4th July 2017

Brooks Macdonald: Weekly Market Commentary 3rd July

Watch Investment Director Ed Park's weekly market commentary and read detailed economic and market news from our in-house research team.

Notable events over the last week

The combination of relatively strong economic data and central bank confidence helped drive the “reflation” trade towards the end of last week. Markets witnessed higher sovereign bond yields across major developed markets, an equity rotation into bank stocks and a weaker trade-weighted dollar.

US consumption data upgraded

In a light week for economic data, the highlight was an upwardly revised first quarter US GDP print. The Bureau of Economics Analysis (BEA) revised its estimate of first quarter real GDP growth up from 1.2% to 1.4% (seasonally-adjusted annualized rate). This was above consensus expectations of 1.2% and occurred despite a downward revision to the inventory data, which has favourable implications for second quarter growth. 

The positive revision was driven mainly by better-than-expected consumption data. Real consumer spending was revised up from 0.6% to 1.1%, albeit, remaining at the slowest pace since the second quarter of 2013, while adding 0.3 percentage points to growth during the quarter. Consumer spending still looks very soft early on this year, but the figures are not as weak as the earlier readings that were reported by the BEA.

Central Banks perform a hawkish pivot

In his latest speech last week, Bank of England (BoE) Governor Mark Carney added more uncertainty to the near-term rate outlook by stating “some removal of monetary stimulus is likely to become necessary” if the trade-offs the Monetary Policy Committee (MPC) face deteriorate further. Markets perceived rhetoric as hawkish even though his comments were conditional on the BoE being surprised further on growth and/or inflation. Carney has potentially become mindful that the sudden hawkish dissent on the MPC could lead to higher rates and reminded markets that any policy rate tightening would be “limited in scope and gradual in pace”. 

Meanwhile, Deputy Governor, Jon Cunliffe who voted to keep rates on hold at the last meeting joined the debate, arguing that he wanted to see how inflation pressures evolved before deciding to raise interest rates. He noted that he would like to see if improvements in investment and exports could compensate for a consumer slowdown and remarked that “on the data we have at the moment, (it) gives us a bit of time to see how this evolves." The market is currently pricing in the probability for a rate hike by November at circa 52%. 

On Tuesday, European Central Bank (ECB) President Mario Draghi revealed his thoughts on growth, inflation and the impact of monetary policy. In general, his comments were optimistic on all fronts. On growth, Draghi noted the recovery was broad-based, dispersion across countries had fallen and monetary policy has contributed a lot to this. With regards to inflation, his comments were also positive, in that he talked at length about factors that were weighing on underlying inflation temporarily and noted that “deflationary forces have been replaced by reflationary ones”, the euro rallied sharply against the dollar in response reaching 1.1445, its highest level in a year.

Investors react favourably to plans for capital return 

Investors rotated into banks which rallied globally, supported by a sovereign bond sell-off and news from the Federal Reserve which released the results of the Comprehensive Capital Analysis and Review (CCAR), which included capital plan approvals for all 34 banks. In aggregate, the industry's payout ratio is expected to approach 100% for CCAR 2017, up from the mid-80% area for CCAR in 2016 and above lofty expectations.

Coming up this week (Source Bloomberg)

The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This document is intended for professional advisers only and should not be relied upon by any persons who do not have professional experience in matters relating to investments.

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