Weekly Market Update
Notable events over the last week
- The FOMC meeting dominated headlines last week as the Fed announced it would scale back its ambitious rate plans. The Fed confirmed that due to global economic concerns and financial system distress that the committee has reduced its forward guidance from 4 rate rises this year to just 2 and left rates on hold with the current effective rate at 0.37%.In the accompanying statement Yellen warned of the continuing risks to global output and the need to remain cautious at least for now. The committee’s new projections cut economic output to 2.2% this year (from 2.4% previously and to 2.1% in 2017), reduced unemployment expectations further to 4.8% – given the recent strength of the labour market, while core inflation expectations remained almost unchanged at 1.6% this year, 1.8% in 2017 and 2% in 2018.
- The overall tone was dovish, despite the recent relatively hawkish Fedspeak and positive data, to the delight of risk assets. The S&P 500 finished up 17 pts (0.56%) for the day closing at the highest level this year. The median Fed dot is now at 0.875% for 2016 with the 2017 and 2018 dots nudged down to 1.875% and 3% respectively. Expectations of a June rate rise have now reduced to 38.67% after having risen to 53.6% in the few weeks leading up to the meeting. Inflation expectations as implied by the 5 year breakeven have risen sharply, with the market somewhat accepting that the FOMC is more willing to deal with an inflation overshoot than risk the recovery in light of a weaker global outlook.
- Prior to the FOMC meeting, the release of US Core CPI surprised markets to the upside ticking in at +0.3%MoM (vs. +0.2% expected) boosting the YoY rate up to +2.3% – the highest in five years. Gains were largely driven by the rising costs of medical care, prescription drugs and rents. Headline inflation on the other hand came in in line with expectations at -0.2% MoM, with the YoY rate down to +1.0%, largely driven by a 13% drop in gas prices. Industrial production underwhelmed falling 0.5% in February after spiking a revised 0.8% in January. There was some positive news in the latest manufacturing production data which showed a better than expected +0.2% MoM gain in February (vs. +0.1% expected). Retail sales also beat expectations coming in at -0.1% MoM (vs. -0.2% expected) with core up +0.3% MoM (vs. +0.2% expected). Despite the beats there were material downward revisions to the January readings.
- In Japan, the BoJ kept its benchmark interest rates steady at -0.1% and refrained from adding further stimulus, holding annual purchases at ¥80tn a year. In the post meeting statement Governor Kuroda warned of a bleaker economic outlook and its readiness to roll out further stimulus in order to achieve its ambitious 2% inflation target.
- In the UK, Chancellor George Osborne delivered his 2016 budget where macro perspectives took centre stage. Growth expectations were revised down to just 2% for 2016 (0.4pp cut) and to 2.2% for 2017, while consumer spending was revised down only modestly from 2.6% to 2.4% for 2016. In better news, the current fiscal year’s deficit is projected to be lower than previously thought, falling by just over £10bn relative a year earlier. Should the deficit continue to fall at this rate then the full year deficit would turn out to be £79bn for 2015-16 (4.2% of GDP). Meanwhile, the UK unemployment rate was left unchanged at 5.1% in January. However earnings data was better than expected with weekly earnings growth ex bonuses up +2.2% YoY in the three months to January (vs. +2.1% expected).
- In the Eurozone, inflation slipped back into negative territory in February, falling -0.2% YoY in line with expectations after gaining 0.3% YoY in January. Core consumer prices also printed higher than expected at 0.8% YoY (versus 0.7% expected). The ECB president Mario Draghi, said it was unavoidable that low inflation would persist, given the collapse in oil prices but insisted it is crucial that the central bank takes action against factors that it might be able to affect.
- Oil continued its recovery last week with WTI closing just below $40/bbl at $39.35/bbl. Commodities in general have benefited from this renewed optimism along with the calming of the China’s currency actions. Gold and Iron ore closed up at the end of last week at $1255.40/oz (+18.31% YTD) and $56.54 (+37.13% YTD) respectively.
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