January 2018 | www.selectasset.com
January 2018 Market Update
The US economy continues to expand in line with expectations; all economic indicators confirm the overall health of the economy is solid; the pace of job creation has been the strongest US Labor market in modern day history holding the unemployment rate in check at a 17 year low of 4.1%. The FOMC anticipates the unemployment rate to dip below 3.9% in 2018. Overall macroeconomic indicators remain positive. With clarity around the US Tax reform proposal; it seems the trickledown effect is in progress with consumers pocketing more money each month, while US businesses seem to now be enjoying a windfall resulting from the reforms. Consumer Confidence remains resilient; PMI opinion polls are on track for upbeat business activity. The Federal Open Market Committee (FOMC) is forecasts at least three interest rates in 2018, possibly more to keep the economy in-check while continuing to unwind the FED’s balance. FOMC data confirms the strength and resilience of the US economy. The FOMC has maintained its 2% inflation target rate and says monetary policies to guide the economy may need to be implemented. The Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite continue to set new record closing highs with the Dow Jones cruising thru the 26,000 level briefly. All the markets continue to post heavy trading volumes in 2018. The US Government has temporarily shut down over the weekend as both party’s failed to agree on a new budget with the impasse over illegal immigrate funding taking the center stage where both sides of the aisle agree that a policy on the issue must be addressed; however the timing and urgency appear to be very different, but negotiations over the issues will be resolved in-time to avert a long shutdown.
Brexit-EU discussions seem to be gaining momentum with France indicating some bespoke policies could be an option in the negotiations; it remains to be seen exactly what tradeoff deals may be worked out, but does give Prime Minister May some relief on a messy UK- EU divorce. The EU Ministers by far remain adamant of no trade deals until after the divorce is final. The ongoing stalemate between the UK Government and Irish Government over a complicated border but have not produced any new development and both time and options to resolve the issue are becoming more of a concern. The Bank of England (BOE) growth forecast for the UK’s economic performance remain broadly similar to earlier forecast projections of 1.5% and is not expected to raise interest rates any time soon because of a fragile economy. The Office for National Statistics shows the U.K. unemployment rate held about the same as during December 2017 and the labor participation rate remaining high around 75.1% but unemployment is expected to rise in 2018. Consumer confidence seems to have turned the corner and is slightly more favorable than in the previous month. The FTSE continues to progressively trend upward in line with other global markets.
The EU political environment was further solidified with Chancellor Merkel’s party aligning herself with a collation party to form a majority. The French Premier has laid out policy framework to address macro-France initiatives, mainly persistently sluggish unemployment, which seems to be viewed favorably by public opinion. The French Premier is also viewed favorably in Brussels and has a good working relationship with German Chancellor Merkel to maintain the cornerstone base of the ECU. European Union’s statistics show economic expansion across the block was solid with GDP still on the rise across and very positive business growth and sentiment. Across the major seven economies, the economic sentiment and capacity utilization in manufacturing remained very high; Industrial and service sector confidence continued to remain in positive territory across most of the sectors. The Euro inflation rate remained firm, which along with U.K., US counterparts; the Central Bank is concerned about as it inflation undershoots the target rate. The Euro block unemployment rate is forecast to remain unchanged with a labor force participation rate across bloc nations that continue to edge up. Overall economic performance is forecast to show solid improvement. Euro exchanges continue to be very vibrant posting solid gains across much of the block and across broader sectors. The ECB meeting is expected to yield results to 2018 expectations on monetary policy, specifically the bond purchases program.
The Japanese economy continues to slowly improve with economic data showing the expansion is spreading across the economy according to the BOJ assessment of nine economic regions, which 7 remain stable and for the first time in 10-years 2 in expansion mode. Positive business sentiment among large export driven companies also has brightened the economic outlook. The BOJ continues finds itself in an awkward position; facing unpresented monetary policy challenges to hit 2% inflation which remains out of reach; this despite rumors the BOJ may need to tighten monetary policy by trimming asset purchases. The BOJ board members remain cautious of the economic outlook. Japan introduced new tax legislation targeting Japanese company’s hording cash in a drive to stimulate the economy more and possibly spark that much needed inflation. Companies now will face one of two scenarios, 1. Firms benefit from lower taxes that increase investments, productivity and salaries or 2. Firms which decide not to increase salaries or increase capital expenditure will no longer be eligible for existing deductions; hence a larger tax bill. The Japanese Government faces unprecedented challenges as well, in 2017 Japan records the lowest number of new births in modern day history, even worse news is the number of 20-year olds remained around record low figures. the Domestic demand for goods and services in Japan appears to be trending slightly downward with the consumer sentiment index slipping to 44.7, but core inflation rising in December 2017, the mix of data suggest consumers may have closed their wallets because of the nil increase to monthly wages, higher food costs that is beginning to take its toll on already tight household budgets. The labor market continues to be extremely tight at full employment; but shows no sign of wage increases. On the bright side the Nikkei 225 briefly broke thru the 24,000 mark for the first time since 1991.