February 2017 | www.selectasset.com
February 2017 Market Update
Federal Reserve Board Chair Janet Yellen announced this month that she supports a strategy for gradually raising interests since the Fed cannot afford to let the economy run too hot. Many economists predict the Fed will raise interest rate three times during 2017. These hikes are seen as a response to the steep tax cuts and infrastructure spending Trump promised during his presidential campaign. The current 4.7% unemployment rate is slightly below what Fed policymakers view as full employment. However, Yellen has said that the Fed is close to achieving its goals of full employment and stable prices. The U.S. Commerce Department reported this month that the U.S. economy grew at an annual rate of 1.6% in 2016. Between October and December, the economy grew 1.9%. This is its slowest growth rate since 2011. As of December, the Fed predicts growth will be around 2% for the next few years, though this projection is subject to change. On the campaign, Trump promised to bring U.S. economic growth up to 4% and repeatedly asserted the U.S. economy is suffering. Since Trump’s inauguration on January 20, his administration has stirred controversy and drawn criticism from many economists and business leaders. On the night of his inauguration, Trump signed an executive order authorizing federal agencies to roll back some provisions of the Affordable Care Act. While this executive order does not require agencies to dismantle the law, it has sent a chill through the health insurance industry and consumers. According to National Public Radio, “several insurers said they were spooked by the administration’s suggestion it might stop requiring most Americans to have insurance even before Obamacare is repealed.” Without the individual mandate, the price of health insurance policies could potentially skyrocket. Shortly after becoming president, Trump also signed an executive order to withdraw the U.S. from Trans-Pacific Partnership negotiations. Boosted by Trump’s promises to build a wall along the Mexican border and increase infrastructure investment, the Dow Jones Industrial average finally broke 20,000 five days after the inauguration. By January 30, the Dow Jones Industrial Average fell below 20,000 and stocks took a hit after Trump’s executive order to suspend refugee resettlement and stop the entry of citizens from seven majority-Muslim states. Economists and business leaders have criticized Trump over this immigration executive order. Trump also faced backlash over his plans to propose a 20% tariff on goods imported from Mexico to pay for the border wall.
On January 17, Prime Minister Theresa May announced that Brexit will be put up for a vote in both houses of the UK parliament. May stated that Britain would leave the EU's single market and that her fundamental goal is for Britain to regain control of its own immigration and law making. May intends to trigger the exit mechanism by the end of March. According to May, Britain seeks “a new and equal partnership -- between an independent, self-governing, global Britain and our friends and allies in the EU,” and that that they “do not seek to adopt a model already enjoyed by other countries.” Bloomberg writes that there is little to no chance that parliament will stop Brexit despite opposition to the deal in both the House of Commons and House of Lords. HSBC CEO Stuart Gulliver said that banking operations that generation 20% of revenue may move from London to Paris. Stuart estimates that 1,000 jobs in London are involved with products covered by EU legislation. Other banks express concern that they will lose access to the EU market after Britain leaves the EU. The pound fell to its lowest level since October after May’s announcement. Governor of the Bank of England Mark Carney predicts that consumption, which contributed greatly to the endurance of the UK economy since the Brexit vote, will slow down. The International Monetary Fund’s growth forecast projects that UK growth will lose momentum due to Brexit.
Throughout the European Union, nationalist parties from both the right and left are calling for their countries to leave the EU. Many economists view the EU in crisis, however, Brexit’s complexity and potential negative economic impact may ultimately be a deterrent for Brexit-like movements to occur. The International Monetary Fund release a draft of a report that details Greece’s public debt will be “explosive” in the coming decades. The IMP projects that Greece’s government debt will reach 275 percent of the country’s GDP by 2060. Currently, the government estimates that public debt is 180% of GDP. The IMF and Greece’s euro-area creditors want Greece to develop a law that will trigger austerity measures should the country fail to maintain a budget surplus before interest payments of 3.5% of GDP. However, Greek Finance minister Euclid Tsakalotos has called this demand “unacceptable.” This month, Deutsche Bank AG reached a final settlement of $7.2 billion with U.S. Department of Justice over the 2008 mortgaged-backed securities crisis. The bank has also admitted to misleading investors. This settlement is in line with the agreement announced on December 23. Annual price increases have exceeded 2% in some states of Germany, with inflation at 2.4% in Hesse, 2.3% in Saxony, and 2.1% in North Rhine-Westphalia. Populism continues to surge in Germany, and Finance Minister Wolfgang Schaeuble has warned “political problems” could arise with higher inflation. According to Goldman Sachs Group Inc, Europe’s stocks will return 8% this year. They also predict Stoxx Europe 600 Index will close at 380 while the S&P 500 will finish off at 2,300 by the end of 2017.
Following President Trump inauguration, Prime Minister Shinzo Abe released a statement that he wants to strengthen Japan's ‘unshakable’ ties with the U.S. by working with Trump. After becoming president, Trump signed an executive order to pull the U.S. out of the Trans-Pacific Partnership. Many economists view this executive decision as negatively impacting Japan’s automotive industry. TPP would have ended the U.S.’s 2.5% tariff they levy of Japanese passenger cars and the 25% tariff on truck imports. Topix index dropped to its lowest since December 7 after Trump’s withdraw from TPP. Governor of the Bank of Japan (BOJ) Haruhiko Kuroda expects GDP growth in Japan to be around 1.5% starting in April. This is higher than the 1.3% projections from three months ago. BOJ estimates that they can keep yield on 10-year Japanese government bonds at around zero percent even if consumer prices reach 1% this year. Japan’s exports rose 5.4% in December 2016 in reports released in January. Exports to China rose 12.5% and exports to the U.S. rose to 1.3% since last year. Meanwhile, imports fell 2.6%. According to many economists, low wage hikes in Japan are suppressing the drive for inflation. For the 10th straight month, consumer prices in Japan dropped. However, the rise in oil cost eased the pace of decline, leading many economists to expect inflation to return later this year. While the central bank is not expected to change their policies this month, some economists predict they the bank central bank could upgrade its forecast for economic growth. The Ministry of Health, Labour and Welfare released data this month that more than a million foreign workers were registered are working in Japan. This is a new record and a 19% increase from last year. The number of Vietnamese workers increased more than 50% in 2016. These numbers can be contributed to the government’s recent push to recruit workers from overseas.