William Riegel, Chief Investment Officer TIAA Public Investments
August 5, 2016
In the U.S., equities stumbled early in the week amid a drop in oil prices to below the key $40 per barrel mark. The S&P 500 Index then began to pick up steam, supported by a subsequent rally in oil and July’s positive employment data. For the week, the index gained about 0.5%.
European stocks also started slowly, dragged down by slumping bank shares. However, they staged a late-week advance on the back of aggressive stimulus measures announced by the Bank of England (BoE) and the robust U.S. payrolls expansion. The BoE cut its benchmark rate to a record-low 0.25%, expanded its quantitative easing program, revived a corporate bond-buying plan, and will offer cheap loans to banks to spur lending.
Despite the rally, the STOXX 600 Index dropped 0.2% (in local currency terms), ending a four-week winning streak. On the economic front, Eurozone manufacturing and service-sector activity rose to a six-month high in July. This data is especially encouraging, since it suggests the region saw little overall contagion from the U.K’s Brexit vote.
Japanese investors were less enthused by Prime Minister Shinzo Abe’s latest effort to stimulate Japan’s economy. Although the fiscal stimulus package totals some ¥28 trillion (about $274 billion), ranking among Japan’s largest since the financial crisis, new and direct spending will make up just ¥7.5 trillion, spread out over the next two years.
Disappointment over the plan sent the yen higher versus the U.S. dollar, weighing on the exporter-heavy Nikkei 225 Index, which fell 1.9% for the week (in local currency terms). Stocks in China were flat, while more broadly, emerging-market (EM) stocks posted a small gain for the week through August 4, supported by a rally in EM currencies―led by the Brazilian real—and the rebound in oil prices from early-week lows.
Current updates to the week’s market results are available here.
Returns for non-Treasury “spread” sectors were mostly negative. High-yield bonds, however, bucked that trend. Although in our view they are richly priced, investment-grade corporate bonds and asset-backed securities should remain firmly in demand over the coming weeks as yield-hungry investors seek higher-quality spread products.
Among the week’s other releases:
employment. At this point, wage growth is more important than job creation totals or the unemployment rate.For the U.S. economy, we expect the third quarter to be a reversal of sorts from the second, with personal consumption falling from its robust 4.2% quarter-over-quarter rate and businesses picking up the slack by restocking their inventories. As a result, GDP should increase from its annualized rate of just 1.2% in the second quarter to around 1.7% in the third, further signaling that the economy is moving positively, albeit moderately.
In spite of consecutive back-to-back months of solid jobs growth, a Fed rate hike in September remains unlikely, in our view. December, though, is still in play. Amid ongoing concerns over global growth―demonstrated most recently by the BoE’s easing―the Fed is in no hurry to raise rates.