Leader Month in Review - July 2015
At the start of July, the dual issues of Greece and a dropping Chinese stock market pushed investors into the safety of Treasuries and drove credit spreads wider. Once the Greek crisis was put to bed, fear of a Chinese economic slowdown continued to drive market performance. While the 2 Year Treasury stayed anchored, risk aversion pushed longer-term Treasury yields lower, flattening the yield curve. Treasuries outperformed other sub-sectors returning 0.83% for the month and are up 0.87% year-to-date.
Closely linked to Chinese economic growth, oil and other commodity prices continued to weaken, sending Credit spreads higher. Spreads are now either at or close to multi-year highs (chart 1). The higher proportion of energy and commodity-related names in the High Yield universe relative to Investment Grade resulted in a -0.58% return in July. However, High Yield is still the best performing sub-sector for the year.
Inflation has been running roughly between 1.5-2.0% over the last two years; the latest print of Core CPI of 1.8% YoY is right in the middle of the range (chart 2). More recent inflation is telling a different story, the 3-month annualized Core CPI (dotted line) figure has been above the Fed’s 2% target for four straight months now. Core PCE is showing a similar trend, albeit at lower overall levels.
A Q2 GDP print of 2.3% disappointed estimates for 2.5%, although the prior quarter was revised higher by 0.8%. As an aside, the Atlanta Fed’s GDPNow estimate has been spot-on so far this year – nailing the initial number for both Q1 and Q2 (chart 3).
Despite the weaker tone to the economic data, the Fed’s latest post-FOMC meeting statement was distinctly hawkish and again showed their intent to raise rates this year.
Economic Data Releases: