PMC Weekly Review - July 7, 2017

A Macro View: June Monthly Recap

Domestic equity market returns were generally positive again in June, though there was a sharp reversal in the trends from the first two months of the quarter. US economic data was again mixed in June, with positive news in employment, slowing inflation, and another increase in the first quarter GDP estimate offset by negative news in retail sales, durable goods, and consumer sentiment. On the employment front, initial jobless claims were under 250,000, and continuing claims were under 2,000,000 each week in June. Headline inflation dropped by 0.1% in May, making the year-over-year change just 1.9%, and core CPI (ex-food and energy) was up 0.1% in May, but just 1.7% over the trailing 12 months. And the final revision to first quarter GDP pushed the figure to 1.4%, double the original 0.7% estimate in April.

On the downside, US retailers reported the largest decline in sales since January of 2016, -0.3%. More than 300 retailers have filed for bankruptcy in the first half of the year, up 30% from last year. There have been 5,300 further store closings announced through June this year, three times the number last year, and more than 85% of the number of closings in all of 2008, the worst year on record. Durable goods orders fell 1.1% in May, following a similar decline in April. Those two drops were preceded by four months of reasonably strong increases, a sign that businesses and consumers are less confident in the Trump administration’s ability to effectively implement its agenda of healthcare and tax reform, in addition to more regulatory changes. Throwing more confusion into the mix is the housing market, which had very mixed signals this month as well. Nationally, average home prices rose by 1.2% from April to May and by 6.6% over the trailing 12 month period. Despite the jump in prices, both new and existing home sales were significantly stronger in May. However, home builders’ confidence fell in both May and June (though still remains positive), evidenced by reduced new housing starts in May, the third straight monthly decline. Finally, the pending home sales index fell 0.8% this month, also the third straight decline.

Within this context, domestic equities were mostly higher during the month, but performance was strongest in the smaller cap and value indices. The Russell 1000 Index gained just 0.70%, while the Russell 2000 finished the month up 3.46%. This was a significant change from May, when the large cap index outperformed by more than 3.25%. Within the large cap index, the growth component was actually down 0.26% vs. the value component’s return of 1.63%, again a reversal from the growth index outperforming the value index by 2.50% in the previous month. There was a difference of just 6 basis points in the value and growth segments within the Russell 2000. The top-performing sectors in the month (across all market caps) were Financials and Health Care, while Information Technology and Telecommunications Services sharply underperformed. The Bloomberg Commodity Index as a whole was down 19 basis points in June, but that disguises a wide range of returns within the commodity sectors. The Agricultural and Industrial Metals sub-indices both returned more than 3.00% for the month, while both the Energy and Precious Metals sub-indices were down more than 3.00%. REITs rebounded after a poor showing in April and May, as the Dow Jones U.S. Select REIT Index was up 2.45% in June and up 1.64% for the quarter.

International equity markets were mixed in June, with most returns either in line or slightly lower than domestic returns. The MSCI World exU.S. Index posted a return of just 9 basis points for the month, as strong returns from New Zealand and Australia were offset by negative returns from most of Europe. The MSCI Emerging Markets Index posted a gain of +1.01% for the month, with strength in Asia offsetting weakness in Eastern Europe and the Middle East (mostly Russia and Qatar). The dollar depreciated against most major currencies in June, despite the increase in short-term interest rates. The significant exceptions were against the Russian ruble and Columbian peso, against which the dollar appreciated by roughly 5% and 4%, respectively. The dollar was also marginally stronger against the Japanese yen and South Korean won.

Domestic and global fixed income markets pulled back slightly in June, after posting strong performance in April and May. The Federal Reserve’s (Fed’s) second rate hike of the year in early June helped push yields higher in the short and intermediate portion of the curve. U.S. Treasury yields for maturities from two to ten years rose by 10-13 basis points, though thirty-year yields fell by 3 basis points. Inflation continues to soften, as trailing 12-month CPI, both headline and core, fell below 2.0% as of the end of May. Demand for fixed income assets remains strong, particularly for riskier credits, as flows into mutual funds and ETFs have already eclipsed last year’s flows. Most of the broad taxable fixed income indexes had modestly negative returns for the quarter, ranging from -10 to -40 basis points. Only the credit indices (both investment grade and high yield) showed nominal gains, as higher coupon income and modest spread tightening overcame the increase in rates. The worst performer for the month was the Bloomberg Barclays U.S. TIPS Index, down 95 basis points in June. Municipal bonds underperformed their taxable counterparts in June, as municipal yields also rose between 8 and 12 basis points for maturities out to seven years. Long maturity municipal rates rose as well, but by less than the front end of the curve, resulting in a slightly flatter muni curve at the end of June. Limited issuance (roughly 15% less than last year) and steady demand continue to support the tax-exempt market. The global fixed income markets followed the same pattern, as the Bloomberg Barclays Global Aggregate ex-U.S. Index was down 9 basis points, while the JPMorgan EMBI Global Diversified Index was down 14 basis points. On the credit side, the Bloomberg Barclays Global Credit Corporate Index was up 42 basis points, and the Global High Yield Index was up 17 basis points for the month.

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