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Global growth continued to decelerate in September, with the divergence between the buoyant US economy and the rest of the world becoming more apparent. Trade relations with China remain a key source of anxiety for global markets, even as things eased after a tentative agreement with Canada and Mexico in a new, revised NAFTA.
The Federal Open Market Committee (FOMC) met at the end of September, voting unanimously to increase short-term interest rates to a targeted range of 2.00% to 2.25%. The official statement dropped the word “accommodative” in describing monetary policy, with Chairman Powell noting that it’s no longer necessary to signal a cautious approach. Projections for future increases were essentially unchanged, and still suggest four more rate hikes by the end of 2019. The Fed’s preferred measure of inflation, Core PCE, came in at 2.0% and consumer confidence remains elevated.
The third estimate of 2Q-18 GDP remained at an annualized rate of 4.2%. Business investment and imports were revised downward, but this was offset by an increase in state and government spending, fixed investments and exports. The consensus forecast for 3Q-18 moved higher to around 3.2%, with the Atlanta Fed’s GDPNow model projecting 4.1%.
The unemployment rate was down 0.2% in September to 3.7% despite employers adding only 134,000 new jobs. The labor force participation rate remained anchored at 62.7%. Average hourly wages continued to rise, with a year-over-year increase of 2.8%, but real wage gains remain subdued after accounting for inflation expectations.
Country-specific shocks and tightening global financial conditions have pressured emerging market economies beyond what internal fundamentals might suggest. Despite some settling in September, this has caused the implied volatility for the JP Morgan EM Currency Index to recently spike above levels witnessed during the “Taper Tantrum” of 2013. As the linchpin for transmitting growth more broadly, it’s notable how China is attempting to offset trade tensions with policy.
Global equities were a mixed bag in September, with the large cap domestic and international developed benchmarks leading the way. The S&P 500, which represents large US-based entities, finished +0.6% higher in September, with year-to-date returns now exceeding +10%. Telecommunications (+4.3%), Healthcare (+2.8%) and Energy (+2.4%) set the pace, as Real Estate (-3.2%), Financials (-2.4%) and Materials (-2.3%) fell in negative territory. Small cap stocks retreated in September, with the Russell 2000 declining -2.4% for the month.
In the broad international developed markets, the MSCI EAFE index was up +0.9% in September. Overall, the US dollar was essentially unchanged versus developed currencies.
The prolonged selloff in the MSCI Emerging Markets index continues, with the monthly loss of -0.5% pushing year-to-date returns further into the red. The benchmark has now posted negative returns in 7 of the last 8 months, as investors have struggled with escalating trade frictions and local currency weakness versus the US dollar.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was down -2.0% during the month as higher US interest rates created competition for income-focused capital. The Alerian MLP index had its first negative month in the quarter, declining -1.6% in September to offset the prior month’s gain. Oil continued to experience upward momentum, with the NYMEX contract up +4.9%. The more broadly diversified Bloomberg Commodity index had a solid month, increasing +1.9%, even as year-to-date returns remain negative.
US Treasury (UST) yields moved meaningfully higher in September, extending the challenging environment for high-quality fixed income. Given signs of strength in the domestic economy, the rates market essentially passed through tighter financial conditions while discounting the ongoing uncertainty associated with global trade. The yield curve remains relatively flat as the excess compensation for extending maturities is quite low. The overall UST complex was down -0.9% for the month, with the longer-dated maturities declining by more than -3.0%. The commonly referenced 10-year UST yield ended the month 20 bps higher at 3.06%. Market-implied probabilities indicate a 70% chance that the Federal Open Market Committee (FOMC) will hike rates by another 25 bps at its December meeting.
Total returns for the Bloombar US Aggregate Bond index were down -0.6% during September, with year-to-date results now down -1.6%. Consistent with the positive response in US equities, IG corporates were an outperforming sub-sector, as credit spreads tightened by 8 bps and partially offset the rise in underlying base-rates. This was an impressive outcome in the face of substantial new issue supply. The traditional benchmark ended the month with an all-in yield of nearly 3.5%.
The Bloombar 1-15-Year Municipal index returned -0.6%, as tax-exempt issues sold off mostly in line with their taxable counterparts. Richly priced short-term issues continued to lag in September resulting in a flatter tax-exempt yield curve. High quality bonds continued to underperform riskier credits.
The Bloombar US Corporate High Yield index advanced +0.6% in September, as supply/demand technicals have been favorable. The benchmark’s overall spread tightened by 22 bps, establishing new post-crisis lows. Despite a relatively flat US dollar, unhedged international government bonds were negative as global yields trended higher. Local currency emerging market debt provided favorable outcomes for the month (+2.6%), as the entire category recovered.
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. Gryphon Financial Partners 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. Gryphon Financial Partners, LLC is a Registered Investment Adviser.