MANAGER’S MARKET REVIEW AND OUTLOOK
The information in this section has been provided to BHM by BHCM. |
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US
Payroll employment rose briskly in January, and approximately one million new jobs have been created in the last four months. The government shutdown which began in December and lasted throughout most of January likely hindered current-quarter growth. However, if history is a guide, most of the lost ground could be recouped in the coming quarters. Consumer price inflation was firm in January, with core prices rising more than 2% over the last year as headline prices decelerated on lower energy prices.
Arguably, the most interesting occurrence in January was a marked dovish turn from the Federal Reserve (“Fed”). The Fed promised to be “patient” and suggested that “adjustments” to its policy rate could be up or down. Coming soon after the rate increase in December, the shift caught the market by surprise and likely put the Fed on the sidelines for at least the first half of the year.
UK
After having been voted down in January, parliament is expected to have another ‘meaningful vote’ on Theresa May’s Withdrawal Agreement for leaving the EU by 12 March. If the Prime Minister’s deal is again rejected, then parliament will vote on whether to leave the EU without a deal on the following day. If parliament votes against a ‘no-deal’ Brexit, parliament will then vote on a motion requesting an extension of Article 50, such that the UK’s exit date will be delayed beyond 29 March; such an extension would require approval from the EU council. The exact timing of any extension is unclear, and is complicated by the European Parliament’s schedule; the EU parliament, who will also have to legislate Brexit, has its last session on 18 April and does not reconvene until 2 July, after the European Parliamentary elections. What is clear is that parliament now has a greater say on the Brexit process, making a no-deal Brexit less likely, and an extension more likely. As such, the pound has rallied to 1.33 against the dollar, reaching the highest levels since June 2018. Meanwhile, the Brexit induced uncertainty has caused economic activity to moderate. GDP grew 0.2% q/q in Q4 of 2018, down from 0.6% in Q3, with business investment detracting 0.1ppt from growth. In particular, GDP fell by 0.3% m/m in December; combined with weak business surveys, the hand-off from Q4 suggests Q1 growth should also be muted. Otherwise, inflation fell -0.3ppts to 1.8% y/y in January, reflective of the energy price caps that the energy regulator introduced in January. Overall, the mix of slower domestic and global growth has in turn caused the Bank of England to lower its economic projections for GDP. As such, the Monetary Policy Committee voted unanimously to keep the policy rate unchanged at its meeting in February.
EMU
EMU GDP expanded by a mere 0.2% q/q and 1.2% y/y in Q4 2018, significantly disappointing the European Central Bank (“ECB”) forecast as Italy fell into technical recession. Furthermore, the EMU Composite January PMI edged closer to 50 and remained at its lowest level since July 2013. EMU headline inflation fell to 1.4% y/y in January, owing to energy price disinflation, while core inflation was 1.1%. With the exception of wages (responding with the usual lag to past growth), the sharp slowdown in activity does not bode well for a convincing end to core inflation inertia.
Having ended net quantitative easing purchases at the end of 2018, the ECB started to retrench from its optimistic outlook at its January meeting by shifting the growth risk assessment to the ‘downside’. In March, the ECB may revise downwards again - and significantly – its macroeconomic projections.
Japan
The Bank of Japan (“BoJ”) left policy unchanged at its January meeting. It lowered its price outlook on energy prices but maintained its language on positive momentum towards its 2% goal. Subsequently, there was positive news as western core prices (consumer price index excluding all food and energy) rose 0.3% on a seasonally adjusted basis in the Tokyo area in January. The last time this occurred (excluding the effects of the consumption tax increase) was in 2010. However, national western core inflation has been running weaker than in Tokyo, being nearly flat over the whole of 2018. Therefore a strong January would still leave the 12-month change well below target.
Some analysts have noted that Governor Kuroda has recently taken to talking about the ‘costs’ of current policy. He mentioned this previously in a speech and repeated it at the press conference after the last BoJ meeting. In addition the latest minutes show that there was a spirited debate over longer-term interest rates, with some BoJ members arguing for letting them turn negative and others favouring pushing them higher. The poor inflation performance suggests no change in policy is in the offing. With the dovish turn in U.S. monetary policy and weakening economic activity in Europe, such talk of the costs to monetary policy or calls for a higher long-term rate target would appear to be moot. Any hint of tighter monetary policy would in this environment risk a stronger yen. |