The Federal Reserve has a tricky problem up their sleeve this week to navigate through which is how they are going to tackle the issue of inflation, which has just bounced back to the central banks elusive level of 2% target. As the current rate is 1.75%, what is the likelihood that this will increase? Are they about to hit an equilibrium where inflation equals interest rates?
The policy-setting Federal Open Market Committee (FOMC) is expected to leave interest rates unchanged at its two-day meeting in Washington. How it opts to describe price pressures will shape expectations for the pace of future rate increases. A policy statement is scheduled for 19:00GMT today. Officials meet after data showed their preferred measure of inflation rose to 2% in March, after falling short of that goal for most of the past six years. If the FOMC statement mentions the price pickup and continued moderate economic growth, it is likely to reinforce expectations of a rate hike in June. Investors anticipate two or three more moves this year. How they choose to alter the characterisation of inflation is important. They have been saying for a long time it’s running below target. Fed forecasts updated for the March FOMC meeting showed officials were almost evenly split between projecting two or three more rate hikes this year, in addition to the quarter percentage-point increase they made on the 21st of March. No fresh forecasts will be released this week, and nor will the meeting be followed by a press conference with Chairman Jerome Powell. A matter-of-fact description of the price gains would suggest that the FOMC is confident in its gradual approach to raising rates and doesn’t see urgency in increasing its pace. Likewise, maintaining its description of the inflation goal as “symmetric” included in every FOMC statement since March 2017, could reinforce the view that the Fed could potentially be patient.
Is it all about the US?
Characterising 2% as a symmetric target, rather than a strict ceiling, conveys the idea that the FOMC would be equally concerned if inflation were running persistently above or below its objective. Officials could also say that inflation is now essentially at target and that they expect to be able to keep it in that vicinity. Some such language allows for a small overshoot which seems likely.
The committee is also likely to debate how to characterise the U.S. economic expansion, which yesterday became the second longest on record. In March, the FOMC downgraded its view of growth to “moderate” from “solid.” Gross domestic product rose at a slightly quicker-than-expected 2.3% rate in the first quarter, making it a close call between those choices. The labour market may continue to be described as “strong” even with data showing some unevenness. Just 103,000 jobs were added in March, according to the Labor Department, though economists estimate that employment picked up in April. This is all positive news as the US economy drives global growth and if the US does well, so does the rest of the world as a derivative.
What about the UK?
As we have received all the new PMI Markit readings for last month, the Eurozone continues to outpace the UK while growth in the eurozone slowed in the first quarter, but the bloc has still expanded faster than the UK in five of the seven quarters since the EU referendum. This suggests that the UK has not been able to reap the full benefits of an upturn in global economic activity, unlike other large economies like the eurozone and the US. This now means that the UK has been the slowest growing economy relative to the US and the eurozone for the fourth consecutive quarter, something last experienced 12 years ago.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track increase slightly with the US gains leading those in Asia and the rest of the world. The Nasdaq has done relatively well over the past week and this is what we usually see when we reach this phase of the cycle when technology stocks look attractive, as investors get more aggressive. Markets are now currently watching for a few events pencilled in for this week and next. Senior US and Chinese officials are due to hold trade talks tomorrow in Beijing and Asian markets are waiting to see if there is any progress with trade talks, also markets are watching central bankers and their approach on monetary policy.
With our model portfolios, given the unique structure and the balance between equities and non-equities funds, we have managed to gain from the upsurge in the financial markets and have seen gains in our equity denominated funds. The multi asset funds have the ability to cyclically rotate assets which would also mean that as we near the peak of the economic cycle, our model portfolios will become “hedged” and we will go into capital preservation mode. We will need to ensure that we keep a close eye on economic data as it will start to slow down, and when it reaches a certain threshold, we will need to go defensive.
Based on our 4th of April rebalance, we included the HSBC FTSE 100 index in the model portfolios from cash we generated on 22nd of February rebalance. We purchased the passive index when it was just below 7,000 points and at the time of writing, the FTSE 100 is at 7,553.06, up almost 8%. From a Relative Strength Index (RSI) perspective the FTSE is now at 73.50, which would indicate that the index is oversold and should start coming back down. We have therefore pencilled in a rebalance if the FTSE 100 reaches close to 7,600 points, benefiting all the portfolios as we will lock in the gains. The drop in sterling has also benefited the gains as anticipated and we will keep an eye on this to ensure that we get out of the passive instrument as soon as the data suggests.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1952, the De Havilland DH 106 Comet was the world’s first commercial jetliner to have been debut. Developed and manufactured by De Havilland at its Hatfield Aerodrome in Hertfordshire, United Kingdom, the Comet 1 prototype first flew in 1949. It featured an aerodynamically clean design with four de Havilland Ghost turbojet engines buried in the wing roots, a pressurised cabin, and large square windows. For the era, it offered a relatively quiet, comfortable passenger cabin and was commercially promising, which then lead to future successful designs.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager