February 2018 | www.selectasset.com
February 2018 Market Update
The US economy powered forward on the resilient economic expansion which now exceeds benchmark expectations; overall CPI rose 0.5% above expectations 0.3% triggering a global market selloff, the PMI, new house construction and existing real estate activity and other major economic barometers confirm the overall health of the economy is very firm; the pace of job creation remain very strong keeping the unemployment rate in check at a 17 year low of 4.1%. Market consensus data indicate the unemployment rate potentially could hit mid 3% by mid-2018; a level very rarely seen in the United States. The number of non-farm payrolls increased, as the number of hours worked, but the key data that rocked global markets earlier this month was the hourly wage, salary and bonus statistics soaring 2.9% annually, a pace not seen in nine-years. Consumer Confidence remains solidly resilient; The Federal Open Market Committee (FOMC) Chair Jerome Powell received his welcome from the global markets via broad based meltdown in response to US economic data, [1. CPI and 2 Payrolls] investors sold heavily global stocks, ETF & etc., on the assumption the FOMC was behind the curve in rate hikes, pushing US Government bond yields on the 10-year Treasury note to 2.93%. Program trading is the most likely culprit responsible for the volatility and the velocity of market, asset price drawdowns. The New FOMC chair is on record as saying the key benchmark interest rate will rise; in his view at least three interest rates in 2018 or more to keep the economy in-check. The FOMC maintains a 2% inflation target rate is necessary; if needed implement additional monetary policies to guide the economy. The Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite fell from record closing highs with all market sectors experiencing very heavy selling pressure leaving the DOW on February 5, 2018 down 1,175 points, the worst point drop in history; unfortunately in some instances history has a tendency to repeats events and nearly did on February 8, the DOW hit it second worst point drop of 1,033. Volatility rose to levels not seen since 2007 causing two ETF to implode. The US Government passed a 2-year budget, with unlimited statutory 2-year debt ceiling cap that sparked concerns over spending and fiscal responsibility. The deal already in-force at least will keep the government funded thru 2019, but potential long-term consequences have taking the center stage on both sides of the aisle.
Brexit-EU discussions now appear to be going nowhere, Prime Minister May seems to have numerous fragmented opinions on the Northern Ireland issue as well as stoking concerns over EU citizens rights in the U.K. EU negotiators in Brussels laminate there seems to be a lack of seriousness to strike a fair deal on multiple sectors, noting the U.K. cannot cherry pick what it wants and what it does not want or in some shape or form hold EU customs rights. With just a little more than one-year away UK and foreign firms have demanded more clarity on Brexit details, specifically, “What does it mean to them”? The Bank of England (BOE) UK’s economic performance was upgraded, revised forecast projections of 1.9% in 2018 and 1.9% 2019, [if EU access] from 1.5%, which the Bank of England is now considering policy options of a May 2018 interest rate hike. The Office for National Statistics shows the U.K. unemployment rate tightened in February with placement vacancies and the labor participation both setting records. Unemployment in the UK is now at a four decade low. Consumer confidence despite news that UK companies will ante up bigger wage increases seems to have turned less favorable expecting further interest rate increases. Consumer Price Inflation hit 3%, forcing the Bank of England to announce rate hikes will occur sooner than earlier anticipated and at a frequent rate to target inflation. UK factory orders slightly dipped from the previous four-months, but forward orders still remain very positive. The FTSE was not immune from the global sell off tumbling to low seen last in 2016; from Asia, U.S., U.K and Europe, investors were left to consider if the period of low interest rates was coming to an end.
The EU political environment has been resolved by voters, solidifying support for Chancellor Merkel’s; Franco-German position as EU leaders remains firm and the French Premier has a very good working relationship with German Chancellor Merkel and both are well respected in Brussels to maintain the cornerstone base of the ECU and in negotiations with the U.K Brexit. European Union’s statistics surprised global markets with number not seen in ten-years, the performance highlighted the underline strength of the E.U and this data was also attributed to the global markets sell off with investors believing the ECB was also well behind the curve. The ECB has already deployed policy measures to wind down its balance sheet, currently €30 billion per month. Economic expansion across the block was stellar coupled with very positive business growth and sentiment. Across the major seven economies, the economic sentiment and capacity utilization in manufacturing remained hit 84.4%; the PMI rose to 58.8, a level last seen in 2006, Industrial and service sector confidence continued to remain in positive territory across most of the sectors. The Euro inflation rate rose 0.6%, which along with U.K., US counterparts; the Central Bank is now concerned about inflation and viewing policy options. The Euro block unemployment rate is dropped significantly to 8.7%, a level last seen in 2009. Overall the forecast continues to improve in line a labor force participation rate across bloc nations that are anticipated to hit a 17-year high this year. Overall economic performance is forecast to show solid improvement. Euro exchanges felt the brunt of the global markets sell off skidding into territory last seen in 2016. The selloff was broad base and hit nearly every broader sector.
The Japanese economy continues hum along, but some warning signs are beginning to appear for 2018 and beyond. The recent economic data show the expansion is mixed results despite positive business sentiment among large export driven companies. First the BOJ continues finds itself in an awkward position to achieve the 2% target inflation which remains elusive; despite the BOJ trimming asset purchases. Secondly, the economic activity in vast sectors is related to the 2020 Olympic games, so uncertainty has arisen about what happens next, thirdly economic estimate for 2018 indicate Japan may in-fact contract as growth slowed 0.5% below analyst’s expectations. The Structural problems a. rapidly aging population, b. a lack of women in the workforce, c. low birthrate d. persistently low inflation e. Japanese are saving more money for retirement and f. the consumer sale tax hike in 2019 further complicate the headwinds, Positive news Haruhiko Kuroda, the current BOJ governor has been nominated to serve a second term by Prime Minister Abe. Under Kuroda’s guidance, the BOJ released a massive quantitative and qualitative asset purchases scheme, the mechanism still on-going has been in place four-years running and guiding Treasury yields into negative rate territory while powering the equity markets. Like other global markets, the Nikkei suffered very violent swings in asset prices and heavy selling pressure. The labor market continues to be extremely tight at full employment; but shows no material sign of significant wage increases.