Weekly Market Wrap-Ups

Week Ended May 17, 2013

Rally continues despite economic concerns

Stocks continued their advance during the week, bringing the indexes to record highs. Global economic data were moderately weak, particularly in the eurozone, but it appeared only to take a toll on materials and energy shares, which felt the brunt of falling commodity prices. The S&P 500 ended the week almost 1,000 points, or 150%, above the lows it marked at the bottom of the last bear market in March 2009.

China growing, but fast enough?

The week started on a negative note, as China announced that industrial production in the country had grown by 9.3% over the 12 months ended in April—a robust pace by most measures but less than many had anticipated. The data followed an earlier report that showed a smaller-than-expected rise in manufacturing activity. Chinese factories have become the primary source of demand for many commodities, so signs of slowing growth have a particularly large impact on commodity prices and the materials sector.

European investors shrug off economic contraction

Europe remains the weakest among the world's major economic regions, and the week brought little encouraging news on that front. The eurozone economy contracted by 0.2% in the first quarter, slightly worse than many expected. The French economy entered its second recession (as commonly measured by two consecutive quarters of negative growth) in four years. Nevertheless, the Paris exchange rallied during the week alongside many other European markets. In part, the gains appeared to be driven by investors' hopes that the poor economic data will spur further monetary easing by the European Central Bank.

U.S. consumers on the mend, thanks in part to low inflation

U.S. economic data were mixed during the week, but a general trend of slow and steady improvement seemed to be enough to encourage investors. Markets appeared to gain momentum Friday on news that a closely watched indicator of consumer sentiment had jumped in May and reached its highest level since the recession began. The news was particularly welcome since Americans have been wrestling with higher payroll taxes and some face job furloughs or layoffs as a result of federal spending cuts stemming from the sequester. T. Rowe Price economists note that very low overall inflation—and sharply declining energy prices—have boosted consumer spending power in recent months, which may be helping families cope with slowly growing incomes.

Week Ended May 17, 2013

U.S. Treasuries and inflation-linked bonds weaken; corporates are mixed

Long-term Treasury prices fell and yields rose amid reports that the Federal Reserve is preparing a strategy to wind down asset purchases, currently totaling $85 billion a month. Treasury inflation protected securities (TIPS) also fell in value following benign inflation data released during the week (see below). An upcoming 10-year TIPS auction also weighed on the inflation-linked sector. The investment-grade corporate bond market was mixed, with a notable level of new issuance early in the week. High yield bonds declined as investors resisted lower yields in the primary market. However, lower-quality bonds with higher coupons and shorter durations continued to attract investors concerned about rising interest rates.

International bonds are active during the week

The typically calm Japanese government bond market, the world's second largest, has been highly volatile in recent days as yields soared to their highest level in months. Although T. Rowe Price analysts are skeptical that the Bank of Japan will be able to achieve a 2% inflation target with its large quantitative easing program, the prospect of higher inflation has convinced Japanese investors to sell low-yielding government bonds and buy equities and higher-yielding fixed income securities. It was a mixed week for emerging markets debt. On Monday, Brazil's partially state-owned oil company, Petrobras, issued the largest emerging markets corporate bond deal on record. First-quarter gross domestic product figures coming out of emerging Europe were mixed with Romania and Hungary beating estimates, while the Czech Republic contracted at a greater pace than expected. Also, Moody's upgraded Turkish sovereign debt to investment grade, from Ba1 to Baa3, on Thursday.

U.S. inflation is subdued amid weak domestic and eurozone economic data

Both producer and consumer prices tumbled significantly in April, with gasoline and food costs moving lower. The benign inflation data occurred against the backdrop of an unexpected drop in U.S. factory output and manufacturing activity, particularly in New York State. Softness in the U.S. economy would be especially troubling in light of the ongoing slowdown in the eurozone. The overall eurozone economy contracted 0.2% during the first quarter of the year compared with the previous quarter, marking the region's longest recession since the birth of the euro in 1999—the sixth straight quarter of economic contraction. Germany, the bloc's strongest economy, grew at only an annualized rate of 0.3% in the first three months of the year after contracting 2.7% in the final quarter of 2012. Italy's economy shrank for the seventh successive quarter, and France reported its second consecutive quarter of contraction.

This table is for illustrative purposes only. Past performance cannot guarantee future results.

Week Ended May 17, 2013

• International Stocks
• International Bond Markets
• International Currency Markets

Foreign stock markets closed higher for the week ending May 17, 2013 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 0.46%.

International bond markets in developed countries were lower this week, with the J.P. Morgan Global Government Bond Less U.S. Index losing -1.36%.

On the currency front, the U.S. dollar was stronger against the major currencies for the week.

Sources: Foreign stock markets and currency sections are from Rimes Technologies, using MSCI data. International bond markets are from J.P. Morgan.

Note: All returns are in U.S. dollars. All bond indices are J.P. Morgan. All stock indices are Morgan Stanley Capital International (MSCI).