week. The major metals, gold, silver, and copper, ended the week lower. The World Gold Council reported this month that global central bank purchases of gold hit a record high in the first quarter of this year, after record annual highs in 2022 amid the present inflation landscape and concerns over a U.S. debt default.
Economic Weekly Roundup
The Japanese economy grew through the first quarter, reversing decreases seen from the last three quarters. Private consumption, which accounts for more than half the economy, drove this increase with its own gain of 0.6%. This rise in private consumption can be attributed to a boost in consumer spending following the rollback of COVID-19 restrictions.
May’s ZEW Indicator of Economic Sentiment, which serves as a leading indicator for the German economy, turned negative for the first time in five months as up to 300 experts from financial institutions and select corporations predict tougher times ahead. This negative outlook is the result of investors perceiving a rise in threats to Europe’s largest economy, the largest of these being the possibility of both the U.S. defaulting and the European Central Bank (ECB) raising interest rates further.
United Kingdom’s GDP grew by 0.1% in the first quarter of 2023. This growth was supported heavily by manufacturing and productive industries, which rose by 0.1%, reversing five consecutive quarters of decline and a sixth of no growth. Furthermore, construction output rose by 0.7%, increasing for a sixth straight quarter. However, inflation that has recently reached 10.1% in March threatens to undermine the progress towards reaching post-pandemic economic activity.
China April Industrial Production and Retail Sales Wane
Chinese industrial production for April increased by 5.6% year-over-year and retail sales rose by 18.4% during the same period, which although positive, shows there may still be obstacles to China’s post-pandemic recovery. These figures, paired with a decline in monthly imports, appear to show that the demand from Chinese consumers could be starting to fade earlier than expected.
Initial and continuing claims for the latest week came in below economists’ expectations and the prior week’s report. The labor market is expected to further loosen during the second quarter as companies respond to slowing demand triggered, in part, by the Fed’s tighter monetary policy.
In addition to a busy week of earnings reports from corporate America, the following economic data is slated for the week ahead:
- Tuesday: Building Permits (Apr), PMI Composite (May), S&P Global PMI Manufacturing and Service (May), New Home Sales (Apr)
- Wednesday: FOMC Minutes
- Thursday: Weekly Initial and Continuing Unemployment Claims, GDP (Q1), Pending Home Sales (Apr)
- Friday: Durable Orders (Apr), Core PCE Deflator (Apr), PCE Deflator (Apr), Personal Consumption Expenditures (Apr), Personal Income (Apr), Wholesale Inventories
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