MARKET UPDATE: RATE RISE ON THE CARDS IN THE US, WHILE UK LIKELY TO HOLD FOR NOW

MARKET UPDATE: RATE RISE ON THE CARDS IN THE US, WHILE UK LIKELY TO HOLD FOR NOW

19th March 2018

LAST WEEK – KEY TAkeAWAYs

Brexit transition deal agreed

On Monday (19 March) it was announced that the UK and EU have agreed terms for the Brexit transition period next year, which lasts from ‘Brexit day’ on 29 March 2019 until 31 December 2020. After several days of talks, the two sides reached a compromise with the EU to allow Britain to sign its own trade deals during the transition, and the UK giving full free movement rights for EU citizens who arrive during the period.

UK growth upgraded in Spring budget

Chancellor Philip Hammond used his Spring Statement to unveil upgraded UK growth forecasts. Office for Budget Responsibility (OBR) figures have revised the UK gross domestic product (GDP) forecast for this year upwards from 1.4% to 1.5%. Government borrowing has also been revised down from previous estimates given last November. For 2017-18, the figure dropped from £49.9bn to £45.2bn, and the 2022-23 estimate is now £21.4bn down from £25.6bn. While the revisions were positive, they were only marginally so and had little impact on UK asset markets.

Putin landslide in Russian polls as relations with UK sour

Vladimir Putin secured a victory in Sunday’s Russian presidential election with more than three-quarters of the vote. He will lead the country for another six years. However, the election was not without controversy with main opposition leader Alexei Navalny barred from standing because of an embezzlement conviction, which he says was manufactured by the Kremlin. There have also been reports of irregularities at polling stations, with video evidence of officials stuffing ballots into boxes. Russian/UK relations have also hit a low amid accusations over the poisoning of ex-spy Sergei Skripal and his daughter in Salisbury.

You’re fired! Trump sacks US secretary of state Tillerson

Rex Tillerson, the US secretary of state, was the latest government official to be sacked by Donald Trump amid reports of disagreements over the country’s stance on issues such as North Korea and climate change. Trump’s chosen replacement is CIA director Mike Pompeo, who will need to be confirmed by the Senate. Tillerson joins a growing list of departures this year from the Trump administration, which includes chief economic adviser Gary Cohn, White House communications director Hope Hicks, White House staff secretary Rob Porter, and FBI deputy director Andrew McCabe.

US inflation steady while retail sales soften

The US core consumer price index (CPI) rose in line with expectations in February. The measure, which excludes volatile food and energy prices, came in at 1.8% higher for the month compared with 12 months’ previous. This was the same as the January figure. However, US retail sales fell for a third straight month in February, with the Commerce Department reporting a 0.1% slip. This was attributed to a cut back on purchases of cars and other big-ticket items.

Looking ahead - TALKING POINTS

Fed set to raise US interest rates

The Federal Open Market Committee (FOMC) of US Federal Reserve (Fed) meets on Wednesday with analysts overwhelmingly expecting a first interest rate rise for the year. A 25-basis point hike would put the Fed funds target rate range at 1.5% to 1.75%. The big talking point for markets remains how many rises are expected to come this year, three or four.

The Fed has said it expects inflation to move toward its 2% target by the end of the year. As outlined above, core consumer price inflation rose 1.8% in February, and a further pickup could push the central bank to raise interest rates faster. The Fed has recently come under the stewardship of new chair Jerome Powell, who took an upbeat view of the US economy when addressing Congress in February.

Following this week’s meeting, the Fed will release new economic projections and an updated ‘dot plot’ which shows the rate projections of the each of the FOMC’s 16 members. The December dot plot (shown below) suggested three rate rises this year. Currently, the average expectation is for rates to hit 2% to 2.25% by the end of 2018, and as high as 2.75% in the long run.

FOMC interest rate predictions – Sep-Dec 2017

 Dot Plot Dec 17

Source: Federal Open Market Committee, Business Insider

Big week for UK economic data

The Bank of England’s Monetary Policy Committee (MPC) will also make an interest rate decision this week though a hike is considered unlikely, for this month at least. According to Bloomberg data, investors believe there is just a 15.8% chance of a UK rate hike in March, compared with 62.6% probability of a rise in May (as at 19 March).

Updated employment data, due out this week, will likely play a significant role in informing the MPC’s decision. At last count, data for the last quarter of 2017 showed the jobless rate ticked up to 4.4% from a 42-year low of 4.3% previously. The second big determinant on interest rate decision making is inflation. Again, the latest data is due this week for the month of February, having stood at 3% in both December and January. 

UK inflation (%) – Feb 2017 to January 2018

 Tuk _inflation _march _18

Source: Office for National Statistics, tradingeconomics.com

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. The big economic story of 2018 so far is speculation around interest rate rises, both at home and abroad. It is the Federal Reserve in the US that has led the way with five rises so far since 2015, while the Bank of England has been more cautious with rates at just 0.5%. The European Central Bank is even further behind in the cycle, showing what a huge impact the financial crisis of 2008 and 2009 had on the health of major economies.

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