The U.S. economy expanded at a 3.9% q/q saar pace in 2Q 2015, according to the BEA's third estimate. This upward revision is based off of personal consumption and non-residential fixed investment increasing faster than originally thought. A slowing pace of inventory accumulation in the second quarter may lead to less of an inventory overhang than foreseen for coming quarters, though the substantial size of inventories outstanding should be a drag on growth as they wind down. The U.S. economy in the second quarter continued to expand at an above trend pace, and whether or not it will continue to do so in the third quarter remains to be seen.
The September Employment Report was disappointing overall, with payroll employment increasing by 142,000, well below consensus of 203,000. The prior two months were revised lower by 59,000 jobs, highlighting that weakness in August was not a one-off occurrence. The unemployment rate remained unchanged at a level of 5.1% and wage growth remained stagnant at 1.9%. While September's report makes an October hike unlikely, December remains in the cards barring any further deterioration in labor market data.
Companies will begin reporting their 3Q earnings numbers this month. We expect to see continued headwinds to profits from low energy prices, a strong U.S. dollar and slower global growth but anticipate growth to rebound in 4Q should these macro factors subside.
CPI softened in August as headline consumer prices rose 0.2% y/y, but fell -0.1% in the month. Core CPI inflation maintained 1.8% y/y growth, although it only inched higher by 0.1% m/m as prices moderated broadly. Gasoline and energy prices continued to drag on the overall number, with gasoline prices down 4.1% and overall energy down 2.0% in the month. The FOMC lowered its inflation expectations as low commodity prices and a strong dollar continue to depress inflationary pressures, and negative import price growth in September suggests that low headline inflation may be with us for some months more.
The FOMC left rates unchanged in September, and indicated in its policy statement that it will wait to see the impacts of global market and economic volatility before moving rates. References to the economic situation in the U.S. were relatively unchanged, although the statement noted that economic activity may be restrained somewhat by global economic and financial developments and that further appreciation of the dollar is likely to put further downward pressure on inflation. In its new projections for interest rates, the members of the FOMC now only expect one rate hike (of 0.25%) in 2015, compared to a previous expectation of two rate hikes, although they still expect four in 2016.
- Volatility caused by the timing and communication of Fed tightening.
- Concerns about a slowing Chinese economy and its ripple effects on emerging markets.
- Deflation worries in other developed economies outside of the U.S.
- Volatility caused by sharp swings in commodity prices and exchange rates.
- A slow upward trend in earnings (despite the temporary drag from cheap oil and a high dollar), coupled with low interest rates, still make stocks look attractive in relative terms.
- Cyclical and small cap stocks are generally favored in a rising interest rate environment.
- High yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given likely Fed tightening in 2015.
- Despite disappointing returns due to a stronger dollar in 2014, international exposure is still warranted given growth prospects abroad.