Weekly Market Update

06/03/2017

Confidence remains high in the US, with a pro-business Trump administration, which continues to drive the bullish sentiment. This positive momentum was enhanced last week as several Fed officials provided the strongest signal yet, predicting that the pace of rate rises would accelerate from here. The bullish chorus led to a violent shift in investor expectations, with the markets-implied odds on a March interest rate rise, jumping from 25 per cent to 90 per cent. However, the bond market appears less convinced with yields only rising marginally.

Following a week of hawkish messages from US rate setters, the Fed chair told an audience in Chicago on Friday that a further increase in interest rates was likely to be appropriate at the Fed’s policy meeting on March 14-15 if employment and inflation stay in line with officials’ expectations. The monetary would also be reduced at a quicker pace than in previous years. Those that believe the US dollar has peaked may be disappointed for now as the hawkish statements continue.

In his address to the US Congress last Tuesday President Donald Trump struck an upbeat but measured tone with limited details on policy specifics. When these do come available it will be interesting to see if the sweeping tax cuts and fiscal spend can really deliver his campaign pledge of 4 per cent annual GDP growth.

On the data front, Markit’s Eurozone manufacturing purchasing managers’ index (PMI) rose from the previous month, marking the highest level since April 2011. Companies indicated that domestic demand remained solid in several markets, while the weak euro contributed to the fastest growth of new export business for almost six years.

In the UK, growth in the UK manufacturing sector slowed more than expected in February, while both mortgage approvals and consumer credit rose significantly providing some evidence that the consumer is far from faltering.

In Japan, core inflation returned for the first time since 2015, providing some positive news after years of deflation. Unemployment fell and labour shortages are having an impact. If this continues then wage growth will rise creating further inflation. Signs of their economy strengthening are starting to shine through although they have a long way before coming close to their 2 percent inflation target.

Finally, political risk shifted further East as Asian markets were rattled by North Korea firing missiles into the Sea of Japan. Political risk appears the largest threat to the recovery and continues to march across the globe

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