After a sluggish first quarter, the U.S. economy is showing some signs of life as we near the end of the first half of 2016. First quarter GDP was revised upward to 0.8% from the initial estimate of 0.5%, due primarily to increased inventories. Many economists believe we are on track for 2.0% GDP growth in the second quarter, as consumers pick up some of the slack from the manufacturing sector. Consumer spending has been strong due in large part to lower gas prices and solid gains in personal income against a backdrop of improving consumer confidence. The housing market remains on solid ground, with sales of newly constructed homes reaching an 8-year high, new home prices setting a record high and overall home prices continuing to rise steadily. Oil prices continued their recovery, briefly touching over $50/barrel before settling on just over $49 for the month. As of May 31st, oil is up almost 90% from its February 11th low. Manufacturing data remains uninspiring, although the ISM Manufacturing Index did rise unexpectedly in May. The Fed threw markets for a loop in the middle of the month, with their minutes indicating the possibility of a rate hike as soon as June. Comments from Fed Chair Janet Yellen suggested that U.S. economic growth appears to be picking up and that the Fed would be warranted to continue gradually raising rates should labor markets continue to improve. Fed futures following the comments indicated just a 21% chance of a hike in June, with a higher probability of at least one raise coming later in the year.
The release of the Fed minutes on May 18th, indicating the possibility of an interest rate hike as early as June, caused a surge of volatility in U.S. equities. In response, equities fell to a two-month low on May 19th. Even with this dip, domestic equity markets finished positive for the month, while foreign markets didn’t fare as well. The biggest headwind currently facing the global economy is the possibility of Great Britain exiting the European Union. A vote on a potential “Brexit” is scheduled for June 23rd. This uncertainty, coupled with stagnant global growth, is weighing on both developed and emerging foreign markets. Following a dismal start to 2016, technology stocks staged a sharp reversal in May. The tech-heavy NASDAQ was up 3.8% for the month, bringing its YTD loss to less than 1.0%.
Overall, the fixed income market was relatively flat in May. The yield on the 10-year Treasury closed out the month at 1.84% (vs 1.83% at the end of April), even as the Fed indicated they may be willing to raise rates sooner rather than later. This reaction – or lack thereof – is consistent with the reaction after the first rate hike in December of 2015. Demand remains extremely high for U.S. Treasuries, as they continue to exhibit higher yields than other developed economies while maintaining their status of being a “safe haven” asset. According to analysis by Raymond James, since the Fed minutes were released in May, Treasury auctions have seen record or near-record demand, mostly from foreign investors seeking yield and safety.