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.
After subdued growth during the first half of the year, the US economy picked up steam during the third quarter driven by strong business spending and growth in exports. The Commerce Department reported gross domestic product (GDP) jumped an annualized 2.9%, following a 1.4% gain the prior quarter. Corporations rebuilt inventories in anticipation of a rebound in new orders and exports accelerated. Consumer spending rose 2.1%, which was less than projected.
The US labor market showed continued progress in October as employers added 161,000 jobs, after the 191,000 gains in September. The unemployment rate fell to 4.9% from 5.0% the prior month. The underemployment rate, which includes part-time workers looking for full time work, dropped to 9.5% from 9.7%. Wages increased as average hourly earnings rose 0.4% in October from a month earlier to $25.92, which represents a 2.8% improvement over the past year. Higher wages should continue to support US consumer spending during the fourth quarter.
US inflation trended higher in September amid rising energy and housing costs. A government report showed inflation is getting closer to the Federal Reserve’s goal of 2.0%. The consumer price index (CPI) increased 0.3% in September from the previous month as energy prices increased 2.9%, and food costs remained unchanged. The year over year increase in CPI was 1.5%, the highest since October 2014. Excluding the volatile energy and food costs, prices were up 0.1% in September and rose 2.2% over the past 12 months.
The Federal Reserve (Fed) left its benchmark interest rate unchanged but indicated the case for raising interest rates had strengthened. This caused financial markets to raise the odds of higher rates before the end of the year. Fed policy makers felt the pace of inflation had “increased somewhat since earlier this year” and were increasingly confident inflation was on track to reach their 2.0% target. Policy makers believed that growth of economic activity was accelerating and labor markets continued to strengthen. Investors showed an 84% probability of a 0.25% hike at the December meeting, according to pricing in federal funds futures.
US stocks fell in October with the S&P 500 recording a loss of 1.8%, ending a streak of seven consecutive monthly gains amid political uncertainty surrounding the US elections and mixed corporate earnings. Two of the eleven S&P 500 sectors posted gains with financials the top performer, up 2.2%. Telecommunication stocks fell 7.5% and healthcare continued to be pressured due to uncertainty regarding drug pricing policies. As of early November, 454 companies have reported third quarter earnings. Of these, 73% reported earnings that surpassed analyst estimates and 6% met expectations. Sales have come in stronger than expected with 65% beating estimates. Small cap stocks underperformed both large and mid-caps, as investors took profits after advancing nearly 12% through September. The Russell 2000 declined 4.8% in October as all sectors fell, led by an 11.7% drop in healthcare followed by energy related issues that lost 7.6%.
Euro zone equities ended in negative territory amid concerns about inflationary pressures and a weakening euro. A government report showed consumer prices in Germany rose in October at the fastest annual pace in two years. Meanwhile, the euro declined 2.3% versus the USD amid speculation the European Central Bank (ECB) may extend its asset purchase program as the Fed begins to raise rates. The MSCI Europe index lost 3.3% as the real estate and technology sectors plunged over 8.0%. Japanese shares rose to a six-month high as the yen weakened boosting expectations for earnings for companies that export goods. The MSCI Japan index climbed 1.3% led by financials as the Bank of Japan’s policy switch to control yields was viewed as a positive for bank’s balance sheets. Emerging market equities recorded a marginally positive return overall as the MSCI EM index advanced for the fifth consecutive month driven by the MSCI EM Latin America index that soared 10% largely from a rally in Brazil.
The Bloomberg Commodity index posted a slight loss largely due to declines in energy and precious metals. In October, oil traded at a 15-month high of $51.93 per barrel on hopes that OPEC may cap production in November. Concerns regarding the ability of members to strike a compromise led to a sell off, dropping 2.9% to $46.86 per barrel.
Global bond markets came under pressure in October after the Fed signaled a rate hike was looming. In the US, Treasury yields climbed to their highest levels since May, resulting in the biggest monthly loss since February 2015. The US Treasury yield curve steepened in October as two-year yields rose 8 basis points (bps) to 0.84% and 10-year yields jumped 23 bps to 1.83%. Yields on the 30-year rose 26 bps to 2.58%. Treasury Inflation Protected Securities (TIPS) breakeven rates, a measure of market based inflation expectations, widened to the highest levels since July 2015 as 10-year breakevens jumped to 173 bps, an increase of 53 bps from the 2016 lows in February. The Bank of America Merrill Lynch US Treasury Index fell 1.15% posting a loss for the third consecutive month.
The current state of monetary policy divergence among major developed central banks set the tone for global bond markets in October as global high grade bonds had their worst month in a year. While the Fed appears on course to tighten policy in December, the Bank of England and the ECB kept accommodative quantitative easing plans in place as overall government bond yields were sharply higher. In the United Kingdom, the two-year gilt yield rose from 0.10% to 0.26%, while the10-year gilt yield rose from 0.75% to 1.25%. In the euro zone, German 10-year yields rose from -0.12% to 0.16%. Italy’s bonds were the worst performers within the region amid uncertainty over an upcoming national election. The yield on Italian 10-year bonds rose to 1.70% before closing at 1.66%. The Bloomberg Barclays Global Aggregate Index declined 2.8%.
Emerging market debt was weaker in October as the USD sovereign JPMorgan EMBI Global Diversified index fell 1.2%. This was the first decline since May and the premium to own EM debt over US Treasuries rose 4 bps to 340 bps. Both local currency and USD corporate EM bonds suffered slight losses for the month.
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.