Macro Overview- September 2016

Markets have become data sensitive as varying economic news moved equities and bonds in anticipation of a looming Fed rate hike. Some members of the Federal Reserve are leaning towards a rate increase before the end of the year rather than waiting until next year.

Growth estimates for the economy were revised down again in August with GDP growth revised to a 1.1% annual growth rate. Even though economic data has been mixed, the Fed may consider some of the data strong enough to raise rates sooner. Some Federal Reserve watchers believe that comments made by Fed members in August were meant to shore up rates a bit without the Fed actually raising rates, a tactic used before.

The S&P 500 index will have a new sector added in September with Real Estate Investment Trusts (REITs) comprising the 11th sector of the index. REITs have been part of the financial sector for years and have now earned their own designated category with an expected 3% allocation.

Internationally, worries still abound regarding the uncertainty of the EU’s future without Britain. Of concern is the lack of new capital investments by companies as a result of new rules that will take up to two years to formalize. Some see possible correlations between the EU vote in Europe and the U.S. presidential election in November, as polls failed to capture the voting intentions of marginalized and antiestablishment voters during the Brexit vote in Great Britain.

Volatility with oil prices continued producing reactions to headlines surrounding inventories, production, and OPEC policies. Domestic oil drillers and energy companies have been quick to acclimate to lower oil prices by retooling and curtailing production and costs. Decisions to increase production is seen as a validation that debt levels are under control and companies are positioned to expand, as long as oil prices stay around $50 per barrel.

Back to school sales rank as the second biggest shopping season for retailers, after the winter holiday season. According to the National Retail Federation (NRF), back to school shopping generates over $27 billion in retail sales every season.

Sources: FDIC, Federal Reserve, S&P, Reuters, Eurostat, NRF

Continued Low Rates – Global Fixed Income Update

Short-term U.S. bonds have been rising slowly as long-term bond yields have been dropping, leading to a “flattening of the yield curve.” Such a dynamic helps bond analysts and economists to determine if there’s an economic slowdown or even inflation on the horizon.

The Bank of England launched its biggest stimulus package since the financial crisis with its first rate cut in more than seven years and a new £70 billion bond-buying program. The bond-buying program will include £10 billion sterling denominated investment-grade corporate bonds and the remaining £60 billion will comprise purchases of government debt. Britain’s central bank, the Bank of England, issued a negative outlook, stating that British households faced a poorer future. The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up.

The Bank of England is joining central banks in Japan and the eurozone in buying large amounts of sovereign bonds, as global benchmark yields continue to descend to new lows, exacerbating the matching of future long-term liabilities for pension plans and insurance companies. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds.

The Fed continues to be at odds with other central banks worldwide, as lower rates and stimulus efforts are underway in Europe and Japan, while the Fed prepares to tighten in the United States.

Sources: Bank of England, Eurostat, U.S. Treasury