U.S. economic data continues to be mixed, and the Fed's minutes from the April meeting confirmed the market's consensus expectation that the Fed won't increase interest rates until September. Most recent data has confirmed this consensus view of the market. The economy is growing at a moderate pace, albeit an uneven growth led by employment. Jobless claims fell to a 15-year low last week, but average earnings have not expanded enough since the recession of 2008.
Consumer spending continues to be disappointing, as consumers focus continues to be on savings and paying down debt. The large decrease in energy prices in the last six months did not increase consumer's propensity to spend. The savings rate has continued to increase. Since falling negative in the mid 2000s, the savings rate has increased to almost 6% currently. This level is still below the long term average of 8%. Overall consumer debt levels have been falling, but not enough to make balance sheets look historically strong.
One of the interesting characteristics of the recent market is its low volatility in the equity market, which contrasts with high price volatility in the fixed income market. Fixed income volatility actually exceeds equity volatility over the past few months. This unusual paradigm -- where bond prices are more volatile than stocks -- has been caused by low trading volumes coupled with a questionable outlook for corporate earnings. Despite the earnings outlook, investors are staying in equities, as bonds appear over-valued given the pending Fed tightening, not to mention their low absolute yields. In the bond market, low trading volumes and reduced liquidity, to a certain extent due to regulation, have caused the opposite reaction, as volatility has gone up. I expect this environment to continue for the next few months, until we have clearer indications of the strength of the economy and the path of the Fed.
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