In this week’s film, Shanti Kelemen, Portfolio Manager, reflects on a strong week for economic data and the markets and what it means for interest rate expectations in the months ahead.
Our key messages this week are:
Strong markets, inflation signals
Robust economic data and strong equity markets continue to support our positive outlook for the investment environment.
The week saw some telling inflation numbers being released. At 2%, eurozone inflation hit the European Central Bank’s (ECB’s) target rate for the first time in five years. In the US, inflation hit 1.9%, just below the US Federal Reserve’s (Fed’s) 2% target, an important milestone on the road to the next rate rise. Even Japan, which has struggled with deflation for the last decade or more, saw an uptick of 0.1% thanks to rising energy costs.
Trump to US Congress – low on detail, low on rhetoric
President Trump gave a fairly measured speech to US Congress during the middle of last week. Markets reacted positively to the focus on tax reform, business regulation and infrastructure plans, and to the clear departure from his recent combative rhetoric.
There was little in the way of detail, but we did find out that infrastructure spending would be around $1trn, and a mix of public and private capital. It’s currently not clear how this will be financed, but some funding will surely come from the long-dated bond market. Treasury secretary Steven Mnuchin said in an interview that the US Treasury was looking into 100 year bonds but expectations for rising bond issuance have been priced into the market since before Mr Trump’s speech.
Great rate rise expectations?
The probability of the Fed raising rates at its next meeting on 15 March rose to 88% from 40% during the week, as measured by trading positions taken by market participants. This was driven by speeches from Fed members on the clear signals of “an improving global economy and a strong US recovery”.
Rising rate expectations have seen bonds sell off and financial equities rise. The dollar traded at a seven-week high over a basket of currencies, and the sterling-dollar rate fell below $1.23. Sterling’s difficulties weren’t helped by the House of Lords demanding an amendment to Theresa May’s Brexit.
We currently favour equities over bonds in portfolios, so we are positioned to take advantage of economic growth. Exposure to financial equities in particular will benefit from higher interest rates. We also continue to see value in sectors like technology and healthcare. Healthy earnings data in the last quarter of 2016 showed that many companies are in these sectors are in a strong position, while long-term changes in global demographics should drive future growth, as we outlined in our Investment Outlook 2017.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
Portfolio Manager, Coutts
Shanti joined Coutts in 2012, and is responsible for running private client portfolios.
She previously worked on developing investment services and lending products for intermediaries. Prior to that she was a derivative specialist, developing trade ideas and investment products for high net worth clients. Shanti began her career working two years in equity derivatives at RBS.