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 US economy continued down the path of slow but steady growth. A string of economic reports showed improving conditions in the US labor and housing markets, while manufacturing may be finding a bottom. Employment climbed and wages increased as the US added 215,000 jobs in March, following a revised 245,000 February increase. The unemployment rate rose to 5.0% from 4.9% and wage growth increased 2.3% in March compared to one year earlier.
Manufacturing expanded in March for the first time in seven months as the Institute for Supply Management’s (ISM) factory index climbed to 51.8 from 49.5 in March. Index levels above 50 denote expansion and it was the first time since August that the gauge exceeded 50. The ISM’s services index rose to 54.5 from 53.4 in March, the first gain in five months as 12 of 18 industries expanded during the month. The faster pace of activity within the services sector alleviates concerns that declining commodity prices and a strong US dollar may have negative implications for the broad economy.
The latest read on US inflation signaled a pickup in inflationary pressures. Core CPI, which strips out volatile food and energy costs, rose 0.3% in February for a second consecutive month, which is the first such back to back increase since early 2001. Core CPI climbed 2.3% from February 2015, the biggest year-over-year advance since May 2012. However, this uptick was not sufficient to persuade policy makers to lift the benchmark Fed funds rate in March. Policy makers cited concerns over global growth as a key element in their decision to keep the target range between 0.25% and 0.50%, but estimated that interest rates would likely move up 0.50% by year end due to an improving economy.
Globally, Japan’s economy contracted during Q415 hurt by slower consumer spending and a stronger yen, which is weighing on corporate profits and spending. The euro zone’s economic recovery remains lackluster having expanded only 0.4% (QoQ) on average, over the last four quarters. Growth has been supported by domestic spending while business spending has declined.
In the US, the S&P 500 index rose 6.8% in March amid stronger than forecast economic data and a more dovish Fed. Policy makers now project only two interest rate hikes in 2016, which is down from the originally projected four moves communicated after its December meeting. Gains were broad based across sectors, led by energy shares, up 9.2%, leaving the sector in positive territory for the year. Healthcare companies were the laggard, up a modest 2.6%. Both mid and small capitalization stocks outpaced large caps as the Russell Midcap posted a gain of 8.2%, while the Russell 2000 moved up 8.0%. Midcaps were paced by energy (+9.5%) and technology (+9.3%) companies, while small cap energy related companies soared nearly 20.0% for the month.
Global equities recovered strongly in March following the volatile start to the year. An increase in investor risk appetite was fueled by higher commodity prices and increased stimulus in Japan, Europe and China. European stocks rose, with the MSCI Europe index gaining 6.4% (USD), helped by a stronger euro that rose 4.7% versus the US dollar (USD) in March. Japanese equities posted positive returns, as the MSCI Japan index climbed 4.9% (USD).
Emerging market stocks surged during the month, due to deferred expectations of monetary tightening in the US and an easing of USD strength, which buoyed risk appetites. The MSCI Emerging Markets index advanced 13.3% in March, the most since May 2009 with several markets up double digits. For instance, Brazilian stocks performed particularly well, with the MSCI Brazil index up 30.5% (USD), driven by a rally in commodity prices and investor optimism that the ongoing political turmoil could soon be resolved. Meanwhile, the Chinese benchmark Shanghai Composite index added 13.5% (USD) after the government provided additional stimulus to support the economy and stock markets.
A jump in oil prices (up 13.6%) and a weaker USD helped boost commodity markets in March, as the Bloomberg Commodity index posted a gain of 3.8%. Gold prices were flat for the month, but advanced 16.4% through the first three months of the year.
The overall dovish tone of the Fed policy statement in March and a downward revision to interest rate projections helped drive US bond prices higher. While acknowledging economic activity continued to expand at a moderate pace, policy makers noted “global economic and financial developments continue to pose risks.” Furthermore, the median of the Fed’s updated quarterly projections saw the Fed funds rate at 0.875% at the end of 2016, implying only two 0.25% rate increases this year. In addition, policy makers cut their projections for inflation to 1.2% this year from 1.6%. They now expect inflation to reach the 2.0% target in 2018.
US Treasury prices advanced in March for the third consecutive month after foreign central bankers announced additional monetary stimulus and investors sought the safety of US government bonds. The BofA Merrill Lynch US Treasury index rose 0.14%, following a gain of 0.98% in February. Two-year Treasury yields, the security most sensitive to Fed policy projections, dropped 5 basis points (bps) to 0.72%, the lowest since February 18. The ten-year note started the month at 1.73% and rose as high as 2.0% just before the Fed meeting. Ultimately, the ten-year yield fell to 1.77% by month’s end. US corporate bonds rallied as average yields on the Barclays US Corporate Investment Grade index fell to 3.21% from 3.55% in February. Strong retail flows helped drive US high yield bonds higher as the Barclays US Corporate High Yield index jumped 4.4% for the month.
A moderate economic recovery in the euro zone coupled with anemic inflation compelled the European Central Bank (ECB)to unveil new stimulus in March to fight deflation and spur growth. The ECB expanded monthly bond purchases to 80 billion euros from 60 billion euros and will now include non-bank corporate bonds. They also lowered the deposit interest rate deeper into negative territory. Euro zone inflation was negative for a second month in March and has not come near the ECB’s goal of just under 2.0% since 2013. German 10-year yields rose 5 bps to 0.15%, while Italian 10-year yields fell 20 bps to 1.22% amid expectations of further support from the ECB’s expanded asset purchasing program. Emerging market bonds advanced, as the JPMorgan EMBI Global index posted a return of 3.4% (USD) as the spread to US Treasury bond yields fell sharply to 434 bps from 483 at the close of February.
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