Market Insights – September 10th, 2018

Weekly financial & economic analysis.

Night city lights bokeh

Sterling bounced back after GDP growth came in better than expected (0.6% quarter on quarter). What’s more, while there’s been no real breakthrough in the talks, it turns out Germany may be able to live with a less detailed Brexit plan. The pound has therefore started to perk up thanks to this encouraging news.

The political road ahead looks somewhat bumpy in Sweden. There was no clear winner in the general elections, with the two main blocs finishing neck and neck. On a positive note, however, the far-right party won fewer votes than the polls had predicted. The Swedish krona has rallied as a result.  

Just a day after the public comment period on the proposed increase in tariffs on USD 200 billion in Chinese imports ended, Donald Trump said he was preparing tariffs on a further USD 267 billion in Chinese goods. If all these packages are implemented, the total amount affected would exceed the value of China’s exports to the USA in 2017.

Has the American dream returned?

The latest figures from the USA leave little doubt as to the outcome of the Fed’s next meeting, on 25 and 26 September. Barring a major surprise, the Chair should announce a further 0.25% hike in the fed funds rate, which is currently at 2%. The US economy is doing well – and even very well – according to the ISM leading indicators of economic activity. These indicators are closely followed around the world, as they are a quite accurate gauge of where the US economy is headed. The August figures were very strong for both the services and the manufacturing sectors. The manufacturing index is at its highest since 2004. And recently it has been buoyed primarily by new orders, suggesting that industrial output should remain robust over the coming months. Job creation figures were also among the key stats released last week. The US economy has consistently created new jobs every month for more than eight years now. In August, a further 200,000 jobs were added, and unemployment (at 3.9%) has levelled off near its all-time low. It’s been ten years since the subprime crisis knocked consumers’ confidence for six, but households now have something to smile about: not only do they seem to have a guaranteed job, but their wages are finally starting to increase after stagnating for so many years. In August, hourly wages were up 2.9% year on year. With the economy nearing full employment, this upward trend is very likely to continue, if previous macro cycles are anything to go by. The only downside will be if wages rise too quickly, as that might worry the Fed, which is keeping a lookout for any risk of overheating or a surge in inflation. For the time being, inflation is still close to the Fed’s 2% target, and the gradual normalisation of monetary policy seems to be the right approach. But in the past, wage rises of 3.5-4% have tended to worry the Fed and often prompted it to adopt a more hawkish stance and speed up its monetary tightening. We’re not quite there yet though.

USA: spirits are still riding high

In August, the US consumer confidence index reached a level not seen in close to 18 years. Last time it was the euphoria around the dotcom bubble that gave consumers such a boost. This time there’s no shortage of reasons for their optimism: the USA is nearing full employment, the domestic economy is booming, tax cuts have raised their disposable in-
come, and low interest rates mean it’s still easy for them to buy a home.

Things are looking extremely bright as we head into a period of the year when consumers regularly reach for their wallets. First it’s back to school, then there’s Thanksgiving, followed by the Black Friday deals, and finally the end-of-year festivities – all occasions that should get people spending more than ever. The discretionary consumer spending and online shopping sectors in particular
could experience an especially robust final quarter. Visa stands to benefit more than most from this climate, and the fourth quarter is its biggest of the year. The company is also riding the online shopping wave, an underlying trend that shows no signs of petering out. For these reasons, we have moved into the stock and are putting out a buy recommendation.

 

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