/perspectives/macroeconomic-research/steady-as-she-goes

Steady as She Goes

Our third-quarter Macroeconomic Outlook indicates that a strong U.S. consumer combined with a wary Fed and global stimulus should support U.S. credit markets.

August 17, 2016


This sector report is excerpted from the Third Quarter 2016 Fixed-Income Outlook.

Slow and steady economic growth, a cautious Fed, low interest rates, and improving oil market supply-demand fundamentals have created a favorable environment for fixed-income markets. Gross domestic product (GDP) growth was soft at 1.2 percent in the second quarter, a slight improvement from the first quarter’s 0.8 percent. But the headline figures belie underlying strength. Real consumer spending rose at a 4.2 percent annualized rate, the second-strongest quarter of the current expansion. The abrupt acceleration in consumer spending appears to have caught businesses by surprise, resulting in a sharp drawdown in inventories that subtracted 1.2 percentage points from GDP growth. Inventory restocking should support growth in coming quarters. Meanwhile, the United Kingdom’s Brexit referendum is unlikely to have a meaningful impact on the U.S. economy, thanks in part to the decline in interest rates and recovery in risk assets that followed. We continue to expect above-trend GDP growth of around 3 percent in the third quarter.

Our confidence in the near-term growth outlook is underpinned by stable fundamentals in the consumer sector, notwithstanding weakness in July retail sales. Labor market gains have boosted real disposable personal income, which rose at a solid rate of 2.4 percent year over year in the second quarter. Payroll gains recovered strongly to an average of 274,000 in June and July, and wage growth is trending higher (see chart, top right). Meanwhile, household debt and debt service coverage ratios are well below pre-crisis peaks, and the personal saving rate of 5.3 percent is about 2 percentage points above what we would anticipate based on its historical relationship with household net worth. We expect these factors to cushion consumer spending from shocks to income or confidence.

Despite this relatively healthy economic backdrop, we expect the Fed to delay its next rate hike until December at the earliest out of an abundance of caution. In our view, policymakers will take time to gauge the implications of Brexit, and watch for signs of firmer growth and inflation. Meanwhile, the ECB and BOJ are likely to follow the Bank of England in increasing accommodation.

Monetary policy divergence is likely to benefit the U.S. dollar in the near term, which would pose headwinds for the recovery in crude oil prices. Our research team’s oil price model calls for a period of seasonal weakness in the second half of 2016 before prices rise to $55 by mid-2017 (see chart, bottom right). We see further near-term oil price declines as an opportunity to add exposure to the energy sector.

Job Market Data Picked Up in the Second Quarter

Solid fundamentals in the consumer sector underpin our confidence in the near-term growth outlook. Payroll gains recovered strongly to 292,000 in June and 255,000 in July, and wage growth is trending higher. Labor market gains have boosted real disposable personal income, which rose at a solid rate of 3.2 percent year over year in May despite a slowdown in hiring, and household debt and debt service coverage ratios are well below pre-crisis peaks.

 

Job Market Data Picked Up in the Second Quarter

Source: Department of Labor Statistics, Guggenheim Investments. Data as of 8.5.2016.

Supply-Demand Dynamics Favor Higher Oil Prices by Year End

Our research team’s oil price model calls for a period of seasonal weakness in the second half of 2016 before prices rise to $55 by mid-2017, which should help to support credit markets into the third quarter and beyond.

 

Supply-Demand Dynamics Favor Higher Oil Prices by Year End

Source: OECD, Guggenheim Investments. Data as of 6.30.2016.

 


FEATURED PERSPECTIVES

August 22, 2019

Looking Past the Liquidity-Driven Rally

Credit spreads could get tighter in this liquidity-driven rally, but history has shown that the potential for widening from here is much greater.

July 29, 2019

The Fed's Sugar High

Rational immigration policy, not rate cuts, is the way to avoid recession.

July 17, 2019

High-Yield Credit in a Fed Easing Cycle

High-yield corporate bond spreads and bank loan discount margins typically widen when the Fed is lowering interest rates.


VIDEO

Third Quarter 2019 Fixed-Income Outlook 

Third Quarter 2019 Fixed-Income Outlook

Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share insights from the third quarter 2019 Fixed-Income Outlook.

Core Fixed-Income Conundrum 

Solving the Core Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.