July 2017 | www.selectasset.com
July 2017 Market Update
The US economy continues to strengthen; the Labor Department employment statistics indicate the economy is still creating jobs; June 2017, 220,000, despite some moderation that may signal a point of diminishing return. The unemployment rate continues to hover around 4%, but so far not creating upward pressure on wage growth to stimulate sluggish inflation. The Federal Open Market Committee (FOMC) in June exchanged views on policy adjustments with the aim of reducing the banks $4.5 trillion dollar balance sheet to begin yet this year. The FOMC intends to tighten monetary policy with possibly one or two more interest rate adjustments, so the real question is whether the US economy is resilient enough to absorb simultaneous measures, despite inflation expectations under the target rate of 2.0%. The FOMC actually increased its anticipation for GDP growth in 2017 ticking the figure up to 2.2 percent; the forecast for 2018 and 2019 remain unchanged at 2 percent. Chair Yellen said "Near-term risks to economic outlook appear roughly balanced. The Consumer Price Index year-on-year to June hovered around 2.0%, but the index was -0.1%, despite forecasts +0.1 for June. The labor force participation rate was at 62.8 %, seen a 0.1% slight increase from May 62.7%. Economists have said data is a mixed-bag for May noting that while the pace of job creation has been brisk, wage growth remains very sluggish. The US administration announced withdrawal from the Paris Accord. The US administration continues to develop policies to strengthen the domestic economy, but international policy seems to be less coordinated sparking concerns about policy and leadership.
In June, Prime Minister May saw her political capital reduced after the snap election losing the majority held in U.K. Parliament; hence now forced to form a collation government to move forward policy initiatives. While the Bank of England (BOE) growth forecasts for the UK’s economic performance remain around 1.9%, data indicates softness in exports with GDP slightly decreasing 0.2% and overall business sentiment tilting more pessimistic, citing election results and lack of clarity on Brexit policy. The Office for National Statistics shows the U.K. unemployment rate held firm at 4.6% and the labor participation rate 74.8%, remained high; however data shows nominal wages increased 2.1% but in real terms adjusted for inflation fell by 0.6%. The BOE policy makers see inflation ticking up above the target rate of 2.0%, responsible for the recent rise is the 0.1% upward increases in real household wages, the greater factor is shifts in the currency value. The UK and ECB traded exchanged harsh words over policy adjustment to exit monetary easing policies. While there are various mechanisms to shrink bloated bank balance sheets; the debate seems to have stirred questions over coordination and future interest rate increases. Ongoing debate between the U.K and European Union over Brexit costs and border free access seem to have hit road blocks, as the European Union is reluctant to negotiate trade agreements and exit strategy at the same time.
According to the European Union’s statistics office in Luxembourg, economic expansion across the block was gaining traction with solid GDP figures that supported overall block 2.1% business growth. Sentiment in the Euro block rose by 1.9 points reaching the highest level 111.1 since August 2007. The Euro inflation rate in the bloc slowed by 0.1% to 1.3%, which is of concern to the Central Bank; inflation undershoots the target rate, delays laying out the framework policy to reduce its balance sheet and reduce monthly bond purchases. Unemployment remains stubbornly high at 9.3% with a labor force participation rate of 57.80 increasing across bloc nations. The economic performance showed modest improvements across much of the bloc, but economists view this data favorable, noting the EU is better positioned for post-Brexit. EU and USA relations have been under strain on foreign policy with the USA appearing to be more selective than ever before to participate in global coordination on important initiatives.
The Japanese economy continued to be active with business sentiment hits a three year high among large companies. The BOJ continued its massive quantitative asset purchases; currently the bank owns 39.5% of bonds and treasury bills, however the 2% inflation rate target seems to not be within reach as consumers appear to be reluctant to invest money into the markets or spend money. Domestic demand for goods and services in Japan continues to lag expectation as households trim spending, further weaken consumer demand. Gross domestic product (GDP) expanded 0.3% in the first quarter, compared to 0.5% to previous figures. The annualized rate of growth was cut to 1% from the initial reading of 2.2%. The data is weaker than expected and was mainly due to an unexpected private consumption.