Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Global Economy:
There was a positive tone to US economic data in July as higher wages and rising equity values continued to underpin strength in consumer spending, indicating the economy kept growing at a moderate pace. Business activity expanded, albeit at a lower pace than June. Companies saw strong orders, which led to higher production levels and an improving outlook for the second half of 2016.
The government’s first reading on 2Q16 gross domestic product (GDP) showed a robust US consumer that was offset by lower business spending. The economy rose at an annualized 1.20% rate, well below projections, driven by a 4.2% gain in household purchases. Cut backs in corporate outlays on equipment and construction projects, coupled with decreased government spending, subtracted from growth. The Federal Reserve (Fed) left interest rates unchanged while saying “near-term risks to the economic outlook have diminished.” They noted the strengthening labor market and robust household spending. The Fed left the target range for interest rates at 0.25% to 0.50% and made no reference to the specific timing of the next potential rate hike. The Fed last raised rates 0.25% in December 2015.
US inflation for June increased 0.2% from May and the year-over-year rate was up 1.0%. Core inflation, which excludes food and energy, increased 0.2% and rose 2.3% from June 2015. In July, employers added 255,000 jobs, which exceeded expectations of a 180,000 gain. The unemployment rate held steady at 4.9%.
The International Monetary Fund adjusted its 2016 global growth estimate downward to 3.1% from 3.2% and also reduced its estimates for 2017 to 3.4% from 3.5%. China’s economy grew 6.7% in 2Q16, which is unchanged from 1Q16. Chinese economic activity was supported by growth in construction, real estate and public services.
Global Markets:
US stocks shrugged off global macro concerns in July, posting positive returns amid speculation central banks would maintain loose monetary policies to support economic growth. For July, the S&P 500 climbed 3.7%, the fifth consecutive monthly gain. For the month, seven of the ten S&P 500 sectors rose. Information technology led with gains of 7.8% followed by material related companies, which were up 5.0%. Energy stocks lost 2.0%, due to poor 2Q16 earnings results. Financials rose 3.4% on the heels of better than expected earnings. However, prospects that low interest rates could persist left the sector as the only group with a loss (0.9%) for the year. With over 75% of the S&P 500 companies having reported Q216 earnings, 72% have beat analyst profit projections and 56% have surpassed sales estimates. Small cap stocks outperformed both large caps and mid caps in July as the Russell 2000 climbed 6%.
For the month, global markets rallied, overcoming increased volatility caused by violent events in France and Turkey and continued uncertainty surrounding Brexit. The benchmark MSCI All Country World index jumped 4.3%, while the developed markets MSCI World index tacked on 4.3%. Japanese stocks surged after Prime Minister Abe set forth a mandate for fiscal stimulus to rejuvenate subpar economic growth. The MSCI Japan index climbed 6.5% led by financial stocks. European equities registered positive gains underpinned by moderate growth, with Euro zone GDP rising 0.3% during the second quarter. The British pound weakened in July versus the USD, helping drive UK equities higher. Investors focused on the cost advantage gained from a weaker currency and the potential boost to earnings generated internationally.
Expectations of gradual Fed tightening and ample liquidity supplied by other central banks drove solid gains in emerging market equities in July. The MSCI Emerging Markets index advanced 5.1%, following gains of 4.1% in June. EM stocks in Latin America rose 5.5% and emerging Asia equities climbed 4.9%. Commodities tumbled 5.0%, as energy was the worst performing sector hurt by a nearly 14% drop in oil prices. Gold ended up 2.2%.
US Treasury yields diverged in July with 2-year and 5-year yields rising but tame inflationary pressures and search for yield driving 10-year and 30-year yields lower. The 10-year UST yield closed at 1.45%, down 2 basis points (bps) from June. Yields on 30-year UST bonds ended at 2.18%, a decline of 10 bps for the month. The BofA Merrill Lynch US Treasury index advanced 0.4% in July, its third straight monthly gain, extending its YTD return to 6.1%. The search for yield, spurred by negative interest rate policies from many global central banks, dominated flows into US corporate bond markets leading spreads to narrow. The spread on the Barclays US Corporate Investment Grade index fell to 130 bps from 139 bps in June. The average yield closed at 2.76% and the index advanced 1.50%. US high yield corporate bonds rallied for a sixth consecutive month driving yields to their lowest levels since June 2015. The Barclays US High Yield corporate bond index posted a return of 2.7%. Average yields fell to 6.71% from 7.27% in June.
The Bank of Japan kept its annual target for expanding the monetary base at ¥80 trillion, left benchmark rates at -0.10% and boosted its purchases of exchange traded funds. However, the yen rallied as the markets had anticipated more from policy makers. Japanese 10-year yields rose to -0.19% from -0.22% in June. The Bank of England (BOE) surprised markets and kept rates on hold at 0.50% in July, choosing to wait to see the impact from Brexit on the economy. Still, markets began anticipating an easing cycle, driving sovereign 10-year yields 18 bps lower to a record 0.69%. The European Central Bank kept its policies unchanged with benchmark rates at zero, but stated it is ready and willing to act in order to stoke inflation back to its 2% goal.
In emerging market bonds, the JPMorgan EMBI Global Diversified index of US dollar sovereign debt rose 1.6% for the month, following a gain of 3.7% in June. The spread to US Treasuries touched a 13-month low of 373 bps before closing the month at 392 bps, which is down from 407 bps in June. Local currency bonds rose modestly, as the JPMorgan GBI-EM Global Diversified index edged 0.9% higher, while EM corporate bonds advanced 1.6% per the JPMorgan CEMBI Diversified Broad index.
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