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.
September reported positive economic results, as second quarter growth was revised higher, job gains were solid, and US housing activity continued to be steady. In its final estimate of 2Q16 gross domestic product, the government said the US economy expanded at a 1.4% annualized rate, compared with a prior estimate of 1.1%. The upward improvement was driven by strong consumer spending and less negative drag from business investment. Household consumption rose 4.3%, while business spending advanced at a 1.0% annualized pace. Additionally, the economy added 156,000 new jobs in September and the unemployment rate rose to 5.0% from 4.9%.
Relatively low borrowing costs coupled with modest gains in household income is contributing to improving demand in the US housing market and rising home prices. New home sales in August were an annualized 609,000, beating consensus estimate of 600,000. Existing home sales for August were an annualized 5.33 million units, down slightly from the 5.38 million reported in July. Likewise, the supply of homes available dwindled further in August, helping drive prices higher. The median existing home price for all housing types in August was $240,200, up 5.1% from August 2015. August’s price increase marks the 54th consecutive month of year-over-year gains.
Gauges of business activity showed modest improvement in the manufacturing sector, while the services sector expanded at the quickest pace in almost a year. The September ISM manufacturing report came in at 51.5 from August’s 49.4 as a reading above 50 signals growth. The ISM’s non-manufacturing index jumped to 57.1, the highest since October 2015 and up from 51.4 in August. The Federal Reserve (Fed) left interest rates unchanged in September for the sixth straight meeting. They judged the case had “strengthened” for an increase but decided to “wait for further evidence of continued progress toward objectives.”
The ECB and Bank of England left interest rates unchanged and did not increase their stimulus purchases. The Bank of Japan (BOJ) also kept policy rates unchanged and adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels of around 0%.
US stocks were relatively flat as expectations that the Fed would increase rates by the end of 2016 weighed on investor appetites for riskier assets. The S&P 500 advanced 0.02%, a seventh consecutive monthly gain, while the Dow Jones Industrial Average underperformed with a 0.4% decline. Three of the eleven S&P 500 sectors (real estate was added in September) posted gains in September led by energy, technology and utilities. Financials did the worst amid concerns about weakness among European banks. Small caps outpaced both large and mid-caps as the Russell 2000 gained 1.1% paced by healthcare and energy stocks with more than 5% gains.
Globally, September was generally a positive month for equities as markets were buoyed by continued central bank stimulus. The MSCI World index moved higher, up 0.6% and the MSCI EAFE index rose 1.3%. European equities eked out positive returns, overcoming a surge in volatility led by financials after the US government demanded $14 billion from Deutsche Bank to settle the sale of government backed bonds prior to the global financial crisis. Ultimately, stocks recovered earlier losses amid rumors a reduced settlement was being negotiated. Japanese equities advanced 1.7% supported by the BOJ’s decision to keep interest rates low, which raised the prospects for corporate profitability.
Emerging market equities delivered monthly gains of 1.3%. Brazil’s Ibovespa index posted its fourth monthly advance amid optimism the new president will implement fiscal reforms and restore confidence in the economy. Six of the eleven MSCI Emerging Market sectors rose as technology, energy and consumer discretionary stocks were the top performers, while utilities fell over 3%.
Commodities rallied after the Organization of Petroleum Exporting Countries (OPEC) announced a plan to reduce oil output for the first time since 2008, helping send oil prices nearly 8% higher for the month. OPEC agreed to limit production to a range of 32.5 to 33.0 million barrels a day. Gold held on to slight gains despite rising expectations of higher US interest rates.
Central bank policy was a key driver of interest rates in September leading to divergent trends across yield curves. In the US, two and five-year US Treasury yields declined after the Fed reduced its outlook for the path of interest rates in 2017. They now project only two rate hikes next year, which is down from their June median projection of three. The long end of the US Treasury curve rose as the 10-year yield increased 1 basis point (bps) to 1.60%, while the 30-year yield jumped 8 bps to 2.32%. The BofA Merrill Lynch US Treasury index lost 0.2%.
The US broad bond market experienced a second month of losses in September hurt by declines in the long end of the credit markets. Average yields on the Bloomberg Barclays U.S. Aggregate index rose 1 bp to 1.96% in September, but have declined from 2.59% at the start of the year. US investment grade bonds declined in September driven by nearly 1.0% losses in the Bloomberg Barclays Long U.S. Corporate index. The search for yield dominated bond markets again in September after US high yield bonds moved higher, registering an eighth consecutive monthly advance. Energy continues to be a top performer in the high yield markets, rising 1.6% for the month.
Negative interest policies implemented by both the ECB and BOJ continued to lead to an increase in negative yielding debt in September. Per Bloomberg, the total face value of negative yielding corporate and government debt in the Bloomberg Barclays Global Aggregate Index jumped to $11.6 trillion as of the end of September, up 6.1% from August. Concerns over the health of European banks led to a flight to quality within Euro area bond markets. Germany’s sovereign debt rallied, sending 10-year yields down to -0.15%. Europe’s peripherals experienced mixed performance as Italy’s 10-year yield increased 8 bps to 1.19%, while Spain’s 10-year yield declined 13 bps to 0.88%.
Local currency emerging market debt (EMD) outpaced US dollar EMD amid solid currency performance versus the US dollar. A basket of EM currencies gained nearly 1% against the dollar. EMD corporate bonds rose 0.3% in US dollars.
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.