Steve Waddington

Summary

Next week attention will remain on the possibility of trade frictions while Italian elections, the Chinese National People’s Congress and US labour market data will also be closely watched.

Strategy review

Volatility remains elevated as trade fears add to an adjustment in risk appetite

The adjustment to a higher-volatility environment and to a higher risk premium in rates continues to present a challenging environment for markets. This week saw new information in the form of the first public testimony of the new Federal Reserve (Fed) Chair Jerome Powell to the US House and Senate, as well as a batch of inflation and growth data. The latter was in the form of the purchasing manager’s indices (PMI), which were released around the turn of the month. Against this backdrop, markets were choppy. News towards the end of the week regarding President Trump’s plans on tariffs on steel and aluminium imports caused another bout of risk aversion. Equity markets ended up the primary casualty while government bond yields fell from their recent highs.

Market and economic review

Trump tariff plans rattle markets and overshadow new Fed chairman

On Thursday, President Trump announced the imposition of tariffs on imported aluminium (10%) and steel (25%), and will sign a formal order in the next week. This unnerved markets at a time when sentiment was already fragile. Initial responses by the European Union (EU), China and Canada hinted at retaliatory measures, although it appears that they will await details of US plans before responding more formally.

This news overshadowed new Fed Chair Powell’s testimony in which he painted an upbeat view on the economy, but suggested rate hikes should be gradual. The market pricing for rate hikes this year moved higher, with three hikes now being largely discounted by the market, while the possibility of four moved above 70%. Longer-dated yields, however, were pretty well behaved with the 10-year treasury ending the week at 2.80% after President Trump’s announcement of metal tariffs, well below the recent high of 2.95%.

Contrasting growth data, while inflation data does not add to market fears

On the macro data front, the closely watched US ISM was stronger than expected (60.8 versus estimates of 58.7), marking the highest level since May 2004. There was contradictory information from China with a notable miss in the official Chinese PMI, which triggered a bout of local equity market weakness until a private sector (market) release pointed to a mild improvement.

European PMIs recorded a small upgrade to the provisional releases and suggested strong European growth albeit off the peak. In mainland Europe inflation data helped soothe bond market fears. The euro area’s February headline and core consumer price index (CPI) were both in line at 1.2% and 1% (year-on-year) respectively, while Germany’s CPI was 0.1ppt lower than expectations, at 0.5% month-on-month and 1.2% year-on-year respectively, with the annual rate at a 16-month low. France and Italy’s CPI prints came in below expectations while Spain’s numbers surprised on the upside. The most important US inflation news came on Thursday in the form of January’s PCE data, but in-line readings (0.3% month-on-month and 1.5% year-on-year) were not a source of market concern.

Brexit uncertainty continues

On the Brexit front, UK Prime Minister Theresa May’s speech outlining the UK government’s plans for the long-term relationship with the EU did not meet a warm reception from the EU negotiators. The European Commission also released its own draft legal text on the Article 50 withdrawal agreement and this served as a reminder as to how far apart the parties are from any sort of agreement. Of particular focus is the status of Northern Ireland post-Brexit and this looks like being a significant sticking point on agreeing a way forward.

Outlook

Trade, politics and central banks

Given events of the last week, the follow-on from the Trump tariff announcement is going to be a key market driver as markets consider the prospect of retaliatory action and trade wars. The outcome of Sunday’s Italian election will be also a focal point. Expectations are for a hung parliament and possibly a technocrat-led government, but this is no longer viewed as an event with wider European ramifications.

At the start of the week, China’s two-week National People’s Congress also begins. Beyond the setting of economic targets it is expected that the term limits on the president and vice-president will be changed or removed.

On the central bank front, the Reserve Bank of Australia, European Central Bank (ECB) and the Bank of Japan are due to meet (announcements due on 6, 8 and 9 March respectively) but no change in policy is expected. The ECB meeting will probably be the most closely watched of the three because analysts are looking for signs as to whether the central bank might tweak its guidance on policy normalisation. Given current market sensitivities, policymakers may be concerned that the market could overreact to any perceived change in direction of policy.

In the US, a number of Federal Open Market Committee members will make speeches at various conferences. With the markets’ focus so concentrated on whether or not the Committee is moving towards four 25bp rate hikes at this month’s meeting, rather than the currently discounted three, their comments should give a steer on how the majority is moving on this front.

On the macro data front, there will be a range of industrial production and durable goods order releases over the course of the week and these will be closely watched given that most PMIs are suggesting strong but possibly moderating growth (the US ISM not withstanding). The key data highlight comes on Friday with the release of the February US labour market report.

By Steve Waddington, Portfolio Manager in the Multi-Asset Strategy Group

The post Global macro economic commentary on the week ahead from Insight Investment appeared first on AdviserVoice.

Steve Waddington

The following are thoughts on the week ahead from Steve Waddington, portfolio manager in the multi-asset team at Insight Investment a leading global investment manager.

FOMC meeting: a key focus but don’t expect much to change

1. The key event of the week ahead is, fairly obviously, the meeting of the Federal Open Market Committee (FOMC) – with any decisions made announced on Wednesday evening.

The newly confirmed chair (Jerome Powell) and his colleagues will have the December core personal consumption expenditure inflation outturn to aid their policy discussion, but that’s unlikely to have a material impact as it’s expected to edge up only slightly.

We are in line with markets, expecting the next rise in the policy rate to come in March, when the FOMC’s next economic forecasts are produced (the probability of a March hike is currently priced in at 95%).

2. US payroll and ISM outturns will be released after the FOMC has made its decision, so they will play into subsequent policy decisions. In our view, hourly earnings are the key.

For private earnings, the risk is that there will be an increase in the annual rate of growth, as the monthly change seen last January was relatively weak (at four cents).

Nonetheless, the annual rate of growth is only likely to edge up to 2.6% from 2.5%.

The ISM balance should point to a month of strong, but moderating, activity growth. On Friday, the latest University of Michigan survey of consumers will be released.

We’ll be looking closely for any change in the inflation expectations balances. Last time round, inflation expected one-year out ticked up to 2.8%.

This is also a busy week for US earnings reports, with 35% of the S&P 500 Index’s total market capitalisation making announcements.

The technology sector will be a particular focus, given its importance to earnings growth in previous quarters. •

3) Away from the US, provisional January consumer price index numbers for Germany, France, Italy and Spain should reinforce the view that inflation pressures around the globe remain fairly limited. Purchasing manager indices in the UK, Italy and China should point to strong but slightly moderating growth.

In Australia, the key quarterly inflation release is expected to edge slightly higher. Any significant surprise there will obviously have a material impact on short Australian rate expectations.

The post Insight’s Global economic outlook for the week – as at 30 January, 2017 appeared first on AdviserVoice.

Steve Waddington

Key points highlighted by Steve Waddington, Portfolio Manager in the Multi Asset Group at Insight Investment, a global investment manager, on highlights from the European and US markets this week :

• The most important data this week are European flash November PMIs, which are released on Thursday, while US markets are shut for Thanksgiving. The FOMC minutes released on Wednesday are not likely to change expectations of a rate hike next month. Separately, Bank of England Governor Mark Carney said UK interest rates could rise “a couple of times over the next few years” if the UK economy evolves in line with expectations.
• While the UK budget normally occurs in spring, from this year the budget is being moved to autumn to allow tax changes to occur well before the start of the fiscal year (which ends on 5 April). The chancellor is under pressure from members of his party who supported Brexit to increase spending to support the economy during its exit from the European Union. The UK labour market showed signs of slowing on Wednesday, as the number of people in work fell for the first time in almost a year.
• Last week the House voted to pass its US tax reform bill, but the bottleneck is likely to be the Senate as Republicans only have 52 of the 100 seats. As the Senate Finance Committee voted to approve its revised package a full chamber vote is imminent. As Thanksgiving is on Thursday, the vote is most likely to occur next week. However, given the differences between the Senate and House’s tax bills, there is likely to be a significant period of reconciliation, which could delay the implementation of the bill until early 2018.

The post Insight’s Global economic outlook for the week – as at 21 November, 2017 appeared first on AdviserVoice.

Steve Waddington

After a relatively calm week in terms of releases, this week is packed with inflation announcements. In addition to the key US consumer price index (CPI) report on Wednesday, we also have UK CPI Tuesday.

The CPI for Germany and France on Tuesday and Wednesday respectively should give an indication as to eurozone inflation on Thursday. Thursday will also have the October retail sales report from the US. Chinese October activity indicators tomorrow could also be a market driver.

We have a full schedule of central bank speakers. At the European Central Bank (ECB) policy panel discussion in Frankfurt today, major central bankers from the G7 countries will be speaking. There will be Mario Draghi from the ECB, Janet Yellen from the Federal Reserve (Fed), Mark Carney from the Bank of England and Haruhiko Kuroda from the Bank of Japan.

There appears to be a consensus within the Fed about a December increase in rates, but there could be a divergence of opinion regarding following rate increases. John Williams, who sits on the FOMC, said a rate rise in December “makes sense” and that he was “pencilling in” three further increases next year. However, Patrick Harker said that while he would support an interest rate rise next month, he wants to see signs of higher inflation before backing tightening next year.

The Senate Finance Committee is due to start working on mark-ups to the US tax reform bill. Given expectations that a final vote would occur before Thanksgiving on 23 November, there are likely to be several tax-related headlines this week given the differences between the senate and house’s tax bill. For further information read the full article.

Insight Investment is a leading asset manager focused on designing investment solutions to meet its clients’ needs. Founded in 2002, Insight’s collaborative approach has delivered both investment performance and growth in assets under management. Insight managed A$935bn (£552bn) as at 30 June 2017, across liability-driven investment, fixed income and currency, global multi-asset and absolute return, global farmland and specialist equities.

Insight Investment is owned by BNY Mellon, a global leader in investment management and investment services with $1.7 trillion in assets under management. The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.

The post Thoughts on the week ahead from Steve Waddington at Insight Investment – as at 14 November, 2017 appeared first on AdviserVoice.