MARKET UPDATE: FED MEETS AGAIN, BUT RATE RISE UNLIKELY

MARKET UPDATE: FED MEETS AGAIN, BUT RATE RISE UNLIKELY

1st May 2018

LAST WEEK – KEY TAkeAWAYs

UK growth disappoints as chancellor blames poor weather 

  • UK gross domestic product (GDP) comes in at 0.1% growth for the first three months of the year, according to the ONS.
  • Chancellor Philip Hammond said exceptional weather in late February and early March was partly to blame for slower growth, but ONS said ‘Beast from the East’ was only a minor factor.  
  • Over the year to the first quarter, the economy grew by 1.2%, well below its five-year average of 2.2% and the slowest annual rate since the spring of 2012.
  • The Omnis view: we believe the UK economy could be hampered further as we get closer to Brexit, however our fund managers are still finding good opportunities at a stock level.

Historic meeting between Korean leaders, as Trump sends delegation to Beijing for trade talks

  • Kim Jong-un and Moon Jae-in pledge to end decades of hostility and move towards denuclearisation.
  • Ahead of Donald Trump’s meeting with Kim Jong-un, secretary of state Mike Pompeo said the US will demand “irreversible” steps towards shutting down North Korea’s nuclear weapons programme.
  • Of more immediate significance to markets may be events elsewhere in Asia as US treasury secretary Steven Mnuchin and colleague Robert Lighthizer head to China for trade discussions.
  • The Omnis view: Recent events suggest the threat of trade war between China and the USA is receding and tensions with North Korea have eased. This should help markets to focus on positive fundamentals. 

European Central Bank reaffirms ultra-easy monetary policy as Bank of Japan ditches inflation target date

  • Both the European and Japanese central banks decided to keep interest rates on hold.
  • The ECB said it still plans to end its €30bn monthly bond-buying stimulus spending after September, but the timing remains uncertain while inflation falls below its target of just under 2%.
  • The BoJ has scrapped a timeframe it had set for hitting its 2% inflation target, which was in the year ending March 2020.
  • The Omnis view: while UK and US policy makers contemplate further interest rate rises in 2018, their European and Japanese peers must tread more carefully, and that rates were held is no surprise. In the BoJ’s case, the removal of its timeframe seems aimed at keeping market expectations for more stimulus in check.

US growth slows but still registers at 2.3% for the first quarter of 2018

  • The Bureau of Economic Analysis (BEA) reported that US GDP growth was 2.3% in the first three months of the year, down from 2.9% in the final quarter of 2017.
  • However, this was still better than the 2% growth predicted by analysts. 
  • BEA blamed slowdown on weaker exports, government spending and residential investment.
  • The Omnis view: the first three months of the year represented the first quarter since Donald Trump’s tax cuts were passed, and economists predict that the full impact of these changes will not come through until later this year.

Facebook and Amazon post stellar results

  • The US earnings season is in full swings with tech giants taking centre stage.
  • Both scandal-hit Facebook and Amazon reported sharp rises in their profits in the first quarter of the year.
  • So far, the majority of S&P 500 companies that have reported have registered positive earnings and sales.
  • The Omnis view: the US earnings season has so far proven to be a very positive one for large-cap US companies, though share price reactions have not always been positive following the beat.

Looking ahead - TALKING POINTS

Eurozone’s turn to report economic growth figures

  • After UK and US first-quarter GDP growth data last week, Wednesday is the turn for the eurozone, which expanded by 0.6% in the final quarter of 2017.
  • New data shows bank lending to European businesses and households picked up in March, 3.3% year-on-year, a positive sign of economic upswing.
  • The eurozone surprised many by growing by 2.3% in 2017 – ahead of 1.7% growth from the UK – but conditions are predicted to be tougher this year.
  • The Omnis view: the slowdown in growth partly reflects poor weather conditions and labour disruption in France, but the growth rate expected is still sufficiently strong to keep markets calm.

EU GDP growth rate (%) – Jan 2015 to Jan 2018

 Rsz _30_apr _euro -area -gdp -growth

Source: Eurostat, tradingeconomics.com

US Fed policy makers set for meeting, but will they act on rates?

  • The Federal Open Market Committee last acted in March, when it raised its benchmark interest rate by 0.25% to a target range of 1.5% to 1.75%.
  • However, according to Bloomberg, the chances of another rate hike in May are at 34% (30 April).
  • Closely followed non-farm payroll data is also due on Friday, giving us a clearer picture on the jobs market.
  • The Omnis view: US growth and company earnings remain strong and so rising interest rates are expected, just so long as policy markers do not raise too quickly which would choke off growth.

US Fed funds rate (%) – March 2013 to March 2018

 Rsz _30_april _united -states -interest -rate

Source: Federal Reserve, tradingeconomics.com

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