October 2016 Market Update

Transcription

1 Market Update (10/2016) Allianz Investment Management LLC October 2016 Market Update Key Points The lack of further easing measures from both the Bank of Japan and the European Central Bank are causing the yield curve to steepen, pushing longer rates higher. Both ISM reports rebounded after the weak readings in August, with the manufacturing index rising back above 50 and the non-manufacturing index rising to an 11-month high. Conditions remain favorable for the consumer, and consumer confidence has risen to a 9-year high. Strengthening economic data leads us to believe that the Fed will increase the fed funds target by 25 basis points in December. The debate over monetary stimulus versus fiscal stimulus has begun, and fiscal stimulus appears to be the only solution to create growth in an environment where the cost of capital is near zero. Outlook GROWTH: Second-quarter GDP was revised higher as the third estimate came in slightly above expectations at 1.4%. So far growth has only averaged 1.1% during the first half of the year, with non-residential investment and net exports being the largest drags to GDP. In order to reach our growth target for 2016, GDP during the second half of the year will need to average about 2.5% and current trends in economic data lead us to believe our target is still attainable. Consumption continues to be the driver of growth, and the current conditions remain favorable for strong consumer spending during the second half of the year OUTLOOK FOR GROWTH EXPECTATION Real GDP (growth) 1.75%-2.25% INTEREST RATES: Rates have broken out of the narrow trading range that we witnessed for most of the summer and are moving close to key resistance levels. The debate over monetary versus fiscal stimulus as the path forward to spur growth and inflation is heating up, and the steeper yield curve is reflecting the uncertainty around global monetary policy. In particular, quantitative easing and the benefits derived from continuous bond purchasing from central banks are being called into question. The yield on the benchmark 10-year Treasury has risen to 1.72% and is nearing a key technical support level of 1.745%. We continue to believe the risk is tilted toward higher rates and a steeper curve as the era of quantitative easing may be coming to an end. FORECAST PERIOD 10-YEAR TREASURY YIELD 12 months 1.75%-2.25% M-5334 Page 1 of 5

2 September 2016 recap and macro themes The theme of higher rates and steeper curves continued throughout the month as the better than expected macroeconomic backdrop drove the direction of rates. Also helping the backup in global rates was a surprise report on ECB tapering discussions that provides further evidence of the realization that central bank policies are reaching their limits. Rhetoric from foreign central banks over the past month could be the first sign that central banks are beginning to acknowledge the additional benefits from continued unprecedented monetary policy is diminishing. The lack of further easing measures from both the Bank of Japan and the European Central Bank are bringing an end to the two-and-a-half year bull flattening trend in the yield curve causing long rates to rise. The recent backup in rates underscores the profound effect central banks have had on global sovereign rates and how quickly things can move in the other direction. Looking ahead, fiscal stimulus appears to be the only path forward to create growth and inflation in an environment where the cost of capital is near zero. The September Fed meeting was the sixth straight meeting in a row in which the Fed has held back from hiking rates. The mantra for Janet Yellen s Fed throughout 2016 appears to be a Fed reaching for any reasons not to hike rates, and we have seen this play out again with the latest policy announcement and decision not to raise the federal funds target. At any rate, this so called data-dependent Fed has created an environment of complacent market participants that are skeptical of the FOMC acting on any forward guidance (if you can call it that) any time soon. The bottom line is the Fed s lack of credibility has put the committee in a predicament where they would have looked bad whether they raised rates or not. The September meeting included the committee s Summary of Economic Projections (SEP), in which the committee once again lowered the median projection for fed funds. The problem we see here is that the dots fail to provide good forward guidance as this is a compilation of 17 different views, and the progression of the dots tells us the committee has been consistently wrong for some time. Macroeconomic data in September has strengthened, and just as we suspected the weak ISM prints from August appear to be outliers as both the ISM manufacturing index and the ISM nonmanufacturing index rebounded. The ISM manufacturing index came in a full point above expectations at 51.5, reassuring us that the sector is still expanding. Production and new orders drove the index higher and the outlook for the sector is much improved. On the non-manufacturing side, the ISM survey jumped to an 11-month high at 57.1 in September. The new orders, business activity, and employment components all rose sharply and indicate the U.S. economy is on solid footing. Consumer confidence also strengthened significantly during the month of September, as the Conference Board s index of consumer confidence rose sharply to We take this as a positive sign that consumer s expectations have moved out of the lull that we saw this summer, and going forward we see this as a strong signal that consumer driven growth will pick up in the coming months. In the labor market, the September report showed an increase of 156k jobs, and although this was slightly lower than the 172k estimate, the number was large enough to convince the market that the Fed will likely raise rates in December. More meaningful was the increase in average hourly earnings to +2.6%, an indicator that inflation will be rising. Overall, strengthening economic data and the lack of further easing from foreign central banks leads us to believe that the Fed will increase the fed funds target by 25 basis points at the December meeting. The debate over monetary stimulus versus fiscal stimulus is likely to play out into next year, which should result in higher rates on the back end of the curve in the coming months. Page 2 of 5

3 Market Indicators (figure a) figure a Equity markets ended the month mostly unchanged, and remain in a narrow range as the uncertainty around the direction of global monetary policy has resulted in a lack of conviction in either direction. With the upcoming U.S. election, we are cautious on the direction of equities until a clearer picture of the election results. Volatility spiked in early September as stocks slumped, but the increase in the VIX index was short-lived as the Fed left monetary policy unchanged. We expect volatility to likely pick up again as uncertainty around the election and U.S. monetary policy develops. Treasury yields finally broke out of the narrow trading range, as the lack of further easing from foreign central banks and discussions of more fiscal stimulus have sparked a sell-off in global rates. The benchmark 10-year Treasury is yielding 1.72%, and the risk is tilted toward higher rates as we move toward the end of the year. Oil prices have quietly staged a rally above $50/barrel for the first time since June, and open interest on WTI oil futures contracts has risen to a 3-year high as investors bet on higher oil prices. OPEC has announced that coordinated production cuts would be happening, and this should help buoy the price of oil for the time being. Economic Indicators (figure b) Recent survey data on consumer confidence indicates that consumption is likely to pick up during the fourth quarter, as both the Conference Board s index of consumer confidence and the University of Michigan s consumer sentiment index rose sharply to and 91.2 respectively. Driving consumer confidence to a post-crisis high was the present situation index moving from to 128.5, likely a result of the strong labor market conditions. Page 3 of 5

4 Economic Indicators (continued) figure b The third reading on Q2 GDP was revised up from 1.1% to 1.4%, as most of the components were revised higher, including inventories. Consumption came in at 4.3%, which was in line with expectations, but overall remains at a healthy pace. Although 1.4 % GDP growth is still pretty tepid, we expect growth during the second half of the year to look significantly better given the economic data we have seen so far. August CPI data came in much stronger than expectations, adding more ammunition for Fed members looking to hike rates. The headline monthly CPI figure rose by 0.2%, while core prices rose by an even stronger 0.3%. The usual components of rent and medical care drove core inflation higher, but most notable was the rise in medical-care costs, which were up 1.0%. On a year-over-year basis, both headline and core CPI rose by a tenth of a percent, to 1.1% and 2.3% respectively. Initial jobless claims continued their trend lower during the month of September, as the four-week moving average of claims has fallen to 254k. Continuing claims also fell during the month, indicating that current labormarket conditions in the economy remain healthy. The U.S. dollar index was relatively unchanged for the month of September, but better than expected economic data in the U.S. has pushed the index higher since the beginning of October. As markets continue to price in a rate hike this year, the U.S. dollar will strengthen. After a brief stop below 50 last month, the ISM manufacturing index rose to 51.5 in September, indicating that the sector is still expanding. Most components of the index reported gains, with the new orders index rising the most, from 49.1 to While we don t expect the sector to grow much in the coming months, recent data is skewed in a positive direction. Page 4 of 5

5 EVENT Previous Survey Actual Next ISM Manufacturing Index November 1 (Tuesday) Q2 GDP Annualized (third) 1.1% 1.3% 1.4% October 28 (Friday) Unemployment rate 4.9% 4.9% 5.0% November 4 (Friday) Retail sales 0.1% -0.1% -0.3% October 14 (Friday) Consumer Price Index (YoY) 0.8% 1.0% 1.1% October 18 (Tuesday) U. Mich. Consumer Sentiment October 14 (Friday) Home Price Index (MoM) -0.10% 0.00% -0.01% October 25 (Tuesday) Definitions Table Columns Previous Observation as of the end of the prior month Survey Economist survey prediction for current month s observation Actual Actual observation as of the end of the current month Next Date of next period s observation ISM Manufacturing Index Based on a survey from the Institute for Supply Management, this index indicates a positive growth in the manufacturing sector when the figure is above 50 and a contraction of the sector when it is below 50. An increase in the figure indicates either slowing contraction or accelerating growth. The index represents underlying figures in employment, inventories, new orders, production levels, and deliveries. (Source: Bloomberg) Unemployment Rate Based on a monthly survey of households, the unemployment rate is one of many figures in the Current Population Survey that move markets by indicating what portion of the population is at work or looking for work, what they are getting paid, and how many hours they work. The unemployment rate is the percentage of workers unable to find work who are actively seeking a job. The survey is conducted by the Bureau of Labor Statistics. Retail Sales Retail sales measure the total amount of purchases by consumers in stores that sell merchandise, food, and other services to end consumers. This measure is a large indication of trends in consumer spending, which moves markets because consumer spending accounts for over 2 / 3 of U.S. economic output. Data is compiled by the U.S. Bureau of the Census. Consumer Price Index (CPI) The Consumer Price Index measures the prices of a fixed basket of goods that reflect an average consumer s cost of living. CPI is a popular indicator of inflation, driving prices on U.S. inflation-linked bonds and used to adjust tax brackets and Social Security payments. CPI is compiled by the Bureau of Labor Statistics monthly. Home Price Index The S&P CoreLogic Home Price Index we track is the seasonallyadjusted average price of residential homes in 20 major cities in the U.S. Data is published with a 2-month lag (numbers available in March reflect price changes from January). Housing prices affect consumer wealth and consumers ability to borrow and spend, which affects U.S. economic growth. Gross Domestic Product (GDP) Gross domestic product is the sum of all goods and services produced in the economy. It is one of the most comprehensive benchmarks for economic performance. Real GDP measures economic productivity adjusted for inflation, which measures growth that is not due to goods getting more expensive. GDP is published by the Bureau of Economic Analysis. University of Michigan Consumer Sentiment Index The index is derived from surveys of 500 households by the University of Michigan on consumer finances and attitudes regarding the economy. The index is set to 100 as of 1966, reached a high of in June of 1999 and a low of 56.4 in June of High consumer confidence levels lead to robust consumer spending, whereas low consumer confidence levels lead consumers to pull back on spending. The views expressed above reflect the views of Allianz Investment Management LLC, as of 10/2016. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual s circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America. Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN In New York, products are issued by Allianz Life Insurance Company of New York, 28 Liberty Street, 38 th Floor, New York, NY Variable products are distributed by their affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN Only Allianz Life Insurance Company of New York is authorized to offer annuities and life insurance in the state of New York. Page 5 of 5