Leader Month in Review - June 2015
The fixed income market sell-off accelerated in June as interest rates rose. The sell-off was particularly acute on the long-end, with the 30 Year Treasury yield rising 17 basis points. The higher-yielding Investment Grade and High Yield sectors had previously weathered the rise in yields, but sold off in June sharply with spreads widening 10 and 48 bps, respectively.
Rising interest rates drove the sell-off in Investment Grade Credit – it might surprise most investors that Investment Grade has a duration of 7.1 years – while risk aversion around the worsening Greek debt situation pushed High Yield spreads higher (chart 1).
Although inflation continues to disappoint and fall below the Fed’s 2% target level, the labor market continues to “check the box” in terms of the first rate hike, more in this below. The economy has shrugged off a lackluster Q1, with ISM showing improvement and decent jobs figures. Consequently, the market-implied time until the first rate hike has been decreasing (chart 2). However, volatility has been increasing as well – we expect this to continue as the lift-off date approaches.
With the Unemployment Rate at 5.3%, we are very close to the Fed’s estimated range for long-term unemployment of 5.0% to 5.2%. Below this range, wage growth and inflation accelerates. Depending on which wage measure you favor, you can argue that this has already begun to occur/is not occurring (chart 3). Regardless, wage growth did bottom in 2012 and the medium-term trend is higher.
The consumer is finally spending again with consumption up 0.9% in May, the strongest month in six years, and up 3.6% YoY. In real terms, Consumer Spending rose 0.6% while on a YoY basis, real spending is up 3.4%. Much of the gain has been from the ongoing improvement in the labor market (chart 4).
With consumption accounting for the largest share of GDP and the labor market continuing to improve, we see the Fed raising rates in September.
Economic Data Releases: