Weekly Market Update

25/02/2019

Markets remained in a wait and see mode in relation to both trade talks and Brexit last week. It was not long before Donald Trump announced a delay in the increase in tariffs on $200bn of Chinese goods set for March 1, averting an imminent escalation in tensions between the two countries.

Minutes from the US Federal Reserve’s latest meeting revealed a discussion about the slow-inflation conundrum and concern over the public’s falling expectations for inflation. Inflation is simply not responding to low unemployment, strong growth and faster wage rises. In the short term this means the Fed has stepped to the side lines on interest rates and the balance sheet. In the longer term they will rethink their inflation target. One option is to broader the Fed’s definition, looking to achieve an inflation target on average over a business cycle.

The impact of Brexit on domestic politics continued, with MPs leaving both the Labour Party and the Conservatives last week to sit in the House of Commons as Independents. If nothing else, with the Conservative defections, Prime Minister Theresa May’s Commons majority continues to shrink. With the all-important vote being pushed back to 12th March, we will have to wait that little bit longer for the next instalment.

The UK employment data showed unemployment steady at 4 per cent, the lowest level seen in the last 45 years. More importantly average weekly earnings grew by 3.4 per cent (the highest for over 10 years and 1.2 per cent in real terms). Financially this has left the UK consumer in a relatively good position. However, with the economy at essentially full employment, it’s inevitable that unemployment will increase in the coming years, either because of negative Brexit consequences or a more naturally ending economic cycle.

In the US, industrial production data was poor for January, though the year-on-year figure of 3.8 per cent remained strong. Eurozone Manufacturing PMI data fell into ‘contraction’ territory, thanks to a much larger than expected slump in German manufacturing. The equivalent Japanese data also fell into ‘contraction’ territory, with manufacturing PMI at the lowest level since the autumn of 2016

The strong start to the year in markets is welcome but also a cause for concern. For the moment there seems to be an expectation of a benign outcome to the trade situation and on Brexit. Likewise, concerns over slowing economic data and weaker company earnings are being offset by a focus on the more dovish tones coming from central banks. Many of the returns in markets we have seen in the past six weeks would have been acceptable for the year, so it is not a time to be putting cash to work. Markets may have further to run, but at some point, the realisation that the corporate and economic backdrop is weakening is likely to lead to further volatility. Whether the central banks and politicians can offset this remains to be seen.

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