This is our first in what will be a new series of monthly blogs that will provide timely market data as well as perspectives on the current state of the economy and the global financial markets.
The US economy bounced back from the weak first quarter highlighted by strength in the housing sector and expanding manufacturing activity. Core inflation accelerated to its highest level in over two years. The government’s second estimate of first quarter GDP showed the economy shrank at a 0.7% annualized rate, revised from the previously reported 0.2% gain. A stronger dollar led to a slump in exports helping subtract 1.9% from growth, the most since 1985.
Home building surged in April, indicating harsh weather may have constrained activity during the first quarter. Builders broke ground at an annualized rate of 1.14 million homes, the most since November 2007 and up 20% from March. Moreover, government data showed building permits, a proxy for future construction, climbed to the highest level since June 2008. Manufacturing activity expanded in May more than forecast, suggesting the industry was recovering from earlier weakness. The Institute for Supply Management’s factory index rose to a three month high boosted by a rise in new orders and increased production.
Continued declines in energy prices held US headline inflation back. Consumer prices that include fuel and food fell 0.2% over the past year largely due to a 1.3% impact from energy prices. In contrast, core inflation, which excludes food and fuel, rose 1.8% over the past year. The Fed’s preferred measure of price growth, the personal consumption expenditures (PCE) index, rose only 0.1% in the 12 months ended in April, well below the Fed’s 2% target. Still, the Fed restated expectations that inflation would gradually rise toward the target “as transitory influences wane” and reaffirmed its commitment to raising rates this year “if the economy continues to improve.”
US stocks marched higher in May supported by data indicating the economy was stabilizing from the first quarter slump and better than expected corporate profits. The S&P 500 reached a record on May 21, and then overcame a holiday shortened near 1% decline in the final week to close the month with a 1.3% gain. Eight of the index’s sectors advanced, led by healthcare (+4.3%) and technology (+2.0%) companies. Stocks also got a boost from an announced $227 billion in acquisitions, highlighted by a $79 billion deal by Charter Communications to purchase Time Warner Cable. At the start of May, first quarter earnings on the S&P 500 were forecast to deliver the first quarterly decline since 2009, but instead managed a slight gain of 0.7% with 496 companies reporting. Overall results were led by 19% gains in healthcare profits and withstood a 54% decline in energy earnings. Small cap stocks reversed April’s losses as the Russell 2000 rose 2.3%, led by over 9.0% gains in healthcare.
Euro zone manufacturing rose to 52.2 in May, above the 50 mark that distinguishes expansion from contraction. It appears the European Central Bank’s (ECB) stimulus is helping to lower the euro and boosting the region’s export competiveness. Germany, Europe’s largest economy, saw manufacturing expand for a sixth consecutive month, while both Italy and Spain grew more than forecasts. After hitting record highs in April, European stocks initially came under selling pressure in May, declining nearly 2% after the first week of trading. However, prices recovered by month’s end after the European Central Bank announced it would increase bond buying in May and June. The benchmark Stoxx Europe 600 index rose 1.8% (-0.4% USD) capping the fifth straight monthly advance. Japanese shares added to their gains this year, climbing 5.3% (+1.6% USD) to bring gains to 18.8% (+14.3% USD) for the year.
China’s economic growth continued to moderate as measures of production, fixed-asset investment and retail sales decelerated in April from prior year’s levels. Chinese stocks tumbled 6.5% on May 28, as the central bank drained cash from the financial system, cutting monthly gains to 4.0% (+4.1% USD). Overall, emerging market stocks tumbled amid speculation the Fed was moving closer to raising rates. Commodities closed lower in May, reversing most of April’s gains. However, oil prices ended May above $60 per barrel for the second straight month.
Global bonds sold off in May, losing $574.4 billion of value, after lack of resolution in Greece and inflation fears sparked sales in European government bond markets that spread across the world. The market value of the Bank of America Merrill Lynch Global Broad Market index declined to $44.9 trillion from $45.5 trillion during the month. Bond market volatility spread to US bond markets as yields on US 10-year Treasuries climbed as high as 2.36% on May 12, a six month high, while US 30-year yields topped 3.0% for the first time since December.
However, Fed Chair Janet Yellen’s comments that the start of a tightening of interest rates would be gradual brought buyers back to Treasuries and the 10-year yield closed May at 2.12%, a rise of only 9 basis points from the end of April. The Bank of America Merrill Lynch US Treasury index closed down 0.2%, the third monthly loss in the past four. US high yield corporate bonds rose 0.3%, after average yields declined slightly to 5.92%, from 5.95%.
The slide in European sovereign bond prices saw yields on 10-year German debt rise to 0.70% from as low as 0.08% in April. Ultimately, ECB policy makers stated they would bring forward purchases of debt, calming investor fears and sending yields lower. German 10-year yields closed at 0.49%, a rise of 12 bps from a month earlier. Peripheral debt yields rose as Italy’s 10-year climbed 35 bps to 1.85%, while yields on Spanish 10-year bonds increased 37 bps to 1.84%. The Greek government warned it was running short of money and could fail to make loan payments of nearly $1.7 billion to the International Monetary Fund in June. Greek sovereign yields rose, as the 10-year yield rose to 11.25%, from 10.47% in April.
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.