March 2017 | www.selectasset.com
March 2017 Market Update
The Federal Open Market Committee (FOMC) released a statement shortly after their two-day meeting in early February that they expect moderate economic growth, strengthening in the labor market, and a 2% inflation rate in 2017. Interest rates remain unchanged, however, economists and FOMC members anticipate that interest rates will gradually rise through the year. In her semiannual testimony to Capitol Hill, Federal Reserve Chair Janet Yellen signaled to lawmakers that the Fed’s decision to raise interest rates later this year will be independent of the White House's timing for tax cuts and spending. Yellen warned that waiting to raise interest rates could have negative consequences for the economy. The Labor Department reported the economy added 227,000 jobs in January, up from 157,000 in December. Unemployment grew from 4.7% in December to 4.8% in January. Labor force participation was at 62.9 %, up from December’s 62.7%. Many economists view the addition of jobs as a possible sign of market confidence in Trump’s proposed tax and regulatory cuts. Labor Department figures additionally indicated that the U.S. cost of living increased in January, the most since February 2013. The cost of goods and services rose 2.5% compared to last year, and the consumer-price index rose 0.6%. On February 14, the U.S. Senate confirmed Steven Mnuchin as U.S. Treasury Secretary. Throughout his confirmation, Mnuchin reiterated his position that a strong dollar is key and that the dollar is currently “very, very strong.” Also on February 14, health insurance company Humana announced that it will not sell individual policies both in and outside Obamacare exchanges in 2018. Humana is one among several major insurers to pull out of Obamacare due to the unexpectedly high cost of patient claims. Other insurances companies such as Aetna and Anthem have stated they are reconsidering their participation in exchanges, especially due to the divide among lawmakers over the repeal and replacement of Obamacare.
In early February, the Bank of England (BOE) upgraded growth forecasts for the UK’s economic performance. Bank officials now estimate that the UK economy will grow by 2%. As of November, bank officials had expected growth to be 1.4%. According to the Office for National Statistics, unemployment will go up to 5% this year. This forecast is up from the 4.8% estimate in the fourth quarter. However, many economists had expected unemployment rates to rise to 5.5% in 2017. Additionally, the Office for National Statistics reported that output of UK industrial production rose 0.3% in December, and the National Institute of Economic and Social Research estimated that GDP rose 0.7% during the fourth quarter. On February 2, the BOE’s Monetary Policy Committee voted unanimously to keep interest rates at 0.25%. BOE policy makers view the fall in the value of the pound after the Brexit referendum was responsible for the recent rise in inflation rates. A survey released by the BOE on February 8 reveals a “slight rise” in the total labor cost growth this year. Difficulties in hiring and retaining employees are viewed as a cause for this increase. Growth in basic pay will potentially slow to 2.2% in 2017, down from 2.7% predicted in earlier estimates according to the report. Data from IHS Markit’s monthly Purchasing Managers released indicated manufacturing costs have increased at a record pace since the start of 2017 in part due to the drop in the pound since the Brexit vote and the increase in oil and raw materials. Many economists believe rising manufacturing costs will place more upward pressure on inflation. Following reports from an unidentified government source that Scotland will potentially call for an independence referendum, the pound fell as much as 0.6 percent towards the end of February. With regards to Brexit, the House of Commons approved a 137-word bill that allows the government to formally leave the European Union. The bill moved to the House of Lords and a final vote for the bill is expected on March 7. U.K. Prime Minister Theresa May demanded that the upper house of Parliament not rewrite the Brexit Bill. Changes to the bill could potentially to delay her timeline to begin the Brexit processes at the end of March.
Data from the Economy Ministry in Berlin released in early February reveal that German factory orders gain 5.2% in December, the highest rate of growth since 2014. The data also indicated that bulk orders were significantly above average as export orders rose by 10% and domestic orders were pushed up to 6.7%. While manufacturing experienced growth in December and early 2017, construction slowed in January. The Federal Statistics Office in Wiesbaden reported that Germany had a record trade surplus of 254 billion euros and exports amounted to 1.2 trillion euros in 2016. This is 1.2% higher from 2015. Imports rose to 954.6 billion euros, 0.6% higher than last year. According to the European Union’s statistics office in Luxembourg, the gross domestic product in the euro-area economy rose 0.4% in the fourth quarter. However, economic performance in the fourth quarter for Germany, Italy, and the Netherlands were lower than analysts’ expectations. Economics view this data as indicating an underlying “fragility” to the Eurozone economic recovery due to the uncertainty with trade with Brexit and the U.S.A., rising populism across Europe, higher oil prices and higher inflation.The Greek economy contracted 0.4% rather than the 0.4% expansion estimated by economists and lower than the 0.5% estimate made on January 31. The International Monetary Fund stated that Greece will not reach a budget surplus target set as a condition for the bailout by euro-zone creditors. Though Greece’s budget surplus is projected to rise 1.5% over the long run, this estimate is still below the 3.1% surplus decreed by European creditors. Elections in Germany, France, and the Netherlands along with surging nationalism in these countries add to rising anxiety regarding the future of the European Union. Marine Le Pen, leader of the nationalist French National Front has said that she will take France out of the European Union should she win the presidential election. France’s presidential elections are set for April. Germany will have a federal election in September. In February, consumer prices are estimated to have risen an annual 1.9% and economic confidence rose to an all time since 2011 and unemployment is an all time low since 2009. The falling unemployment combined with weaker inflation has supported the rise in consumption and growth this past month according to many economists.
Shigenori Shiga, Chairman of Toshiba, Corp, announced he will resign due to an estimated 712.5 billion yen writedown caused by unexpected costs for U.S. units and declining prospects for atomic energy operations. Toshiba expects a net loss of 390 billion yen for the fiscal year ending on March 31. The Ministry of Finance released data indicating investors dumped the largest amount of U.S. treasuries in December at 2.39 trillion yen. Japan is the largest holder of U.S. treasuries. In an article for Bloomberg, Kenta Inoue, chief strategist for overseas bond investment at Mitsubishi UFJ Morgan Stanley, stated that “it may be more difficult than usual for Japanese to invest in Treasuries and the dollar this year because of political uncertainty.” According to data from Japan’s Ministry of Economy, Trade, and Industry, Japan’s industrial production fell 0.8% in January. This decline in production is the first in six months and has caused many economists to express concern over the sustainability of Japan’s export-driven growth. The drop in car, engine, and transport equipment production contributed the biggest decline with production down 4.7%. Japan’s first ‘Premium Friday’ launched on February 24. ‘Premium Friday’ is part of a government campaign to curb overwork and stimulate the economy by allowing works to leave work at 3pm on the last Friday of every month. Economists are uncertain if ‘Premium Friday’ will have a clear economic impact and most companies are not participating in the campaign. According to many analysis, Japan’s biggest economic issue is an influx of income to Japanese companies that remain unproductive to creating consumer demand. This, combined with predictions by economists that wages will continue to stagnate, has the potential to further weaken consumer spending. Several economics have expressed concern that Japan is depending too much on export and allowing consumer spending to suffer.