October 2017 | www.selectasset.com
October 2017 Market Update
The US economy continues broad-base expansion; the Labor Department employment statistics indicate the economy is still creating jobs; October 2017, 261,000, sent the unemployment tumbling to 4.1%. Since the financial crisis, wage growth has been sluggishly low inflation remains under pressure. Overall macroeconomic indicators remain positive, but there is political concern the U.S. President Trump has lost so much needed political capital from both parties on a number of key issues of his political agenda. The USA economy continued to expand, the July to September period logged 3.1% beating market expectations of 2.5%; this despite three devastating hurricanes that wreaked havoc across swaths of the USA. With back-to-back 3.1% the overall USA expansion continues to march forward to one of the longest expansion stories in history, 8-years and running. The Federal Open Market Committee (FOMC) in October 2017 began the process of policy adjustments to normalize the bank’s balance sheet. The US economy is proving to be more resilient and the street view is pricing 82% chance the FOMC may tighten monetary policy at the December 2017 meeting, despite the target inflation rate still hovering under the target rate of 2.0%, raising the specter that inflation dynamics require additional research to understand the market drivers better. The FOMC actually increased its anticipation for GDP growth in 2017 averaging 2.2 percent; the forecast for 2018 has been revised upward to 2.6 percent. The FOMC cited risks to the economy appear to be roughly balanced. The Consumer Price Index year-on-year to hovers around 2.0%; the labor force participation rate was at 63.0 %, down from 63.1% seen a 0.1% slight decrease from September 2017. Economists have said recent data is more broad and supports the economic indicators of continued strength in the economy in October 2017; citing a key element of job creation, which continues to be very brisk, exceeding the benchmark 150,000 per month needed. The Dow Jones Industrial Average joined the S&P 500 and Nasdaq Composite in setting new record closing highs during the month. Monthly share trade volume on the exchanges have been have been relatively brisk each day.
Brexit-EU discussions continue to be of high concern to U.K. businesses and causing a ripple effect throughout foreign firms there citing a lack of exit policy, transparency and operational clarity. The EU has advised an exit policy followed by negotiation of trade deals can only be only discussed after formal exit. The sticking points are numerous; Prime Minister May weakened political clout is clearly evident in her inability to collectively gain conscious within the Conservative party or manage key dealmakers of the Labor party. The EU views this ongoing indecision as a potential leverage to dictate terms and conditions to the U.K. The fact that the U.K and EU seem to be on different pages and really unable to even agree to disagree highlights the lack of clear policy coordination as time is becoming constrained. While the Bank of England (BOE) growth forecasts for the UK’s economic performance remain around 1.6%, data indicates. The Bank of England did hike interest rates 0.25% for the first time in a decade, but also noted interest rate policy adjustments could be forthcoming within one year. The BOE policy makers see inflation ticking up to a five-year high 3.2% well above the target rate of 2.0%, which has raised the eyebrows of many economists as the macro-economy remains sluggish, the greater factor is shifts in the currency value, import prices and Brexit, but the BOE does expect to peak or recede by year-end. The Office for National Statistics shows the U.K. unemployment rate held firm at 4.5% and the labor participation rate 75.1%, remained high.
According to the European Union’s statistics office in Luxembourg, economic expansion across the block was solid with GDP figures supporting overall block 2.9% business growth, up 0.6%. Sentiment in the Euro block remains in positive territory around 114. Across the major seven economies, the economic sentiment significantly brightened with capacity utilization up strongly in manufacturing; two exceptions were Germany and the U.K, which remained flat. Industrial and service sector confidence continued to move upward strongly posting advances across the entire sectors. The Euro inflation rate remained unchanged 1.4% from September 2017 1.5% which the Central Bank is concerned about as it inflation undershoots the target rate. Unemployment rate dipped below the 9% to 8.9% with a labor force participation rate across bloc nations picking up slightly. The economic performance showed modest improvements and resilience across much of the bloc, sufficient enough for the ECB to begin mechanical and operational policy discussions on winding down its balance sheet.
The Japanese economy continued to be active logging the second longest [59 months] economic expansion with upbeat positive business sentiment among large export driven companies that a weak Yen support. The BOJ left the interest rate in check despite its counterparts in the U.K., USA and Euro by either raising interest rates or unwinding quantitative asset purchases. The BOJ board members now believe that Japan might hit 2% inflation rate, sometime in 2020. The overall outlook remains fragile, citing forecast revisions that make the figure more and more out of reach despite the massive QE financial market operations. Domestic demand for goods and services in Japan continues ticked up a bit 2.5% but lags expectation as household spending is moderate, but overall consumer sentiment was up 44.5, October 2017. The labor market remains extremely tight at full employment; but despite the tight labor conditions economists remain puzzled by the falling wage growth.