Weekly Market Update - March 19

Posted by FlexShares on Mar 19, 2018 10:00:00 AM


Chinese imports, inline inflation and how will the UK respond to Russia? Find out more in this edition of “The Week in Review.”

Last Week Review

Decline in U.S. equities drags global equities lower for the week. Global equities declined 0.5% last week,1 primarily due to a 1.1% decline in U.S. equities.2 Emerging market equities gained 0.5%,3 while non-U.S. developed market equities returned 0.1%.4 Global equities are currently up 2.3% year-to-date.5 The 10-year U.S. Treasury yield moved five basis points (bps) lower to 2.84%,6 while the 2-year U.S. Treasury yield increased by three bps to 2.29%.7

Busy week for White House on personnel and trade. Last week saw additional personnel change in the White House as Secretary of State Rex Tillerson was fired on Tuesday and Larry Kudlow was named National Economic Council director in place of Gary Cohn, who resigned in early March. Current Central Intelligence Agency (CIA) Director Mike Pompeo will be nominated to replace Tillerson. President Donald Trump’s administration has also indicated it is moving towards pursuing tariffs on China related to intellectual property and technology. U.S. concerns are centered on China violating intellectual property laws, making it difficult for U.S. companies to do business in China, and forcing U.S. companies to transfer technology. In response, the U.S. is considering tariffs in the $30 billion range on Chinese imports in addition to restrictions on Chinese investment in the U.S. Elsewhere in Washington; the Senate passed a bipartisan banking regulation bill which would help ease regulations on small and midsize banks. The bill will now go on to the House.

In-line inflation helps reassure U.S. investors. Both headline and core Consumer Price Index (CPI) figures were in-line with survey expectations and very close to prior levels at 2.2% year-over-year (y/y) and 1.8% y/y, respectively.8 These readings helped smooth investor concerns about inflation following the increase in wage growth in early February. In Europe, core CPI remained at 1.0% y/y, well below the 2% level targeted by the European Central Bank (ECB).9

Tensions between UK and Russia increase over chemical attack. Russia saw tensions increase with the UK and the U.S. in the wake of a chemical attack in the UK that poisoned a former Russian spy. UK Prime Minister Theresa May announced the expulsion of Russian diplomats from the UK, while the U.S. announced Russian sanctions related to election interference and cyberattacks. The U.S. also issued a statement of condemnation with the UK, France, and Germany on suspected Russian involvement in the attack. Also in Europe, German Chancellor Angela Merkel was elected to a fourth term as chancellor, bringing an end to a bumpy six months of politics in Germany as Merkel worked to patch together a governing coalition.

This Week Preview

Investors widely expect a rate hike at March Fed meeting. The March Federal Reserve (Fed) meeting will conclude on Wednesday this week, where a rate hike would bring its policy rate to the 1.50%-1.75% channel. Investors will be closely following the tone of new Fed Chair Jay Powell’s press conference and the Fed dot plot forecasts in order to better assess the Fed policy outlook for 2018. We believe markets are currently expecting about two more rate hikes in 2018 in addition to a March hike. We believe market expectations for Fed activity in 2018 have shifted higher in the last two months, with more expectations of four rate hikes compared to two rate hikes.

No major changes expected in flash PMI data. We believe flash manufacturing Purchasing Managers’ Index (PMI) readings are expected to remain fairly in-line with February’s figures across most major developed market countries. Slight downticks are expected out of Europe and Germany while a slight increase is expected in the U.S. We believe all three sets of figures are expected to remain comfortably above 50, which is the divider between expansionary and contractionary territory.

Government funding deadline approaches. Congress will look to vote on a spending bill based on the budget agreement reached last month to avoid a government shutdown when funding expires this Friday. A shutdown is not widely expected, though some contentious items still need to be resolved around immigration and infrastructure.

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.

End Notes

  1. Bloomberg, MSCI World Index returns 12Mar2018 – 16Mar2018.
  2. Bloomberg, MSCI U.S. Equities IMI Index returns 12Mar2018 – 16Mar2018.
  3. Bloomberg, MSCI Emerging Market Equities Index returns 12Mar2018 – 16Mar2018.
  4. Bloomberg, MSCI World ex-U.S. IMI Index returns 12Mar2018 – 16Mar2018.
  5. Bloomberg, MSCI World Index returns 02Jan2018 – 16Mar2018.
  6. Bloomberg, 10-Year Treasury Rate 12Mar2016 – 16Mar2018.
  7. Bloomberg, 2-Year Treasury Rate 12Mar2016 – 16Mar2018.
  8. Bloomberg, U.S. Headline & Core Consumer Price Index (CPI) Inflation rate 16Mar2018. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. The core CPI index excludes goods with high price volatility, such as food and energy. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic.
  9. Bloomberg, Europe Core Consumer Price Index (CPI) Inflation rate 16Mar2018.
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