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Economic reports were mixed in January as a US Commerce Department report showed US economic growth slowed more than forecast during the fourth quarter of 2016, but January gauges of US manufacturing and service business activity continued to gain momentum. Initial data from the Bureau of Economic Analysis revealed gross domestic product rose at a 1.9% annualized rate in Q416, down from the prior quarter’s 3.5% rate as slower exports subtracted 1.7% from the expansion. Consumer spending, which accounts for about 70% of the economy, rose 2.5%, versus 3.0% in Q316.
Manufacturing growth accelerated for a fifth consecutive month in January as the Institute for Supply Management’s (ISM) factory index rose to 56.0, the highest since November 2014, from 54.5 in December, driven by rising orders and increased production. Likewise, US service industries expanded, with 12 of 18 industries reporting growth, as the ISM non-manufacturing index was 56.5 after December’s 56.6. Readings above 50 signal expansion.
US labor markets continued to strengthen as US employers added 227,000 jobs to payrolls, following a gain of 157,000 in December. The unemployment rate ticked up to 4.8%, from the previous month’s 4.7%, as the labor force participation rate inched higher. However, there was setback in wage gains as average hourly earnings rose 2.5% from a year ago, after a 2.8% gain the prior month. The Federal Reserve (Fed) left its benchmark Fed funds rate target range between 0.50% – 0.75%, commenting that with “gradual adjustments” to interest rates, the expansion will continue, labor markets will strengthen and “inflation will rise to 2% over the medium term.”
The European Central Bank (ECB) left its quantitative easing program unchanged, holding the main refinancing rate at zero, choosing to wait to see if a recent pickup in inflation would be sustained. Euro area consumer prices rose an annual 1.8% in January, from 1.1% in December.
Equities continued their positive momentum in January amid optimism over the new US administration’s pro-growth plans to cut taxes and boost government spending. Likewise, US equities registered positive gains as the S&P 500 crossed the 2,300 intraday mark for the first time, and closed the month at an all-time high, advancing 1.9%. Eight of eleven sectors gained for the month, as the materials sector was the top performer, followed by Information Technology. Energy lagged, hurt by declining oil prices. Q416 earnings season for S&P 500 constituents is well under way, with 67% (235 out of 353) of the index having reported positive surprises to estimates, and 12.5% (44 out of 353) having reported in line with analyst estimates. After a strong finish in 2016, US small caps underperformed both large and mid-caps in January as the Russell 2000 index rose a modest 0.4%, led by healthcare and material related stocks. Consumer staples was the worst performing sector in January.
Global equities gained ground in January driven by improving economic prospects and continued easy monetary policy as the MSCI ACWI index advanced 2.8% with broad gains across both developed and emerging market equities. Macro economic data from the Eurozone showed an economy regaining strength as business activity in the manufacturing sector expanded in January with the MSCI Europe index rising 2.1%. Japanese stocks moved higher after investor’s reacted positively to the Bank of Japan’s raised assessment of the country’s economic prospects for 2017. Additionally, the Japanese yen strengthened nearly 4% versus the US dollar (USD); helping drive gains for US based investors. Emerging market equities delivered solid gains for the month, supported by strong macroeconomic data from China, with Q416 GDP rising 6.8% year-on-year driven by increased consumer spending.
Commodities closed January with only slight gains as oil prices declined amid concerns over increased supply. Meanwhile gold rallied given investor speculation the Fed may be more cautious in raising US interest rates.
US Treasury (UST) yields were virtually unchanged in January as investors rotated toward riskier assets, curbing the safe haven appeal of government bonds. The two-year Treasury yield was two basis points (bps) higher at 1.21%, while the five-year fell 1 bps to 1.91%. The 10-year yield rose to an intraday high of 2.55% on January 26, before closing the month at 2.45%, relatively unchanged from the end of 2016. The UST yield curve primarily steepened as the spread between the five- and 30-year UST yield traded above 115 bps.
US high grade bonds advanced as the BloomBar US Aggregate index gained 0.2%, while the BloomBar US Corporate bond index rose 0.3% as spreads tightened to 121 bps from 123 bps at the end of December. Junk bonds rallied as investors were attracted to the higher yields with the BloomBar US Corporate High Yield index advancing 1.5%, as yields narrowed 27 bps to 5.85%, from 6.12% at the end of December. US High Yield Industrials posted a solid gain amid speculation a proposed increase in US infrastructure spending favored this segment.
Accelerating inflation in the euro area pressured government yields higher in January as German 10-year bund yields rose to 0.48% on January 26, the highest since January 2016, closing the month 23 bps higher at 0.44%. Italian 10-year yields increased 45 bps to 2.26%, while Spain’s 10-year yield moved 21 bps higher to 1.60%.
Emerging market debt generated positive returns for the second consecutive month, as the US dollar denominated JPMorgan EMBI Global bond index climbed 1.4%. The premium investors demand to own emerging market bonds rather than US Treasuries narrowed to 352 bps from 365 bps in December.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.