New Federal Reserve Chair

Jack Turner, Research Analyst

This week we look at the new Fed chair, flag three economic updates out of the UK, EU and US and highlight a recent change in our portfolio allocation.

New Federal Reserve Chair

Jerome Powell became the new chair of the Federal Reserve on 5 February, taking over from Janet Yellen, who as a Democrat did not suit as chair under a Republican administration. Powell has spent five years as a governor at the Fed, and also brings to the table experience from his stint at the Treasury under George Bush Snr. He started his career in investment banking and is a lawyer by education. He will be the first non economist to take up the role since 1981, and while many believe that the role should be done by an economist, the current empty vice chair may yet be filled by someone of this ilk.


NEWS

UK UPDATE
The IHS Markitpurchasing managers’ indexes (PMIs) were published for January and were all weaker than expected. The construction PMI fell to 50.2 in January, compared with 52.2 in December, posting a fall that was more marked than had been expected. The manufacturing PMI come in at 55.3 in January, down from December’s reading of 56.2, as price pressures intensified. Meanwhile January’s PMI data for services pointed to a slowdown in the growth of the sector across the UK with the index sliding to a 16-month low of 53.0, down from 54.2 in December.

EUROZONE UPDATE
The region’s economy expanded by 0.6% in Q4 2017 according to the latest GDP statistics. This took 2017 growth as a whole to 2.7%, up from the 2.6% as at the end of Q3, which is the strongest growth since the 3% rate seen in 2007, according to Eurostat. It is up significantly from the 1.8% posted in 2016 and means that the Eurozone growth was faster than the US and nearly a full percentage point above that of the UK. The momentum in Europe’s economy goes a long way to explain bullish attitudes towards the Euro and European stocks. The well-received GDP data figures helped lift the euro but global factors could limit the gains.

US UPDATE
Non-farm payrolls rose by a stronger than forecast 200,000 in January, with growth broad-based as construction, manufacturing, business services and leisure all saw solid increases. There was even a rebound in retail employment (up 15,000) after losses throughout much of 2017. Average monthly payroll gains for 2017, meanwhile, were revised up by 10,000 to 281,000. The unemployment rate held steady at 4.1%. As a result of the low unemployment and good job prospects, average hourly earnings rose 2.9% on a year-on-year basis in January, the highest annual rate since 2009.


PORTFOLIO ACTIONS
Given our belief that gold may be sensitive to higher bond yields and since we think that the tail risks in our scenario planning have shifted from political to inflationary fears, we have reduced our gold position by a further 2%.

Instead we have used part of the profits to buy another equity index put on the Eurostoxx 50. Spending a small premium spend to buy this position should help protect portfolios as this certificate will work well in challenging equity environments. It has a strike level of 3,450 and expires in December 2018.

The decision to sell down our gold position further also adds 2% to our cash position. This will be invested in short term bonds until such time as we decide that there is a better opportunity.


THREE ANNOUNCEMENTS DUE THIS WEEK
06 Feb –US Balance of Trade (Dec) // 08 Feb –Germany Balance of Trade (Dec) // 09 Feb –UK Balance of Trade (Dec)

SOURCES: BLOOMBERG; IHS MARKIT, REUTERS; 7IM

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