August 2017 Market Update

Transcription

1 Market Update (8/2017) Allianz Investment Management LLC August 2017 Market Update Key Points Upbeat GDP data from the second quarter along with another solid labor market report has begun to overshadow weaker inflation data as of late. The Fed continues to view the recent soft patch of inflation as transitory and thus we still expect an additional rate hike this year. Thematically, we continue to hold the view that central banks are reaching peak accommodation. We expect there will be marginal upward pressure on interest rates as global central banks work to remove accommodation. We are lowering our targets for both growth and the 10-year Treasury by 25 basis points as fiscal initiatives from Capitol Hill continue to develop slowly. Outlook GROWTH: As expected, growth indeed picked up during the second quarter with the first estimate for second-quarter real GDP from the Bureau of Economic Analysis coming in at 2.6%. Consumption was a large driver of the rebound, coming in nearly a percent higher than the previous quarter. Additionally, we saw another solid increase in nonresidential fixed investment, which had previously been a drag throughout most of Downplaying some of the enthusiasm was a downward revision to first-quarter real GDP from 1.4% to 1.2%. While consumption was higher than the previous estimate, fixed investment was revised lower. Overall, the rebound in secondquarter GDP confirms our view that the consumption-driven economy is picking up. However, the lower data recorded in the first quarter combined with the long delay in the president s growth driving policy changes has us optically revising our outlook for growth down by 25 basis points to 2.00% to 2.50% for OUTLOOK FOR GROWTH EXPECTATION Real GDP (growth) 2.00% % INTEREST RATES: Despite discussions around balance sheet reduction, expected to begin by the end of the year from the Fed, low inflation readings have been the main factor holding interest rates down in recent months. We continue to expect the Fed to move toward removing policy accommodation and thus putting upward pressure on rates. However, the recent soft patch of inflation has some investors questioning the validity of the Fed s forecast for another rate hike this year and their forecast for three additional hikes in While we think current rate levels are underpricing potential future rate hikes from the Fed, we are lowering our target range for the 10-year Treasury by 25 basis points for 2017, as dysfunction on Capitol Hill and delayed action from the Fed could weigh on rates in the second half of FORECAST PERIOD 10-YEAR TREASURY YIELD 12 months 2.25% -2.75% M-5334 Page 1 of 5

2 July 2017 Recap & Macro Themes The doldrums, when referred to historical maritime expression, can be depicted by long periods of calm or almost no winds that left sailing vessels immobile for sometimes weeks at a time. This describes the market environment in recent weeks as historically low volatility, lack of clarity from global central banks, and dysfunction on Capitol Hill has created a period of calmness in the markets. We expect this environment to continue over the coming weeks until central banks meet again in September for key policy decisions. Thematically, our view continues to be that central banks are reaching peak accommodation with regard to their monetary policy stances. The Fed has already begun removing accommodation and we are beginning to see this with other central banks as well. The Bank of Canada has raised rates for the first time in seven years and the ECB is moving toward tapering their QE program with the possibility of a rate hike in late 2018 or early While the current market environment has this theme on hold for now, we expect further clarity when central banks meet again this fall. Economically speaking, the situation is somewhat positive at the moment as upbeat GDP data from the second quarter, along with another solid labor market report, has begun to overshadow the weaker inflation data in previous months. It is tough to argue the strength in the U.S. labor market, given the results of July s employment report. The pace of job additions was much stronger than the 180k consensus estimate, coming in at 209k. Within the solid report, job gains were broad-based across sectors with the exception of retail. Notably, the manufacturing sector added 16k jobs in July on top of the 12k reported additions for June. The unemployment rate ticked slightly lower to 4.3% and we continue to expect this rate to drift lower with a steady participation rate. Lastly, the much-scrutinized wage figure came in at a robust 0.3%, keeping the annual figure at 2.5%. Overall, it s hard to nit-pick the healthy results of this report, which will augment the Fed s decision to further remove policy accommodation later this year. Regarding the Fed, with no expectation for policy action at the July meeting, we expected only subtle changes to the language in the FOMC statement as the committee appears committed to the course of policy action that began in March. Softer inflation data is a difficult topic for the Fed to recognize. Nonetheless, the Fed continues to view the recent soft patch as transitory and thus we still expect an additional rate hike this year, as continued strength in the labor markets will induce a Phillips curve believer like Yellen to hike rates again this year. Regarding 2018, markets are only pricing in one hike. It s possible the market could be mispricing the Fed s ability to continue hiking if the labor market trend continues and financial conditions fail to tighten. No decision was made with regard to the start of balance sheet normalization, but changes to the language in the statement lead us to believe this will be happening soon. Given the mechanics laid out by the Fed, we could see $450 billion come off the Fed s balance sheet by the end of 2018, with the complete unwinding process lasting until Overall, we expect that marginal upward pressure will continue on interest rates as the removal of policy accommodation becomes more prevalent. Inflation is still expected to rise to the 2% target, but it could be slow to develop. On the global front, there are certainly idiosyncratic and geopolitical risks on the table such as China, Russia, and North Korea, but the main theme we continue to watch is central bank peak policy accommodation. Albeit slowpaced, the Fed has already begun removing accommodation and it s only a matter of time before other central banks follow. Page 2 of 5

3 Market Indicators (figure a) figure a Equities rallied during the month of July with both the S&P 500 and Nasdaq-100 indexes reaching higher highs. More specifically, the S&P index increased by almost 2% in July while the Nasdaq shifted higher by 4%. Corporate earnings have surpassed market expectations, particularly on the revenue front, which fueled market gains last month. Volatility returned to subdued levels in July after following a quick spike in June. With the lack of marketmoving catalysts combined with the solid economic backdrop, we have seen equity volatility remain near historical lows. That being said, as we move into the third quarter it s hard to imagine that we won t see some pickup in volatility as debates over the debt ceiling heat up in September. Subdued inflation continues to hold down the long end of the curve as yields struggle to rise. In addition, lack of action from central banks has put any catalysts on hold until the fall. Overall, we will expect upward pressure on rates to resume once inflation starts moving back up toward the Fed s 2% target. Oil prices recovered significantly during the month of July as the price of West Texas Intermediate crude oil moved above $50 per barrel for the first time since May. The tentative rise in prices has been mostly driven by weekly supply numbers coming in better than expected, but there still seems to be some hesitation in the market that OPEC is going to achieve the level of supply cuts they set out to reach. Economic Indicators (figure b) The University of Michigan Consumer Sentiment Index and the Conference Board s Index of Consumer Confidence again retained their elevated stance in July. Both measures indicated optimism from consumers on both the current economic landscape as well as the outlook for the future. Despite the upticks, a noticeable gap between confidence and sentiment readings has taken form, as sentiment data remained steady and while confidence soared higher. Page 3 of 5

4 Economic Indicators (continued) The initial reading for second-quarter GDP came in at 2.6%, bouncing back from the slow start to growth we witnessed during the first-quarter (GDP revised downward from 1.4% to 1.2%). Despite a decline of 6.8% in housing investments, increases in both personal consumption, which increased by 2.8%, and nonresidential fixed investment, which moved upward by 5.2%, were enough to drive growth higher during the second quarter. figure b Consumer prices softened for the fourth straight month as headline CPI came in flat for the month of June versus an expectation of a 0.1% rise. Once again energy and transportation dragged the index lower, pushing the year-over-year figure down to 1.6% from 1.9% in the previous month. Core inflation rose by 0.1% in June and had no change on the yearly core inflation figure of 1.7%. This puts the annual headline figure below the annual core figure for the first time since the beginning of the year. Jobless claims continue to support the notion of a healthy labor market as there are no signs of significant job layoffs occurring in the economy. Jobless claims for the week of July 15 dropped by 15k to 233k and were well below the consensus forecast of 245k. Overall, the solid claims data supports our view that labor markets should remain robust over the coming months. The U.S. dollar index was under pressure for the fifth consecutive month as stronger economic data abroad has outweighed data in the U.S. The index fell 2.89% and reached a new low for the year, as bullish dollar bets in the market continue to be unwound. Despite the small decline, signs of strength in the manufacturing sector continue as the latest ISM data showed the sector remains at elevated levels. ISM manufacturing PMI came in a touch below estimates at 56.3, but still remains at a healthy level. However, in the service sector, we saw a larger pullback as the ISM nonmanufacturing index fell to an 11-month low of While disappointing, both indexes still show robust expansion. Page 4 of 5

5 EVENT Previous Survey Actual Next ISM Manufacturing Index September 1 (Friday) GDP Annualized 1.2% 2.7% 2.6% August 30 (Wednesday) Unemployment rate 4.4% 4.3% 4.3% September 1 (Friday) Retail sales -0.3% 0.1% -0.2% August 15 (Tuesday) Consumer Price Index (YoY) 1.9% 1.7% 1.6% August 11 (Friday) U. Mich. Consumer Sentiment August 18 (Friday) Home Price Index (MoM) -0.18% 0.30% 0.10% August 29 (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 Case-Shiller 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 8/2017. 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