Weekly Market Update - February 5

Posted by FlexShares on Feb 5, 2018 10:45:00 AM

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Global equities see first weekly drop, no change in Fed policy and U.S. wage growth moves higher. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities see first weekly drop in 2018. Global equities pulled back last week, after a strong start in the first four weeks of 2018. After negative returns early in the week, global equities sold off on Friday amid concerns around rising interest rates. Emerging market equities dropped 3.9% for the week,[i] followed by a 3.8% and 3.3% declines in the United States[ii] and non-U.S. developed markets,[iii] respectively. Despite a difficult week for equities, all regions remain positive for the year, with emerging market equities leading at 5.3%.[iv] Reviewing the yield curve, the 10-year U.S. Treasury yield climbed to 2.84%,[v] while the 2-year U.S. Treasury yield remained relatively unchanged at 2.14%.[vi]

No changes in Fed policy in Yellen’s final meeting. The Federal Reserve (Fed) maintained interest rate policy in Janet Yellen’s last meeting as Chair last Wednesday. The Fed continues to forecast three rate hikes in 2018.[vii] Many professional investors utilize the Forward Rate Curve to determine the probability of a Fed rate hike and about how the market is feeling about the future movements of interest rates. The Forward Rate Curve is calculated extrapolating from the risk-free theoretical spot rate. Markets are expecting the first rate hike of 2018 to occur in March with a Fed fund futures implied probability of 100%.[viii] Core PCE index[ix], the Fed’s preferred inflation measure, posted 1.5% year-over-year (y/y) figure,[x] which was in-line with surveys and the prior month. The Fed expects near term inflation to move up before it stabilizes at 2% and also believes that strengthening economic conditions will allow the Fed to gradually move interest rates higher.[xi] At the end of the week, Jerome Powell was sworn-in for a four-year term as the next Fed Chair. Though many investors expect him to continue the policies of Janet Yellen, some think Fed policy could become more hawkish due to added fiscal stimulus, inflation metrics possibly moving higher, and asset prices moving into potentially overvalued territory.

Wage growth moves higher in January jobs report. Average hourly earnings moved up to 2.9% y/y, above both the prior level (2.6% y/y) and consensus (2.5% y/y).[xii] The 200k jobs added figure was slightly above consensus and in-line with levels observed in 2017.[xiii] Overall, the unemployment rate remained steady at 4.1%.[xiv] Meanwhile in Europe, headline and core Consumer Price Index (CPI) figures were both near consensus expectations, with readings of 1.3% y/y and 1.0% y/y, respectively.[xv] Germany headline CPI came in slightly below expectations at 1.6% y/y.[xvi]

This Week Preview

Government funding expires (again) this Friday. Congress leaders and President Donald Trump will likely return to the negotiating table to try to work out a solution to keep the government funded. Another short-term agreement is the most likely outcome, as neither party likely has the appetite for a second government shutdown. Divisions over immigration policy and military spending remain, likely preventing a longer-term budget deal. President Trump’s State of the Union Address last week offered little new information regarding immigration policy.

China economic data expected to remain healthy. In the middle of the week, China will release a number of economic data points including foreign reserves, import/export data, and inflation. Foreign reserves are forecasted to remain relatively unchanged, while inflation is expected to modestly drop. We believe the overall economic backdrop in China has been stable lately, with manufacturing and services Purchasing Manager’s Index (PMI) readings in the low-to-mid-50s range.

No change expected in BOE meeting. The Bank of England (BOE) meets on Thursday, where it is expected to hold interest rates steady at 0.5%.[xvii]17 UK CPI has stabilized at around 3% y/y over the past few months.[xviii]18 Nonetheless, the BOE represents a major developed market central bank that has taken steps to normalize policy in the recent past, as it hiked rates 0.25% in November 2017.

Click here to view the full report.

Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.

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End Notes

[i] Bloomberg, MSCI Emerging Market Equities Index returns 29Jan2018 – 02Feb2018.

[ii] Bloomberg, MSCI U.S. Equities IMI Index returns 29Jan2018 – 02Feb2018.

[iii] Bloomberg, MSCI World ex-U.S. IMI Index returns 29Jan2018 – 02Feb2018.

[iv] Bloomberg, MSCI Emerging Market Equities Index 02Jan2018 – 02Feb2018.

[v] Source: Bloomberg, 10-Year Treasury Rate 02Feb2018.

[vi] Source: Bloomberg, 2-Year Treasury Rate 02Feb2018.

[vii] Cox, J. Fed Leaves Rates Unchanged but Gives More Aggressive Inflation Expectations. CNBC. Retrieved Feb 2, 2018 from https://www.cnbc.com/2018/01/31/fed-no-rate-hike-but-more-aggressive-inflation-expectations.html.

[viii] Ibid.

[ix] The "core" PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

[x] Federal Reserve Bank of St. Louis. Personal Consumption Expenditures Excluding Food and Energy. Economic Research. Retrieved Feb 2, 2018 from https://fred.stlouisfed.org/series/PCEPILFE.

[xi] Robb, G. Fed Takes Step Toward Rate Hike as Baton Set to Pass to Powell. MarketWatch. Retrieved Feb 2, 2018 from https://www.marketwatch.com/story/fed-takes-step-toward-rate-hike-as-baton-set-to-pass-to-powell-2018-01-31.

[xii] Leubsdorf, B. U.S. Gained 200,000 Jobs in January as Wages Picked Up. Wall Street Journal. Retrieved Feb 2, 2018 from https://www.wsj.com/articles/u-s-gained-200-000-jobs-in-january-as-wages-picked-up-1517578320.

[xiii] Ibid.

[xiv] Ibid.

[xv] Investing.com. Eurozone Core Consumer Price Index (CPI) YoY. Latest Release. Retrieved Feb 2, 2018 from https://www.investing.com/economic-calendar/core-cpi-317.

[xvi] Investing.com. German Consumer Price Index (CPI) MoM. Latest Release. Retrieved Feb 2, 2018 from https://www.investing.com/economic-calendar/german-cpi-128.

[xvii] Turak, N. The Bank of England Could Validate Some Long-Awaited Optimism for the UK Economy. CNBC. Retrieved Feb 2, 2018 from https://www.cnbc.com/2018/02/02/bank-of-england-to-go-hawkish-responding-to-uk-economic-growth.html.

[xviii] Ibid.

 

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