by Investment Solutions Group, MFS Investment Management
A review of the week’s top global economic and capital markets news.
For the week ending 18 August 2023
As of noon on Friday, global equities were undermined by surging US bond yields — especially real, inflation-adjusted yields — along with uncertainty surrounding China’s property and shadow banking sectors. The yield on the US 10-year Treasury note rose toward a 15-year high, hitting 4.33% on Thursday before easing to around 4.23% midday Friday. The price of a barrel of West Texas Intermediate crude oil fell more than $3 from a week ago to $79.90 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 18.0 from 15.5.
Resilient growth, higher-for-longer Fed send US yields higher
Unexpectedly resilient US economic growth and fears that the US Federal Reserve will need to keep rates higher for longer helped push the yield on the US 10-year Treasury note to retest October levels just below 4.35%, and the highest yields since 2007. The economy has so far shrugged off sharply higher rates as July retail sales and industrial production both handily exceeded economists’ expectations this week. Sales rose 0.7% while industrial production rose 1% after contracting 0.8% in June. The latest reading of the Atlanta Fed’s GDPNow measure estimates the economy will grow at a nearly 5.8% annual rate in Q3, one of the fastest clips in decades, not including the pandemic rebound. A Bloomberg survey of economists, published Friday, forecasts a more modest 1.8% Q3 growth rate, but one dramatically higher than July’s 0.5% consensus view.
Slowing growth pressures Chinese shadow banks
China’s economy continues to slow, data released this week showed. The government reported on Tuesday that retail sales, industrial production and fixed asset investment all fell well short of expectations in July. These data, combined with last week’s subzero inflation reading prompted the People’s Bank of China to cut the rate on its medium-term lending facility to 2.5% from 2.65%. China also announced that it would no longer publish youth unemployment figures. The country reported a 21.3% youth unemployment rate in June. Slowing economic growth is increasing pressure on property developers and nonbank lenders, many of which are heavily exposed to real estate. One large shadow bank, Zhongzhi, has stopped making interest payments on wealth management products to retail investors, further souring fragile market sentiment. Last week, one of the country’s largest home builders missed bond coupon payments. On Friday, property developer Evergrande filed for bankruptcy in New York as part of a debt restructuring plan. As a result of the building pressure on developers, the PBOC extended a special loan program for the sector on Friday.
FOMC minutes hawkish
Minutes of the July meeting of the Federal Open Market Committee show that most Fed policymakers continue to see significant upside risks to inflation and that those risks could necessitate further tightening. But despite the economy’s resilience, some FOMC members observe downside risks to growth. Officials saw high uncertainty around the lags inherent in monetary policy. On the dovish side, some worried that tight financial conditions could cause a sharper slowdown than anticipated. The next rate decision will depend on the totality of economic and inflation data, the minutes show. Markets will look to the annual gathering of central bankers in Jackson Hole, Wyoming late next week for further policy guidance.
The Conference Board’s Index of Leading Indicators fell 0.4% in July, the sixteenth straight monthly fall.
Credit rating agencies Moody’s and Fitch this week issued downgrades and warnings for a number of large and medium-sized US banks amid higher funding costs, commercial real estate woes and tighter regulations.
With Argentina experiencing triple-digit inflation, the country’s central bank devalued the peso 18% and raised interest rates 21% to 118% after antiestablishment candidate Javier Milei won the country’s presidential primary election on Sunday. He advocates the dollarization of the country’s economy and opposes continuing IMF lending programs.
US homebuilder sentiment slumped to 50 in August from 56 in July amid sharply higher mortgage rates. On Thursday, Freddie Mac reported that the average 30-year mortgage rate hit 7.09%, a 20-year high.
Russia’s central bank hiked rates to 12% from 8.5% to defend the tumbling ruble.
The New York Times reported this week that the US is transitioning away from fossil fuels at a faster pace than expected.
A study from the Federal Reserve Bank of San Francisco found that US households are on pace to exhaust their pandemic-driven excess savings this quarter. J.P. Morgan estimates that the savings won’t run out until May.
Norway’s central bank hiked rates by 0.25% to 4% and said it would likely raise rates again in September. Core inflation in Norway is running at 6.4%.
Surging wage growth in the United Kingdom continued to stoke inflation fears as average weekly earnings rose at an 8.2% annual rate in the second quarter, much higher than forecast, while core CPI came in modestly firmer than expected in July, at 6.8%. Swaps markets anticipate 50 basis points of additional rate hikes over the next two BOE meetings.
US President Joe Biden moved forward Monday with a plan to cancel $39 billion in student loan debt for more than 800,000 borrowers after a Michigan federal judge dismissed a lawsuit aimed at blocking it.
Moody’s reaffirmed India’s Baa3 credit rating, with a stable outlook. Baa3 is the lowest rung on the investment-grade ladder.
Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your investment professional, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.
The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.
The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.
Past performance is no guarantee of future results.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
This content is directed at investment professionals only.