U.S. economic conditions rebounded in the second quarter. Real GDP grew at an annualized rate of 2.6% from April through June, following a first-quarter reading of just 1.2%. The overall economic picture remains generally positive with strong consumer confidence aligning with low unemployment, respectable jobs growth, and nascent signs of improving wages. As consumer confidence hovers near a 16-year high, employers added 222,000 jobs in June, beating expectations and resulting in the 81st consecutive month of job gains. At 4.4%, the unemployment rate rests just above its lowest level since 2001. Housing starts grew a robust 8.3% in June, ending a three-month decline. The ISM Manufacturing Index continues to suggest an industrial sector that is firmly in an expansionary phase, reaching its highest level since August 2014 in June before falling slightly in July. Despite tightening labor conditions, inflation and inflation expectations remain well contained, but stubbornly below the Federal Reserve’s intended target. The Fed left its target rate unchanged at its most recent meeting but anticipates commencing with further rate increases later in the year. Importantly, Fed committee members also indicated that they expect to begin unwinding, “relatively soon”, the vast amounts of government bonds it purchased during the crisis years to stimulate the economy.
Both domestic and international equity markets posted strong gains in July. The NASDAQ Index, up almost 3.5% for the month, was the best performing domestic index and indicative of technology and growth stock leadership. Growth stocks in general continue to lead value stocks by a wide margin year-to-date. Internationally, emerging market equities continued their winning streak with heady July returns resulting in the MSCI Emerging Markets Index showing returns of over 25% through the first six months of the year. Key drivers of emerging-market performance included encouraging economic data out of China, investor inflows, and bourgeoning corporate earnings. Developed-market international equities have also posted strong returns so far to 2017, supported by improving economic conditions in the Eurozone.
Government bond yields remained little changed in July while investment-grade and high-yield credit spreads continued to tighten. Credit spreads are now at historically narrow levels, offering little yield advantage over like-maturity government bonds. The 10-year Treasury bond closed the month yielding 2.29%. Despite Fed comments about unwinding its balance sheet, paltry longer-term rates are being supported by low inflation readings and dovish July policy statements regarding the pace at which the Fed anticipates increasing its target rate. Treasury inflation-protected security yields reflect the market’s view of low inflation for the foreseeable future and may offer relative value if tight labor markets result in a pickup in wage growth.