This week we look at the Federal Reserve interest rate policy, as well as review three other pieces of data releases out of the US, UK and EU. We also flag the regular portfolio process that the team are undertaking.
While journalists were surprised that Jerome Powell, Chairman of the Federal Reserve (Fed), is set to double the number of press conference to eight in 2019, the market was less surprised by the US central bank increasing its target for the Fed funds rate to a range of 1.75% to 2%. And with the Fed still expecting interest rates to be in a range between 3.25% and 3.5% by the end of 2020 and statements that interest rates will be “normal” and “relatively soon”, many see at least two more 2018 rate hikes taking place and maybe even a third.
Retail sales rose 1.3% over May, with warm weather and the royal wedding seen as the factors to have boosted spending and significantly above consensus expectations of 0.5%. This followed a revised increase of 1.8% in April, up from the 1.6% originally published. The news may prompt the Bank of England to raise rates given sales rose by 0.9% in the three months to May, compared with 0.2% in the three months to April. The bounce back over the last two months is taken by many to state that the sales slump in February and March was down to the heavy snow and cold weather from the ‘Beast from the East’.
The European Central Bank left interest rates on hold but announced it was to call an end its €2.4 trillion bond-buying programme in December. It will halve the size of monthly asset purchases to €15bn after September and then phase them out entirely after the end of 2018. However, in its accompanying statement, the ECB stated that rates would stay at current record low levels until at least mid-2019 and “for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.” The move was slightly more proactive than markets expected, although the news that interest rates would remain on hold tempered the reaction.
US consumer prices rose 2.8% in May year-on-year, the fastest annual rise in six years. Core inflation, which excludes food and energy, rose to 2.2% compared to 2.1% in April. Meanwhile, US retail sales jumped 0.8% in May, the strongest rate in six months, as the tax cuts and strong employment growth boosted incomes. And producer prices also rose – up 3.1% in May, the fastest annual rate of growth since January 2012.
The team has begun its formal quarterly tactical asset allocation process to determine whether its portfolios need to be revised based on current market conditions and economic expectations. The process starts with a review of all the main regions of the world, looking at economic and political developments that could impact asset returns over the next three to 12 months. The team then draws up a set of forward looking scenarios that are presented to the Asset Allocation Committee, which consists of the 7IM investment team and external representatives, who provide expert insight into economics, financial markets and politics. The team then assesses the probability for each scenario, and then overlays these probabilities onto forecasted returns to produce expected returns for each asset class. This information is then used to tilt portfolios versus the strategic asset allocation.
THREE ANNOUNCEMENTS DUE THIS WEEK
20 Jun – US Existing Home Sales (May) // 21 Jun – UK Interest Rate Decision // 21 Jun – EU Consumer Confidence Flash
SOURCES: BLOOMBERG, IHS/MARKIT, REUTERS, 7IM
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