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.
The outlook for the US economy improved in June as business activity and job growth pointed to a rebound during the second quarter. The Institute for Supply Management’s (ISM) manufacturing index rose modestly in June to 53.5, from 52.8; with readings over 50.0 indicating overall expansion. Production activity was largely unchanged, but the new orders component rose to a six-month high. Moreover, the ISM’s gauge of non-manufacturing companies was solid as new orders increased.
June’s employment report was slightly softer than expected. Nonfarm payroll growth came in at 223,000 versus expectations for 233,000. The report also included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000). The unemployment rate declined to a seven year low of 5.3%, from 5.5% as the size of the labor force receded. Wage growth slowed with average hourly earnings unchanged in the month and the year over year number dropping to 2.0% from 2.3%.
Increases in employment and rising stock and home prices led to the biggest gain in consumer spending in almost six years. Commerce Department figures showed that spending was up 0.9% in May after rising only 0.1% in April. Recent strengthening in household spending and continued progress toward full employment led the Federal Reserve to upgrade its assessment of the economy and remain on course to raise benchmark rates from near zero. However, the Fed reiterated that subsequent increases would be gradual and dependent on the pace of economic growth.
Solid first quarter GDP gains were recorded across Japan, Europe, and China, with a contraction in Brazil. Growth in Japan was revised up to 3.9% from 2.4%; in the Euro region growth expanded 0.4%. The Chinese economy grew 7% YOY, while Brazil contracted as a weak currency and rising inflation eroded consumer purchasing power.
June was a volatile month for US stocks as Greece’s bid to secure a bailout from official creditors and a plunge in Chinese equities caused a sell-off in riskier assets. Stocks sold off during the final two days of trading after a last ditch effort by Greece to receive a financial lifeline was rebuffed by European leaders. The S&P 500 posted its first 2.0% move for the year on June 29, closing at the lowest level since last March. Nine out of 10 sectors declined in June. Utility stocks continued to be the worst performing sector, declining 6.3% resulting in a 12.0% plunge for the year. Energy fell 3.6% and healthcare slipped 0.4%, but it remained the top performer YTD, posting a gain of 8.7%. Small cap stocks outpaced both large and mid cap stocks, advancing 0.8% in June as five of nine sectors gained. Health care rose 2.5%, followed by consumer staples, up 2.2%. Energy lost ground, down 5.3%.
For the month, global markets declined. The MSCI ACWI index dropped 2.3% (USD) with developed markets outperforming emerging. Greece’s debt standoff dominated trading in European markets amid fears the crisis could spread to other debt laden countries in the region. European shares lost ground for the first time this year, declining 4.4% (-2.9% USD). All 19 sectors in the Stoxx 600 index declined with technology, utility and resource companies plunging more than 7.0% each. Japanese equities climbed to an 18-year high on June 23 with the Nikkei 225 reaching 20,952.71, before a bout of selling brought the index down for the month, dropping 1.5% (+0.1% USD).
Emerging markets declined in June due to a significant sell-off in Chinese stocks that roiled the benchmark Shanghai Composite index. After climbing to a seven year high on June 12, Chinese stocks began to drop as investors questioned the impact of the country’s slower economic growth. China’s government introduced support measures to stem the losses, helping stocks rebound on the last day of the month, cutting the monthly loss to only 7.0% (USD). Despite economic woes, Brazilian equities bucked the trend, rising 3.8% (USD). Fears of a drought in India initially pressured prices lower before recovering in the second half of the month following the start of a heavy monsoon. Rising crude oil supplies from OPEC and the US signaled the relatively high level of supply will likely persist, leading to further declines in oil prices in June. Despite global uncertainty, gold prices dropped 1.5%.
Conflicting forces were at work in the bond market in June. Federal Reserve policy concerns outweighed the safe haven demand resulting from the debt crisis in Greece, leading US Treasuries to decline for the third month in a row. Fed Chair Janet Yellen reiterated that policy makers were poised to raise interest rates this year for the first time since 2006, dependent primarily on US economic data. The benchmark Treasury 10-year yield jumped 23 basis points (bps) to 2.35%, while 2-year yields were little changed, rising only 4 bps to 0.65%. The BofA Merrill Lynch US Treasury index declined 1.0%, sending the index down slightly for the year (-0.1%).
US corporate bond yields edged higher with the steepening US yield curve. Average yields on US investment grade corporate bonds rose to 3.36% from 3.09% at the close of May, sending bond prices lower by nearly 2.0%, the worst monthly decline in two years. US corporate high yield bond spreads to US Treasuries widened to 408 bps from 380 bps at the start of June, as average yields rose to 6.6%. The high yield index dropped nearly 1.50% for the month of June.
Greece missed a $1.7 billion payment due to the International Monetary Fund on June 30, the same day its euro area aid package ran out. The country continued to negotiate a compromise from official creditors on nearly $367 billion of debt. Uncertainty surrounding the Greek situation had limited impact on other peripheral countries as investors assessed the possibility of “contagion.” Although there was an uptick in government bond yields across the region, only Greece experienced a significant increase. In fact, Spanish 10-year yield spreads to German 10-year bonds rose by only 19 bps to 154 bps, while Italian 10-year spreads rose a modest 21 bps to 157 bps.
Riskier US dollar emerging market bonds declined in June, ending five straight months of gains. Yields climbed to 5.27% from 5.04% in May.
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.