Second Quarter 2015: Greece Won’t Budge(t)
US equities traded in a tight range, finishing little changed from where they started the quarter and slightly positive for the year. Economic data appeared to rebound from another sluggish winter as the US job market continued to improve, adding enough jobs to move some long-term unemployed back into the labor pool. While the US is adding jobs at a rate almost double what we need to absorb population growth (+223k for June), almost twice that number of people dropped out of the labor force in June (432k). This leaves the US labor force participation rate at its lowest level since 1977 (only 62.6% of all working-age Americans are looking for work or are employed).
Housing was another bright spot, but manufacturing came in below expectations, weighed down by low oil prices and slowing car sales. The Federal Reserve sifted through mixed economic data to reiterate both its intent to raise interest rates sometime this year and that the timing and pace of any rate increases would be data dependent. That data, of course, includes any potential contagion effects from the unfolding Greek crisis, and a potential similar, though smaller-scale, dilemma unfolding in Puerto Rico.
Greek news contributed to fluctuating non-US equity prices, which advanced slightly in the quarter. Amid fear and uncertainty, Greece implemented capital controls and declared a banking holiday as its leaders informed the IMF that they would certainly miss their June 30 debt payment, becoming the first developed country in history to do so. Negotiations look set to continue for the immediate future, with an exit from the European Union a real possibility. Chinese stocks dipped sharply in June on growth concerns.
Continued ECB bond buying was not enough to keep rates at all-time lows, with the German bund yield bottoming out in April and finishing the quarter at 76 bps. US interest rates, which had bottomed earlier this year, rose steadily throughout the quarter. The rise in rates was enough to erase first quarter gains in fixed income markets, as long-dated maturities were hit the hardest. Emerging market and high yield debt, each posting a flat return, were relative outperformers in the quarter.