William Riegel, Chief Investment Officer TIAA Public Investments
June 3, 2016
Investors remained cautious during the past week. With Federal Reserve Chair Janet Yellen’s recent statement that a rate hike would be “appropriate” in coming months if the economy continued to improve, markets hoped May’s jobs data would provide some clarity about the Fed’s next move.
Instead, the disappointing employment report muddied the waters, sending markets lower following its release on June 3. The S&P 500 Index retreated from a seven-month high to finish about flat for the week. European stocks broke a three-week winning streak by declining 2.4% in local currency terms. On a positive note, the European Central Bank upgraded its growth and inflation forecasts for 2016, while still warning of downside risks related to the global economy and the “Brexit” vote on June 23.
William Riegel, Chief Investment Officer, TIAA Investments
In Asia, Chinese equities surged 4.2% for the week, with most of the gain coming early in the week amid expectations that the global index provider MSCI might include China’s domestic shares in its indexes. Broad emerging-markets (EM) equities also rallied despite a weakening yuan. We take this EM performance as a positive sign, because Beijing’s sharp currency devaluations last summer and again early this year destabilized global equity markets.
Current updates to the week’s market results are available here.
U.S. Treasuries rallied during the week. The yield on the bellwether 10-year note, which began the week at 1.85%, moved lower in the wake of May’s surprisingly meager jobs number to end the week at 1.70%. (Yield and price move in opposite directions.)
Returns for most non-Treasury “spread sectors” were mildly positive. Investment-grade corporate bonds performed well, bringing their year-to-date gain through June 2 to 5.5%, while their high-yield counterparts continued to benefit from inflows and stabilizing oil prices.
The U.S. labor market generated a far-below-consensus 38,000 jobs in May, the smallest one-month increase since the fall of 2010. In addition, employment gains for April and March were reduced by a combined 59,000. The unemployment rate unexpectedly fell to 4.7%, a drop almost entirely due to 664,000 people leaving the work force. This drove down the participation rate from 62.8% to 62.6%. Disappointingly, wages rose only 0.2% in May and 2.5% compared to a year ago.
Other economic releases, especially in consumer spending and income, were mostly upbeat. Among the week’s reports:
Although job creation in May was weak, a strike by Verizon workers likely reduced the overall tally by about 35,000. Moreover, payroll data can be highly volatile. Therefore, we believe May’s total will be revised higher. At the same time, the economy’s job engine has begun to slow, as we had anticipated: on average, only 116,000 jobs per month have been created over the past three months.
The lack of significant wage growth is a bigger concern. With other wage measures beginning to improve, we would have expected more progress on this front. Wage pressure is important for continued growth in the overall economy. For example, the surge in personal consumption, which feeds directly into GDP, was fueled by the boost in wages during the first quarter.
Given May’s employment miss, markets are now writing off a June Fed rate hike, but we believe a move is still very much in play. Fed officials have made it clear that they want to raise rates, and they believe the economy is reasonably healthy. Moreover, economic growth has not changed materially since December. In our view, only January’s market volatility and fears of a China-induced global slowdown prevented the Fed from raising rates earlier this year. Since then, markets have settled down, employment growth has slowed—a trend the Fed believes is necessary—while wages have grown (at least through the first quarter). Against this backdrop, June may be a suitable time for the Fed to resume tightening.
In terms of U.S. equities, we still expect the S&P 500 to reach and exceed its previous highs, although a correction would not surprise us. Meanwhile, fixed-income investors are likely to face heightened volatility in the coming weeks as the “Brexit” vote approaches and economic data provides clues to the economy’s strength.
TIAA Global Asset Management provides investment advice and portfolio management services through Teachers Insurance and Annuity Association and affiliated registered investment advisors, including Teachers Advisors, Inc., TIAA-CREF Alternatives Advisors, LLC and Nuveen Asset management, LLC.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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