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Inflation in Japan Increases

30 Jan 2018

Jack Turner, Research Analyst

The week we look at Japan’s creeping inflation, US and UK GDP numbers and a Eurozone business confidence index. We also flag some recent portfolio developments.

Japan may have finally started to turn the corner in the battle against deflation following the release of its latest consumer price index, which in December saw a 0.9% year-on-year increase, while 2017 saw a full year price rise 0.5%. The data followed on the heels of a report by the Cabinet Office that pointed to encouraging signs in the supply-demand gap and the price of consumer goods in the corporate goods sector. While still below the Bank of Japan’s 2.0% target, these signs could be reflected in data in the first half of 2018.


UK GDP growth beat consensus expectations for Q4 2017 and for 2017 as a whole. The economy grew by 1.5% year on year in Q4, versus the 1.4% forecasts. On a quarterly basis, GDP growth came in at 0.5%, again ahead of the 0.4% estimates. While the numbers may yet be revised down as well as up, the number puts the UK’s growth alongside Japan and Italy and only slightly behind the 1.8% that France is expected to achieve. The numbers also highlight that this increase marks the 20thconsecutive quarter for positive numbers.

The IHS MarkitComposite Purchasing Managers’ Index for the region rose to 58.6 in January, above the consensus of 57.9 and higher than December’s 58.1. The number is the highest level for the index since mid 2006 –a 139 month high –and was largely driven by the services sector, where growth was at its fastest pace since August 2007. While that expansion was partly countered by a slowdown in manufacturing output growth, that sector remained very buoyant with the last three months posting the strongest factory output increase since 2000. Companies also grew more optimistic about the outlook for the year ahead in January, with business expectations reviving to an eight-month high.

The US economy posted solid Q4 GDP numbers of 2.6% in December. While this was lower than the consensus 3%, there were encouraging signs that further growth is on the cards given domestic demand rose by 4.6% –demand that has yet to enjoy any real impact from the December-approved tax cuts. For 2017 as a whole, GDP came in at 2.3%, up from the 1.5% logged in 2016. Aside from the modest pace of inventory accumulation holding back the growth, the highest spending by consumers on imports in seven years also negatively impacted given they subtract from GDP growth.

In addition to the significant overweight in Sterling denominated assets versus our Strategic Asset Allocation, we also entered two FX options on GBP/USD with strikes of US$1.35 and US$1.45 in July 2016 and February 2017 respectively.

The call options are designed to protect the portfolios against a sudden spike in the value of Sterling, which would impact our foreign currency holdings. The US$1.35 option has particularly supported portfolios in January 2018 given the weakness of the US Dollar.

However, the team believes now is a good time to exit the US$1.35 option after that good performance and are looking at alternative ways of protecting the portfolios. The US$1.45 option is due to expire on 2 February.

31 Jan –UK Consumer Confidence (Jan) // 31 Jan –Fed Interest Rate Decision // 31 Jan –EU Unemployment Rate (Dec)


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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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