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Benchmarks end mixed The major indexes were mixed for the week. The large-cap benchmarks and the technology-focused Nasdaq Composite index managed record highs before pulling back Friday to end the week with modest losses. The S&P Midcap 400 Index and the small-cap Russell 2000 Index broke a string of underperformance and recorded gains. Likewise, recently underperforming utilities shares reversed course and were among the best performers in the S&P 500 Index, along with materials and real estate stocks. A decline in shares weighed on the consumer discretionary sector following news Thursday evening that the online retailer missed consensus second-quarter revenue expectations. It was the busiest week of the earnings season, with 177 of the S&P 500 companies expected to report second-quarter results, according to Refinitiv. While earnings reports drove large moves in individual stocks—including several technology and internet-related giants—investors appeared to keep a close eye on macroeconomic concerns. On Tuesday, the S&P 500 ended lower for the first time in six sessions, which T. Rowe Price traders attributed in part to the spread of the delta variant of the coronavirus. Investors’ concerns were elevated that afternoon by the recommendation from the Centers for Disease Control and Prevention that vaccinated individuals wear masks indoors again in higher-transmission areas. Conversely, sentiment appeared to get a boost from the U.S. Senate’s 67 to 32 vote Wednesday evening in favor of beginning formal consideration of a bipartisan USD 1 trillion infrastructure proposal. Growth rebounds, but not as much as expected Investors also absorbed several high-profile economic data points during the week, many of which indicated strong growth but surprised on the downside. The Commerce Department reported its advance estimate that gross domestic product (GDP) increased at an annualized rate of 6.5% in the second quarter, well shy of consensus estimates of around 8.5%. Nevertheless, it was the second-fastest pace of growth since 2003 and left the economy larger than its pre-pandemic peak. Many analysts pointed to lingering supply chain problems as preventing even stronger growth. Headline June durable goods orders also fell well short of expectations, as did core capital goods orders and shipments, though there were some upward revisions to older data. Weekly jobless claims fell less than expected, and continuing claims rose a bit. On the positive side, July consumer confidence surprised to the upside, and inflation expectations eased slightly. Personal spending also rose more than expected in June (1.0%), rebounding from a slight contraction in May. The Labor Department’s measure of employment costs rose 0.7% in the second quarter, a slowdown from the first quarter and below estimates of 0.9% gain. U.S. Treasury yields decrease Reflecting the downward growth and inflation surprises, the yield on the benchmark 10-year U.S. Treasury note ended lower for the week. (Bond prices and yields move in opposite directions.) According to our traders, market participants viewed the official statement from the Federal Open Market Committee’s (FOMC’s) July 27–28 meeting as somewhat hawkish—namely, policymakers’ recognition that “the economy has made progress toward” the committee’s goals was perceived as paving the way for the Federal Reserve’s future tapering of monthly asset purchases. During his post-meeting remarks, however, Fed Chair Jerome Powell underscored that the committee’s marker of “substantial further progress” has not yet been reached.The broad municipal bond market posted slightly positive returns through most of the week, with short-term yields touching fresh lows. T. Rowe Price traders reported that technical drivers remained firmly in place, supporting strong demand for the week’s primary market deals. Our traders noted relatively light trading volumes and new issuance in the investment-grade corporate bond market ahead of the FOMC meeting. Flows were balanced, and credit spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal—were little changed as market participants digested an uptick in primary issuance. Meanwhile, the high yield market traded flat for most of the week, as broader risk markets fluctuated with the focus on corporate earnings and the delta variant impacting economic growth forecasts. Investors also appeared concerned about increasing regulations on Chinese technology stocks (see below). Our traders noted that market sentiment improved somewhat after the FOMC meeting as policymakers maintained the same stance on inflation.


Shares in Europe were little changed. Optimism engendered by strong corporate earnings was offset by concerns about the spread of the delta variant of the coronavirus and volatility spurred by Chinese regulators cracking down on domestic technology and education companies. In local currency terms, the pan-European STOXX Europe 600 Index ended flat. Major indexes were mixed. Germany’s Xetra DAX Index fell 0.80%, France’s CAC 40 Index gained 0.67%, and Italy’s FTSE MIB Index rose 0.95%. The UK’s FTSE 100 Index ended was roughly flat. Eurozone bond yields declined on concerns about the spread of the coronavirus and doubts about reflation expectations and the wider economic recovery. Peripheral market yields generally followed core markets, falling after the European Central Bank (ECB) suggested inflation could temporarily overshoot its 2% target. UK gilt yields also tracked yields in other core markets. UK lifts travel bans on U.S., Europe Beginning August 2, the UK will allow most travelers who have been fully vaccinated in the U.S. and Europe to enter England, Scotland, and Wales without having to quarantine. However, separate rules will apply to travelers from France. The number of people in England and Wales told to self-isolate by the National Health Service’s (NHS) COVID-19 app rose to 689,313 in the seven days ended July 21—up more than 11% sequentially. The alerts are causing widespread labor shortages that are interrupting production and some food supplies. The auto industry and opposition Labor Party called on the government to bring forward the date for exempting fully vaccinated adults from self-isolation rules. Eurozone GDP grows more than forecast; inflation picks up The eurozone economy bounced back from recession in the second quarter, growing by a faster-than-expected 2% relative to the first three months of 2021. The year-over-year growth rate of 13.7% also topped prominent estimates. Output expanded in Germany, France, Italy, and Spain, although the uptick in Germany came in below forecast because of supply bottlenecks that hindered its manufacturing sector. Euro area inflation accelerated to 2.2% in July from 1.9% in June, lifted by higher energy prices. However, excluding food and fuel prices, the inflation rate held steady at 0.9%.


Japan’s major stock benchmarks faced headwinds as COVID-19 cases in the country reached a record level and the government extended a state of emergency to combat the spread of the virus. The Nikkei 225 Index was down 0.96%, while the broader TOPIX Index lost 0.17%. The equity markets reopened Monday after a four-day weekend to mark the start of the Tokyo Olympics. The yield on the 10-year Japanese government bond ticked up to 0.020%, while the yen strengthened and finished the week at 109.6 against the U.S. dollar. Coronavirus cases reach record level New coronavirus cases passed 10,000 for the first time this week, according to The Japan Times, and Tokyo and several other cities reported their highest case counts since the start of the pandemic. As a result, the state of emergency in Tokyo and Okinawa has been extended from August 22 to August 31 and the emergency measures have been broadened to include additional areas near Tokyo. Slightly more than a quarter of Japan’s population has been fully vaccinated. Flash PMIs weaken In a sign of the continuing impact of the coronavirus pandemic on the Japanese economy, the au Jiban Bank Flash Japan Manufacturing Purchasing Manufacturers’ Index (PMI) declined to 52.2 in July from 52.4 in June and showed a decrease in the ratio of new orders to inventories. The Services Flash PMI also declined, dropping from 48 to 46.4. (In the survey, 50 is the dividing line between contraction and expansion.) Aadish Kumar, a T. Rowe Price international economist, said that while Japan’s COVID-19 case numbers mean a broad reopening of the economy could be about two months away, he believes that the eventual reopening will help lift the services PMI. He also expects the manufacturing PMI to rise due to pent-up demand (particularly in capital expenditures), an improvement in business confidence, and a buildup in inventories, which are currently low relative to history. Auto manufacturing rebounds Economic data that covered the period just before the latest COVID-19 surge showed mixed results. Industrial output rose 6.2% in June for the year-over-year period, which was stronger than expected and followed a 6.5% decline in May. A nearly 23% increase in auto production contributed to the positive results. However, retail sales only rose a disappointing 0.1% over the same period.



Mainland Chinese stocks slumped after a regulatory overhaul of the for-profit education sector unveiled July 24 proved to be much tougher than investors had expected, and fears of heightened government oversight spilled into Chinese technology, health care, and property stocks. The large-cap CSI 300 Index sank 5.5% in its worst weekly drop since February, according to Bloomberg. For July, the benchmark shed 7.9%, its biggest monthly drop since October 2018. In Hong Kong, the Hang Seng Index declined 1.4% for the week after the benchmark index shed more than 8.0% on Monday and Tuesday on record-high volumes. Under the education policy changes, China banned after-school tutoring companies from being run for profit, raising capital, or going public. Moreover, the companies are forbidden from offering school syllabus-related tutoring on weekends and vacation days and giving online lessons to children under six. Beijing assures investors on reforms Toward the end of the week, stock markets stabilized as regulatory concerns appeared to ease, albeit without a relief rally. The People’s Bank of China pumped RMB 30 billion into the country’s financial system on both Thursday and Friday via seven-day reverse repurchase agreements, Bloomberg reported. The central bank’s unusually large injection was viewed as a sign of Beijing’s unease with the extent of the downturn and desire to bolster investor confidence—a message amplified in state-run financial media, calling the sell-off overdone. Additionally, a top official at China’s securities regulator reportedly met with investment bankers, asset managers, and foreign investment firms on Wednesday to relay the official view that the education rules were intended to achieve long-term social goals despite appearing antimarket. China’s stock market sell-off had a relatively mild impact on the domestic bond and currency markets. The yield on the 10-year Chinese government bond shed eight basis points to close at 2.85%. The renminbi currency edged up 0.3% against the U.S. dollar to 6.46, a gain that analysts attributed more to dollar weakness than to the broader stock sell-off.



RUSSIA Russian stocks, as measured by the Russian Trading System Index, returned about 1.9%. Late in the previous week, the Russian central bank raised its key interest rate from 5.50% to 6.50%. The move was widely expected, as the central bank has been raising rates since March due to increased inflation. According to T. Rowe Price sovereign analyst Peter Botoucharov, the most recent data showed that inflation in June increased 0.69% month over month and that the 12-month consumer price index (CPI) was 6.5%. Both measures were above consensus expectations. Based on the acceleration of core CPI readings—a sign of broad-based inflationary pressures—and the central bank’s observation that “steady growth in domestic demand” is exceeding “production expansion capacity in a wide range of sectors,” Botoucharov expects one last rate hike in the current tightening cycle. He believes that policymakers will raise the key interest rate to 7%, which is firmly above the central bank’s 5% to 6% neutral range. He also believes that this restrictive monetary stance will enable CPI readings to start easing by the end of the year. PERU Pedro Castillo was inaugurated as Peru’s new president on Wednesday. In his inauguration speech, President Castillo mentioned that nationalizations and foreign exchange controls are off the table and that he would maintain economic order and predictability to promote private investment. However, Castillo has also indicated that he wants to impose price controls over gasoline, medicine, and consumer loans; intervene in the mining sector by making the state a majority partner in projects in order to regain "sovereignty" over natural resources; and increase the influence and role of state-controlled public banks in the financial sector. In addition, critics observed that there was no sign of fiscal discipline in Castillo's speech, as indicated by his promises of free and universal health care, a doubling of education spending, a path to free university and higher education, and universal pensions. President Castillo is also looking at strengthening Peru’s social safety net, promoting rural development and national production, protecting minority groups, and safeguarding the environment. With new center-right leadership in the unicameral legislature, Castillo's main challenge will be to pass most of this through Congress, notes T. Rowe Price sovereign analyst Aaron Gifford. Some of these things will also require constitutional reform, which must be passed with a two-thirds vote. Castillo still intends to create a new constitution via referendum and, for now, is committed to seeking congressional approval to do so.

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