In this week’s Market Insights, we cover second-quarter gross domestic product and consumer spending, the expiration of the debt limit suspension, and new home sales activity. In our Chart of the Week, we discuss the Federal Reserve’s monthly bond purchases and recent FOMC tapering discussions. Finally, we highlight the recent increase in credit spreads.
Top Weekly Themes
- Consumer spending drives U.S. economic growth – The U.S. economy expanded at a 6.5% annual rate in the second quarter, slightly better than the 6.3% growth rate in the prior period. When stripping out inventories, a more volatile component of GDP, the annual growth rate was about 7.6%. Personal consumption was the primary driver, as consumers dipped into savings to increase spending at an annualized rate of 11.8% during the second quarter. Healthy consumer spending has coincided with rising consumer confidence levels and an improving labor market. The Conference Board Consumer Confidence Index increased to 129.1 in July, its highest reading since February 2020. We continue to believe the U.S. economy will experience above-trend growth for the remainder of this year and into 2022. We believe healthy consumer balance sheets and further improvements in the labor market will support consumer spending, the primary driver of U.S. economic activity. We are sensitive to current risks including the delta variant, high inflation, and potential changes to tax policy but believe the underlying fundamentals of the U.S. economy are well-positioned to withstand some degree of economic volatility.
- Time’s up! The suspension of the U.S. debt limit officially expired on July 31st. Until Congress either raises or suspends the U.S. debt ceiling again, the U.S. Treasury will not be able to borrow any additional funds other than to roll over existing maturities. Essentially, the U.S. government has maxed its credit card. For a government that’s been running trillion-dollar deficits, it does present an interesting situation. The U.S. Treasury can and will resort to “extraordinary measures” which basically refers to alternative methods to free up cash without having to turn to the capital markets for new borrowings. For this reason, that the financial markets were able to remain calm and look beyond the July 31st deadline knowing that the government still has access to internal funding. However, according to the Congressional Budget Office, these measures may be exhausted in the final quarter of this year. Needless to say, the clock is ticking. As time passes, and if no action by Congress is taken, we look for the markets to get a little more jittery. Although we fully expect action will be taken before any missed payments occur, based on prior episodes, investors may become impatient as “extraordinary measures” come close to running out.
- New home sales tumble in June – For the third consecutive month, new home sales dropped as homebuyers headed to the sidelines as elevated prices and the current stock of inventory deterred homebuyer’s interest. In June, new home sales increased at a 676,000-annual rate, the lowest since April 2020. Housing activity had been robust in 2020 before tapering off this year. Rising construction costs, including labor and lumber, have been partly to blame for rising home prices. Lumber had nearly doubled in price from $873 per 1,000 board feet on December 31, 2020, to its high of $1,686 per 1,000 board feet on May 7, 2021. Although the commodity’s price has fallen substantially since potential homebuyers have opted to remain patient. In fact, according to the University of Michigan Confidence Survey, 30% of consumers reported that home-buying conditions remain favorable, the lowest level since 1982. We believe that robust demand for housing will continue and that supply bottlenecks and labor shortages should improve as the U.S. economy continues to reopen. The housing sector has been a bright spot for the U.S. economy during the pandemic and is well-positioned to continue contributing to economic growth this year while cost pressures are expected to gradually ease.
Returns Table
| Equities | Week(%) | YTD(%) | 1-Year(%) | 3-Year(%) | 5-Year(%) | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | 0.6 | (0.8) | 26.1 | 24.25 | 17.94 | 1.22 |
| Russell 1000 Value | 1.2 | 1.5 | 22.7 | 16.79 | 11.35 | 1.77 |
| Russell 1000 Growth | 0.0 | (3.5) | 23.4 | 30.79 | 23.83 | 0.64 |
| Russell 2000 | (0.8) | (3.1) | 3.3 | 16.00 | 11.25 | 0.94 |
| MSCI EAFE | (0.5) | 0.7 | 10.3 | 12.91 | 9.74 | 2.51* |
| MSCI EM (Emerging Markets) | 3.7 | 2.9 | (4.0) | 11.03 | 10.03 | 2.38* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | (0.3) | (1.5) | (1.9) | 4.21 | 3.16 | 1.98 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | (0.6) | 4.6 | 7.50 | 5.93 | 4.45 |
| Bloomberg Barclays Municipal Bond | (0.7) | (0.9) | 0.7 | 4.30 | 3.74 | 1.31 |
| Bloomberg Barclays Global Aggregate x US (Country) | 0.3 | (0.3) | (5.8) | 2.44 | 2.94 | 1.15 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 6.2 | 9.9 | 55.3 | 17.0 | 9.3 | 82.6 |
| Natural Gas (NYM $/mmbtu) Continuous | 16.6 | 21.6 | 59.8 | 13.7 | 5.1 | 4.3 |
| Gold NYMEX Near Term ($/ozt) | 0.1 | (0.0) | (0.9) | 12.4 | 8.8 | 1,827.2 |
| Copper Cash Official LME ($/mt) | (1.2) | (0.2) | 21.1 | 17.7 | 10.9 | 9,665.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.13 | 1.24 | 1.22 | 1.15 | 1.07 | 1.14 |
| Japanese Yen per U.S. Dollar | 115.79 | 115.16 | 104.20 | 108.41 | 114.03 | 114.85 |
| U.S. Dollar per British Pounds | 1.36 | 1.35 | 1.36 | 1.28 | 1.22 | 1.37 |
Chart of the Week
- The Federal Reserve (Fed) left the federal fund’s target range unchanged at 0.00% to 0.25% at the Federal Open Market Committee (FOMC) on July 27/28. Chairman Powell remained upbeat on the U.S. economy while noting that progress has been made towards achieving maximum employment within the U.S. labor market. Currently, the unemployment rate is at 5.9% compared to 11.1% a year ago.
- Importantly, although progress towards Fed objectives has clearly been made, it wasn’t enough for the Fed to alter its ongoing monthly bond purchases which currently stand at roughly $120 billion. Instead, Chairman Powell stated in the post FOMC meeting press conference that the labor market still has a way to go. Chairman Powell did acknowledge that the labor market is in a very good position to continue improving this year given the record number of job openings as well as labor market bottleneck issues that are expected to ease this fall.
- The active communication and ongoing labor market improvement, in our view, probably sets the stage for tapering to begin later this year or early 2022. Regardless of the inception date, we do believe U.S. Treasury yields will be pressured higher considering the largest buyer of U.S. Treasury securities will be dialing back its demand.
Commentary
- Investor demand for corporate bonds has subsided in July with investment-grade corporate spreads increasing 9 basis points (0.09%) to 0.89% on July 20th, the highest level since mid-May. Concerns that the coronavirus delta variant will dampen economic activity weighed on investor’s risk appetite.
- In our view, the additional yield pick-up over U.S. Treasury securities remains attractive given healthy corporate balance sheets and our expectations that U.S. economic growth will remain solid into 2022. We expect credit spreads will be volatile for the remainder of this year as the global economy contends with covid-19 and its potential economic growth implications.
- We believe a spike in corporate spreads may create a buying opportunity so long as fundamentals remain financially sound. We continue to overweight investment-grade corporate bonds across our taxable bond strategies but will continue to monitor data closely looking for notable signs that the financial landscape is changing.
