July 2023 Commentary
Following a pause in June, global central banks continued to watch inflation trends and tread carefully on their policy rate decisions. In July, the European Central Bank (ECB) and the U.S. Federal Reserve (Fed) both hiked interest rates by 25 bps, despite slowing inflation.
In Asia, most central banks including China held rates steady in July. Among the few central banks in Asia that made policy moves in July, the Hong Kong Monetary Authority (HKMA) remained committed to its U.S. dollar peg and raised rates by 25 bps in lockstep with the Fed, while the Central Bank of Sri Lanka (CBSL) continued its march in the opposite direction, slashing rates by another 200 bps, following a 250 bps reduction in June.
With signs of inflation losing steam and central banks trying to steer a path toward soft landings for their economies, the S&P 500® finished the month up 3.11—a run of four consecutive months of gains despite the ongoing rate hikes. Conversely, U.S. Treasuries, as represented by the iBoxx $ Treasuries, retreated by 0.41%. This brought the YTD return of the two indices to 19.52% and 1.47%, respectively.
As a continuation of the previous month’s trend, the overall index edged up 0.23% in July, mainly driven by a 0.44% gain in the investment grade segment. Most of the gains were contributed by the shorter-end maturity buckets. BBB rated bonds were the only segment with positive returns across all maturity buckets. Year-over-year, the high yield segment posted 8.15%, even as China Real Estate extended its decline from a year ago and posted -5.31%. China Real Estate has played an increasingly smaller role in the performance of the high yield segment, as its weight in the high yield segment shrunk from 46% to 10% over the three-year horizon.
Other than Mainland China (down 0.24%), all other markets that make up the top seven in the index posted positive returns in July. The Philippines (up 0.85%), Indonesia (up 0.70%) and India (up 0.40%) were the best-performing markets.
