Weekly Market Update - March 26

Posted by FlexShares on Mar 26, 2018 10:00:00 AM


Trade concerns, tensions with China and where will inflation come in? Find out more in this edition of “The Week in Review.”

Last Week Review

Additional trade concerns weigh on global equities. U.S. equities declined 5.7% last week1 following concerns on increased global trade tensions, despite Congress and President Donald Trump passing a $1.3 trillion spending bill. Non-U.S. developed market equities fell 2.4%2, while emerging market equities declined 3.3%3. Year-to-date returns for U.S. equities (-2.5%)4 and non-U.S. developed market equities (-2.7%)5 are both currently negative. Heading towards the end of the first quarter, year-to-date returns for most major asset classes are in negative territory, with emerging market equities the main exception with a 1.1% gain so far in 2018.6

Trade tensions heat up between the U.S. and China. On Thursday, the U.S. announced tariffs on $60 billion of imports from China in key strategic industrial and technology areas. The U.S. also plans to create new restrictions for Chinese investments in the U.S. and target China’s technology licensing rules with the aim of better protecting U.S. intellectual property. China responded with tariffs on $3 billion of U.S. imports, but noted that the measures were in response to earlier U.S. tariffs on steel and aluminum. Related to the steel and aluminum tariffs, the Trump administration announced last week that certain countries such as Brazil and South Korea as well as the European Union (EU) would be temporarily exempt from the tariffs. Investors will be on the lookout for further details on the China tariffs, as the Trump administration has not specified final details on implementation.

The Fed hikes rates in Powell’s first meeting as Fed Chair. The Federal Reserve (Fed) raised interest rates to the 1.50%-1.75% channel in the first meeting under the leadership of new Fed Chair Jay Powell. The Fed expects inflation to pick up in the near term and economic growth to benefit from the recent tax cuts and increase in government spending. The Fed retained its overall expectation for three rate hikes in 2018, which is in-line with what markets are expecting. Fed officials are also predicting three rate hikes in 2019 and further tightening in 2020, though Powell implied investors should not be overly focused on the these forecasts.

Flash PMI data drops across the globe but remains expansionary. With the exception of the U.S., all major regions experienced decreases in flash manufacturing Purchasing Managers’ Index (PMI) levels from the prior month. The decreases in both Germany and Europe were larger than anticipated by consensus surveys, but both metrics remain well into expansionary territory and among the highest levels in developed markets. Investors will continue to look for signs that trade tensions between the U.S. and China are starting to weigh on global growth momentum.

This Week Preview

Inflation across U.S. and Germany in focus this week. With the Fed expecting inflation to increase over the upcoming months, investors will keep a close watch on core Personal Consumption Expenditure (PCE), the Fed’s preferred inflation measure. Core PCE will be released on Thursday and is expected to inch closer to the Fed’s 2% target level at 1.6% year-over-year (y/y). Headline PCE is expected to remain unchanged from the prior level at 1.7% y/y. Inflation data will also be released this week in Germany, with an expected Consumer Price Index (CPI) reading of 1.7% y/y.

Brexit talks on Ireland border begin this week. The UK and European Union (EU) are expected to start negotiations on the Northern Ireland border on Monday. This follows the recently announced agreement for a 21-month transition period that would allow the UK to remain within the EU’s economic structures after the official departure in March 2019. The Ireland border after Brexit remains one of the key issues that may determine whether the UK government will be able to reach consensus on a final Brexit agreement.

Modest increase expected in China manufacturing PMI. Towards the end of this week, the manufacturing PMI for China will be released. Consensus expectations call for a 51.1 figure, which is above last month’s reading of 50.3. Investors will also keep an eye on economic data from Japan including retail trade, industrial production, and housing starts following the drop in Japan’s flash manufacturing PMI last week.

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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 U.S. Equities IMI Index returns 19Mar2018 – 23Mar2018.
  2. Bloomberg, MSCI ex-U.S. Equities IMI Index returns 19Mar2018 – 23Mar2018.
  3. Bloomberg, MSCI Emerging Market Equities Index returns 19Mar2018 – 23Mar2018.
  4. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 23Mar2018.
  5. Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Jan2018 – 23Mar2018.
  6. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 23Mar2018.
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