Economic data delivered mixed signals and elicited a mostly muted market reaction. The 10-year Treasury note yield breached 4% for the first time since November as investors sought out government debt in anticipation of higher interest rates for longer given the generally robust economic picture. It however pulled back on Friday and ended the week at 3.96%.
This came after Atlanta Fed president Raphael Bostic said that he favoured a “slow and steady” approach and was in support of a quarter-point rate hike at the next meeting. The Treasury yield pullback lent support to equities, with stocks rallying on Friday. After three consecutive weekly losses, equities managed to post a weekly gain. The S&P 500 added 1.9%, led by materials and energy sectors while utilities were a laggard.
European markets advanced for the week, helped by signs of an improving economic outlook; while the final eurozone composite PMI for February was revised down to 52 it remained in expansionary territory. The pan-European STOXX 600 added 1.4% for the week. Stocks did lose some ground after inflation data for France, Germany and Spain came in above expectations. Indeed the overall eurozone CPI eased to an annual rate of 8.5% in February, versus 8.6% logged in the previous month, while core inflation rose to 5.6%, although markets took this in their stride given the earlier signs of stickier than expected inflation.
European Central Bank president Christine Lagarde indicated that a 50bps rate hike was likely at the next policy meeting. Swaps markets are indicating that the ECB’s main policy rate will reach 4% by its November meeting. In response to concerns over monetary policy government bond yields ticked higher, with Germany’s 10-year yield having hit its highest level since July 2011, ending the week above 2.7%. Meanwhile, Bank of England governor Andrew Bailey indicated that another rate hike was not inevitable with future moves data dependent.
Japan’s Nikkei 225 ended 1.7% higher although the 10-year Japanese government bond yield once again crossed the Bank of Japan’s 0.5% ceiling, due to US interest rate concerns. Chinese equities also posted a weekly gain, supported by signs of economic recovery. The official manufacturing purchasing managers’ index for February came in at its highest level since April 2012. Hong Kong also lifted its mask requirements in another boost to sentiment.
Latin American stocks mostly managed to move higher, helped by hopes of an economic rebound in China. However, Brazilian equities bucked the trend with the Bovespa index down 1.8% for the week. Gross domestic product for the country contracted by 0.2% in the fourth quarter compared to the previous quarter, driven by a slowdown in investment and weaker industrial output. President Luiz Inácio Lula da Silva used this as another opportunity to criticise the central bank, blaming the high level of the Selic rate, 13.75%, for hampering economic growth.
Important source information: The sources for data used in this publication are EFG and Refinitiv, as at publication date, unless otherwise stated.
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