This week, we review news on the US economy, as well as highlight economic data out of the UK and EU. We also provide an update of changes made to the passive model portfolios and flag three news items being published this week.
The instillation of Donald J. Trump as US president led many to believe that business would take heart from a more business-friendly administration and start to expand through the use of loans. However, as 2017 wore on, the growth in lending failed to show. Figures from the Federal Reserve (Fed) released on 13 April, however, showed that businesses may finally have become comfortable about taking on debt as the tax breaks kick in as loans rose by 9.3%. Previous publications of data had seen just two months with numbers over 3%. However, there is a lot of caution linked to the pick up in data given the number is only for March 2018.
UK manufacturing output unexpectedly fell 0.2% in February instead of growing by 0.2% as had been expected –the first decline since March 2017 and down from revised growth of zero for January, with the poor weather being blamed. Manufacturing accounts for around 10% of the UK’s GDP totals. March’s two snowstorms, meanwhile, have already hit retail sales, with figures slumping by 10.1%, according to figures from accountancy firm BDO. The retail sales balance from the Confederation of British Industry's trades survey also fell in March to -8, down from +8 in the previous month.
The Eurozone’s industrial production fell 0.8% in February, the third straight month of declines, as output growth slowed for intermediate, capital and consumer goods. And while industrial production is still up by 2.9% versus February 2017, the rate of growth has slowed from 3.7% in January (short of market expectations of 3.8%) and 5.2% in December 2017. Meanwhile, the Eurozone’s investor sentiment also dropped for the third month in a row, on the back of worries about the deteriorating relations between China and the US. The Sentixeurozone index dropped to 19.6 in April, from 24.0 the previous month and 32.9 at the start of this year.
Minutes of the March meeting of the Fed’s Monetary Committee indicated that policymakers think "some further firming" in rates will be needed since they have become more optimistic that inflation is on track to hit the Fed’s target. Core consumer prices rose 2.1% year-on-year in March, this is slightly ahead of the Fed’s target and the highest rate in a year. Core producer prices, meanwhile, also rose 0.3% in March, taking the annual rate up to a seven-year high of 2.7% and which could push out consumer prices further if any increases are passed on by businesses.
Changes made to the 7IM Asset Allocated Passive funds over the last quarter were reflected in 7IM’s passive model portfolios in the quarterly rebalancing process. As a result, the team added to its UK, US and Japanese equities’ positions. The team also trimmed their European equity exposure, although the level of holdings still shows the team’s belief in the region’s continuing growth story. In addition, the team reduced their investments in short term bonds and switched a small amount of government bonds to corporate ones. The main difference between the implementation of the funds versus the models remains the lack of options to manage the currency risk in the models versus the funds. So, in order to ensure that the level of Sterling-denominated assets is consistent across both investments, the team has invested in more UK corporate bonds in the models.
THREE ANNOUNCEMENTS DUE THIS WEEK
18 Apr –UK Inflation Rate (Mar) // 19 Apr –US Jobless Claims (Apr) // 20 Apr –Eurozone Consumer Confidence (Apr)
SOURCES: BLOOMBERG, REUTERS, 7IM
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