Despite a strong gain on Wednesday stocks went just about nowhere this week. The S&P 500 closed on Friday at 2,094 which was just about 1 point above where it ended the week before. The Dow Jones Industrial Average fared a bit better with a gain of 0.4% over the past five days while the NASDAQ Composite lost 0.3%. So far in the month of June stocks in the S&P 500 have lost about a half percent, but the large cap index remains in positive territory for the year, up 1.6%.
Treasuries managed a bit of a rally on Thursday which pared some of the recent losses from the bond market selloff that has occurred over the past few weeks. The yield on the 10 year benchmark note briefly touched 2.5% on Thursday before falling back to close the week at 2.39%. Ten year yields have risen just over 50 basis points since mid-April as conflicting economic data increased the level of uncertainty around the timing of the fed’s upcoming rate hike.
As of late borrowing costs have been spiking (albeit from record low levels) both in the U.S. and around the world. Domestically, the average 30 year mortgage rate has risen from a recent low of 3.6% in February to just over 4% this week. Abroad, German 10 year yields have gone from a low of 7 basis points in April to a recent intraday high of 1.05% on Wednesday and closed the week at 0.83%. Overall, the Barclays Global Aggregate Bond Index, a broad representation of the worldwide investment grade bond market, has fallen just under 2% since mid-April.
And given the recent volatility in the bond market it seems rather appropriate that there is a two day FOMC meeting scheduled next week. The meeting will conclude on Wednesday with a rate announcement, release of the Fed’s latest economic forecasts, and a press conference with Janet Yellen. While rates are expected to remain unchanged at this meeting (fed funds futures are calling for a 0% chance of an increase), markets will be looking for any indication that the Fed is preparing for a hike in September. In prior meetings the Fed has been quick to dismiss the soft economy in Q1 as “transitory” and the job market continues to show strength. However, there have been more calls for the Fed to delay a liftoff in rates, as the World Bank joined the IMF this week in suggesting that rates should not go up until next year. The World Bank warned of renewed strength in the dollar if rates rise too soon which could impact growth here at home. Realistically though, the Fed will likely do what it wants and as recently as May 22 Janet Yellen said a rate hike this year would likely be justified if the economy continues to improve as she expects.
One of the important economic data points out this week was retail sales figures, which showed a rebound from the rather sluggish rates seen in recent months. Total sales for May were in line with expectations of a seasonally adjusted 1.2% gain over April. Readings for April and March were also revised upward. The gain is a welcome sight as the drop in oil prices had been widely expected to spur additional consumption in the economy, and up until this week the data had been disappointing.
MSCI, one of the largest index providers in the world, announced this week that it intends to add Chinese A shares to its emerging markets (EM) index at some point, but just not yet. Recall that the emerging market index offers broad exposure to large and mid-cap companies in 23 developing economies throughout the world. China already represents over 25% of the EM index, but that is from H shares that are traded in Hong Kong. A shares on the other hand are traded in Shanghai and Shenzhen and are only available for purchase by mainland Chinese residents and select outsiders through the Qualified Foreign Institutional Investor (QFII) program. The restrictions on purchases by international investors is what led MSCI to delay the inclusion of Chinese A shares until some later date. If A shares were to be included, China would represent approximately 40% of the index and funds representing roughly $1.7 trillion in total assets would be forced buyers. You can see the potential effect on individual country weights in the attached chart. The decision to wait could prove to be timely as the local Chinese market has probably gotten ahead of itself, with gains of over 60% and 120% YTD in Shanghai and Shenzhen, respectively.
And finally some good budget news! Remember just five or six years ago when the federal government had a roughly $1.3 trillion deficit? During the aftermath of the financial crisis Uncle Sam was spending about $1.3 trillion more than he was taking in through taxes each year. While the government is still spending more than it is taking in, the amount has been reduced drastically. The Treasury Department announced this week that the budget deficit has fallen to $412 billion dollars, the lowest level since August 2008. Much of the budgetary progress has been spurred along by increased tax receipts and adherence to the automatic spending cuts (or “sequester”) that was agreed to in 2011.
Have a great weekend everyone, summer has definitely arrived here in Anchorage!
Senior Investment Analyst