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.
U.S. economic activity gained momentum driven by strong consumer and business demand even as weak global sales held back exports and manufacturing. The economy expanded at a 1.5% annualized rate during the third quarter. A resilient consumer was masked by a major reduction in corporate inventories. Consumer spending grew an estimated 3.2% as consumers benefited from cheaper gas prices and income gains. However, companies reduced inventories by an annualized $59.8 billion from the prior quarter, the largest slowdown since the third quarter of 2011.
Manufacturing continued to struggle due to the impact of a strong U.S. dollar, which makes U.S. goods more expensive overseas, thereby weakening global sales. However, the U.S. services sector expanded in October at the second fastest pace in a decade. A gauge of non-manufacturing activity advanced to 59.1 from 56.9 in September as low borrowing costs and improving labor markets fueled business activity. Auto sales reflected the durability in consumption as an annualized 18.1 million autos were purchased in October, matching September’s total, representing the strongest consecutive monthly performance since 2000.
In October, the economy added the most jobs this year, snapping back from lackluster gains in August and September. The jobless rate fell to 5.0%, the lowest since April 2008. Employers added 271,000 new jobs in October, outpacing the average of 145,000 in August and September. The job market improvement increased the chances that the Federal Reserve (Fed) will raise interest rates in December, after keeping rates steady during its October meeting. Bond investors imply a 68% probability that the Fed will raise its benchmark rate at its next meeting, up from 56% before the jobs report was released.
China’s economy expanded more than forecast in the third quarter due to strength in services and domestic consumption. China’s GDP rose 6.9% from a year earlier, as the services sector expanded 8.4% through the first nine months of 2015.
In October, U.S. stocks posted their strongest monthly gain since 2011 due to better than expected earnings. These gains reversed the steep losses experienced in August and September. The S&P 500 rose 8.4%, the largest gain since October 2011, rebounding more than 11% from its August low. A measure of market volatility, the VIX, saw its steepest monthly retreat, down 38%, after the Fed calmed market fears of higher interest rates. All ten sectors in S&P 500 rose, led by the Materials sector (+13.5%) and Energy sector (+11.3%). With nearly 90% of companies in the S&P 500 having reported third quarter earnings, 78% have met or exceeded analyst projections. Small cap stocks rebounded as well. The Russell 2000 index jumped 5.6%, paring its loss to 2.5% for the year.
Inflation returned to Germany in October, rising an annual 0.2%, after dropping by the same amount in September. Economists forecast that euro area consumer prices will probably increase 0.1% in October, after dropping 0.1% the prior month. Still, the persistent low inflation raised concerns among European Central Bank (ECB) officials that inflation could become entrenched, creating a headwind for growth. These concerns increased speculation the ECB could further expand stimulus in December. Prospects for additional easing helped European stocks post the biggest monthly gain in six years as the benchmark Stoxx Europe 600 index rose 8.0% (+6.4% U.S.D.). Japanese stocks rose with the Nikkei index posting its best monthly gain in more than two years as investors focused on corporate earnings and the possibility the government is considering additional fiscal stimulus. United Kingdom stocks rallied the most since 2013.
China stepped up efforts to bolster its slowest economic growth since 2009 with its sixth interest rate cut in a year. They reduced the one-year lending rate to 4.35%, from 4.60%. Emerging market (EM) equities rallied 7.1% in October, their first monthly increase since April. Investors speculated that the Fed would keep borrowing costs low for longer than previously expected. China’s stocks posted their first monthly gain since May.
Oil prices rallied above $50 per barrel in October, but failed to sustain that level amid signs of a prolonged surplus from rising U.S. inventories and continued OPEC production above its target limits. Oil rallied 3.3% for the month.
U.S. Treasuries declined in October for the first time since June, after the Fed left open the possibility of an interest rate increase this year. Two-year yields, the most sensitive to changes in Fed policy, rose as high as 0.75%, from a low of 0.54%, and closed at 0.73%, a gain of 10 basis points (bps) for the month. Ten-year yields were pressured higher amid better than expected economic data, rising 11 bps to 2.14%. Thirty-year Treasury yields gained 7 bps to 2.92%. The BofA Merrill Lynch U.S. Treasury index fell 0.36%, paring the year-to-date advance to 1.42%.
The prospects for higher interest rates continued to incent U.S. corporate borrowers to lock in debt and current low levels. As an example, Microsoft issued its biggest ever offering of $13 billion. U.S. corporate debt issuance is on pace for a record year, with $1.41 trillion sold versus 2014’s record of $1.57 trillion, per Bloomberg data. The cost of U.S. investment grade corporate borrowing relative to U.S. government debt declined to 128 bps, down from a three-year high of 138 bps at the start of the month. U.S. high yield (i.e. below investment grade) bonds returned 2.8% in October, reversing four consecutive months of declines.
European government bonds rallied after ECB President Mario Draghi pledged to reexamine the capacity of quantitative easing in light of low inflation lingering in the region. German government bonds posted a second monthly gain, as 10-year yields declined to 0.52%, from 0.59% in September. The spread between Spanish 10-year yields and German 10-year bonds fell to 115 bps, the lowest since July, as Spain’s 10-year yields closed at 1.67%, a drop of 22 bps for the month.
Emerging market debt, denominated in U.S.D., advanced after the Fed left borrowing costs on hold. Average yields on the JPMorgan EMBI Global Diversified index fell to 6.02% in October, from 6.32%. Local currency EM government debt gained after a basket of EM currencies strengthened vs. the U.S.D. from lows set in September.
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.