Monthly Market Update for May 2016

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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:

US economic data was mixed as positives from robust consumer spending and the stabilizing US housing markets was offset by weaker than expected employment gains.  As a result, financial markets have reduced expectations that the Federal Reserve (Fed) will raise interest rates at the June meeting.  Consumer spending climbed 1.0% in April, the biggest monthly increase since August 2009, led by a 2.2% rise in durable goods purchases (items meant to last at least three years).  In addition, US home construction rebounded in April from the prior month’s slump, as residential starts increased 6.6% to a 1.17 million annualized rate from 1.10 million in March.  Ongoing job creation and affordable mortgage rates are maintaining solid demand for housing.  Sales of existing homes increased in April to a 3-month high with median prices gaining 6.3% from April 2015, to $232,500.

Business activity in the manufacturing sector picked up amid signs of increased global demand as the Institute for Supply Management’s (ISM) factory index climbed to 51.3 in May from 50.8 in April.  A gauge of factory export orders held at 52.5, the third consecutive month above 50, which signals expansion.

US inflation showed signs of an upswing as consumer prices rose 0.4% in April, the biggest gain since February 2013, led by a rise in energy and gas prices.  Data showed energy costs increased 3.4% from March and gasoline soared 8.1%, the most since August 2012.

A Labor Department report showed US employers added 38,000 jobs in May, the slowest pace since 2010.  In addition, April’s job gains were revised lower by 37,000 to 123,000.  Although the unemployment rate dropped to 4.7%, from 5.0% in April, the decline was primarily from discouraged workers deciding to leave the work force rather than from an increase in employment.  Following the jobs report, financial markets lowered the probability of a Fed rate hike in June to as low as 2% from a previous high of 30% reached in late May.

 

Global Markets:

Investors cheered the improving US macroeconomic data sending US equities higher in May and the S&P 500 index recorded a third consecutive monthly advance.  The S&P 500 index gained 1.8% during the month, for a year to date gain of 3.6%.  Six of the ten economic sectors of the index advanced as information technology and healthcare were the top performers.  The energy sector struggled even as oil prices continued to rally.  Small cap US equities outpaced large caps, as the Russell 2000 climbed over 2.0%.

European equities posted positive local currency returns in May for the third consecutive month after government data showed the euro zone economy expanded in the first quarter.  However, the MSCI Europe index fell 0.4% in US dollar (USD) terms after the euro weakened by 2.8% in May versus the USD.  In addition, the Japanese yen weakened nearly 4.0% versus the USD in May, reversing its April appreciation.  As a result, the MSCI Japan index (USD) fell 1.0% for the month.

Emerging market equities underperformed developed markets in May amid speculation higher US interest rates might spur capital outflows.  Brazilian stocks lost ground in May, reversing strong gains from the prior three months, as investors assessed how the change in government would impact the country’s economic prospects.

Gold prices retreated nearly 6.0%, paring 2016’s double digit rally, as the Fed’s signals for higher interest rates in the near term reduced gold’s appeal versus interest bearing assets.  Oil prices touched $50 per barrel, before closing at $49.10 per barrel, up 6.9% in May on signs the global surplus is easing amid declining output.

Fed policy expectations helped shape US fixed income markets in May after Fed Chair Janet Yellen noted that policy makers would look to boost borrowing costs in the “coming months.”  Two-year Treasury yields, which are sensitive to Fed policy, moved 10 basis points (bps) higher in May to 0.88%.  Benchmark ten-year yields rose 1 bp to 1.85%.  In corporate bond markets, US investment grade bonds generated negative returns as average yields on the Barclays US Corporate Investment Grade index rose to 3.14% from 3.07% in April.  However, US high yield bonds rallied a fourth consecutive month in May, sending average yields 6 bps lower to 7.31%.

Euro area consumer prices fell 0.1% in May compared to a year earlier, following a 0.2% decline in April, indicating the European Central Bank’s stimulus efforts are failing to ignite inflation.  Core inflation, which strips out food and energy, accelerated to 0.8% from 0.7% in April.  Euro area finance ministers agreed to release aid to Greece, potentially removing the threat of a repeat of the 2015 turmoil.  In response, Greece’s government bonds rallied, with 10-year bond yields declining below 7.0% for the first time since November, before closing at 7.27%.  News of the accord underpinned positive sentiment for riskier European sovereign debt as 10-year yields on Italian debt dropped 13 bps to 1.36% and Spanish 10-year yields fell to 1.47%, from 1.59% in April.  Benchmark German bond yields fell 13 bps to 0.14%.

Concerns about rising US interest rates weighed on emerging market currencies, paring gains in emerging market debt from the past three months.  Brazil’s real slid 4.9% in May – its worst monthly performance this year after investors questioned the ability of the country’s government to revive an economy plagued by recession.  South Africa’s rand declined 9.4% in May, the biggest monthly retreat since May 2013, ahead of a credit rating review of the country’s debt by Standard & Poors.  The premium investors demand to own emerging market debt over US Treasuries increased to 421 bps from 410 bps in April.  The JPMorgan EMBI Global bond index of USD debt declined 0.3% in May, ending three consecutive months of gains.  The local currency JPMorgan GBI-EM Global Diversified Composite index fell 5.4%.

 

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.

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