While second-quarter GDP growth was revised downward from 1.2% to 1.1%, economic data reported in August was solid with several indicators pointing to a strengthening economy in the third quarter. Third-quarter GDP could see a boost from an inventory bounce, continued strength in consumer spending and a solid labor market. Weekly jobless claims remain low and the national unemployment rate remains below 5%. Housing continues to be strong, with new home sales rising 12.4% in July to the highest level since 2007. Although existing home sales dropped 3% from June to July, the drop was primarily due to low inventory levels and increased prices. Home values nationally have risen 5.1% over the last year according to the Case-Shiller index. Oil prices increased 8% in August following a 15% drop in July, though West Texas Intermediate Crude (WTI) backed off its highs at the end of the month as OPEC looks increasingly unlikely to institute a production freeze. WTI closed the month at $44.86 after touching over $48/barrel midway through August. The Fed has become increasingly hawkish in light of stable economic data. Fed Chairwoman Janet Yellen’s comments at the annual summit in Jackson Hole support the possibility of two rate hikes this year. However, according to Bloomberg, traders assign only a 32% chance of the Fed raising rates in September.
U.S. equity markets generally took a breather in August, exhibiting very low volatility while eking out small gains. This was the least volatile 30-day period in more than 20 years, with only five days of the month with a daily move greater than 0.5%. Four of the 10 sectors in the S&P 500 were positive in August, with Financials performing the best and Telecom and Utilities falling the most. This is not surprising given the Fed’s hawkish tone of late. If rates go up, Financial stock earnings streams may stand to benefit while investors will likely move money out of some of the higher-yielding sectors such as Telecom & Utilities. Emerging markets once again outperformed developed markets, led by Brazil, as investor sentiment improved in reaction to political developments that may lead to positive economic change.
Central banks are maintaining an “easy” money policy by continuing to pump money into global markets. Interest rates in the U.S. remain significantly higher than in other major foreign markets, which has led to strong demand for U.S. Treasuries. The 10-year Treasury yield closed the month at 1.57%, up from 1.46% at the end of July, but down from 2.3% at the start of the year. Investors have also been drawn to U.S. corporate bonds, causing fairly significant spread tightening. Nevertheless, supply remains strong in the corporate bond space, with a record $106 billion issued in August and $853 billion year-to-date. High yield bond funds continue to exhibit strong performance, attracting YTD inflows of $10 billion. This contrasts with outflows of $5.8 billion in 2015. Emerging market debt has also seen strong inflows as investors continue to search for yield.