Each month, representatives from Allianz Investment Management LLC provide commentary on market and economic indicators including Federal Reserve actions, interest rates, credit markets and economic releases such as inflation, GDP, consumer confidence, housing, retail sales and job unemployment news.
Allianz Investment Management LLC July Market Update
Equities chugged along throughout the month of June as much of the country began to open after the prolonged shutdown. Although virus concerns increased, equities ended the month higher with all three major indices reporting gains month-over-month. Most notably, the NASDAQ increased over 6% in June as the tech sector outperformed the broader index. Overall, market sentiment for equities continues to improve, however, some question whether equities may have rallied too quickly given the economic backdrop and ongoing virus worries. Tech was doing better than the broader index indexes.
Market volatility, measured by the CBOE VIX Index, returned above 30 in June as surging COVID-19 cases in the South coupled with increased uncertainty surrounding the November election outcome drove investor apprehension. Overall, we expect volatility to be elevated for some time as repercussions from the virus, as well as the election, play out.
Treasury yields continue to be anchored as purchases from the Fed continue to put downward pressure on yields. With the exception of the long-end of the curve, which declined slightly, the U.S. Treasury curve was mostly unchanged throughout the month of June. Overall, we expect the trend of low yields to continue for the foreseeable future.
West Texas Intermediate (WTI) crude oil closed just under $40 per barrel at the end of June, marking a gain of $3.83 month-over-month. Going forward, the price and overall recovery of crude oil is going to depend on future implications of the virus and whether economic demand returns. Overall, the energy market continues to work through the supply imbalance resulting from nearly nonexistent demand during the COVID-19 lockdowns.
As the initial lockdown measures have been lifted, the ISM manufacturing index suggests that activity has recovered fairly quickly. The index increased significantly to 52.6 in June from its May level of 43.1, indicating an expansion of the overall economy. The biggest contributors were new orders and production sub-indexes, which each rose by roughly 24 points. However, the employment sub-index remained more subdued. Industry commentary turned positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March.
Inflation was softer than expected for the month of May as both headline and core CPI declined by 0.1%. The story remains the same as it has been in previous months with airfares, hotels and apparel being a large drag on the index. Within core CPI, we also witnessed the same components putting downward pressure on consumer prices. On an annualized basis, headline CPI dropped to 0.1% and core CPI fell by two-tenths of a percent to 1.2%. Overall, the CPI data is in line with recent commentary and projections from the Fed in that inflation is expected to be quite muted for the near-term outlook.