CIO Markets Report. Key Observations Implications Markets Charts. Stephen Sexauer, CIO. CIO Markets Report

Transcription

1 Key Observations Implications Markets Charts

2 Key Observations and Implications 1. The Fed, Inflation and Jobs. The FOMC raised the Federal Funds rate to a range of 0.75%-1.00% at its March 15 meeting. This is the third interest rate hike since December Minutes from the March meeting indicated that the FOMC held serious discussions on how to begin reducing the Fed s $4.5 trillion balance sheet. Markets are predicting the next hike as soon as the June 14 meeting. The Personal Consumption Expenditure (PCE) Deflator rose to 2.1% year-over-year in February, the highest since March The Core PCE Deflator, which excludes food and energy and is the key FOMC measurement, was 1.8% year-over-year in March, moving closer to the FOMC s stated 2% target. The March nonfarm payroll report was a stunner: Payrolls increased 98,000, well-below expectations of 180,000. At the same time, the unemployment rate fell to 4.5%--close to all-time lows (Chart 1). If the Fed wants to maintain lower for longer interest rates, the low March nonfarm payroll number provides the space to do so, but all of the other data indicates an economy near full employment. 2. U.S. High Yield Spreads and Returns. U.S. High Yield spreads are currently near the lowest levels since 2014 (Chart 2). The continued drop in spreads has contributed to the strong returns of high yield bonds over the past year. Given the current tight spread levels, near-term returns are expected to be close to the median total return observed since 1993 of about 6.5% (Chart 3). 3. European Calm For Now. Status quo news: (i) Populist anti-euro candidate Geert Wilders lost in his bid to become the Netherlands Prime Minister. (ii) Populist anti-euro candidate Marine Le Pen s chances of winning in the upcoming French elections continue to decrease (Chart 4). (iii) In a speech in Frankfurt, Germany, on April 5, European Central Bank (ECB) President Mario Draghi put to rest speculation that monetary policy tightening would occur sooner than planned, saying he does not see cause for deviation from the current plan for low interest rates for an extended period of time. The Eurozone status quo could be challenged in Italy, where support for the Eurozone is low and general elections are forthcoming, in Scotland, which could vote for independence from the United Kingdom after Brexit, and in the April elections in France. Additionally, Greece has to repay approximately Є6.4 billion in bonds and loans in July, which will require a third tranche of aid from the ECB, European Commission and International Monetary Fund. 4. Implications: We trimmed exposure to high yield bonds in March and will closely watch spreads and returns in the space. We continued to maintain the overweight to emerging markets equities that resulted from outperformance of the asset class and SDCERA s managers. We will also continue to monitor the economic data, the evolution of global political changes, and the combination of earnings growth and equity valuations.

3 Chart 1 U3 Unemployment: Total unemployment as a percent of the labor force, headline number U6 Unemployment: U3 plus persons marginally attached to the labor force, plus total employed part time for economic reasons, as percentage of the labor force.

4 Chart 2

5 Chart 3

6 Chart 4