1st Quarter 2017
Content: Switzerland, Eurozone, USA, Overview of Purchasing Managers’ Indices worldwide
In the fourth quarter of 2016, the Swiss economy grew by a weak 0.1%. This resulted in a growth rate of 0.6% over the previous year. Positive impulses came from consumer spending. Investment activity, which slowed down compared to the previous quarter, had a negative impact, as did the trade balance. Initial estimates put the real GDP growth rate in 2016 as a whole at 1.3%, following on from 0.8% in 2015. The unemployment rate has remained unchanged since August 2016 at 3.3%. The core inflation rate has risen from -0.3% to -0.1% since the end of 2016. The inflation rate including food and energy prices increased in February to 0.5%, the highest level since September 2011. The drivers are the stable EUR/CHF exchange rate and the stabilisation of commodity prices. The Swiss industrial PMI rose to a strong 58.6% in March, its highest level since the beginning of April 2011. Here, all the sub-components experienced positive growth. Production increased and order books grew. At the same time, inventories decreased and delivery times had to be extended – both indicators of strong demand. The labour market figures also improved. The relevant subcomponent rose to a five-year high.
In the fourth quarter, GDP growth year-on-year stabilised at 1.7%. The drivers for this positive trend were private consumer spending and investment activity. Foreign trade had a dampening effect on economic growth as imports grew faster than exports. The unemployment rate remained unchanged in February at 9.6%. According to preliminary estimates, the Purchasing Managers' Index rose to 56.7% in March. This means that growth in the eurozone has once again accelerated and is estimated in the first quarter to be as high as it last was six years ago. A look at the sub-components reveals that both production and order books made strong gains. At the same time, employment growth rose to a ten-year high. The surveyed purchasing managers also pointed out that price pressure was as high as it had last been in 2011. Contrary to expectations the core inflation rate dropped to 0.7% in march while the inflation rate including energy and food prices decelerated from 2.0% to 1.5%. The European Central Bank did not change its monetary policy strategy, but announced that "there is no longer the sense of urgency to take further [expansive monetary policy] measures."
The US economy grew by 2.1% (annualised) in the fourth quarter of 2016, having grown 3.5% in the previous quarter. Growth drivers were higher consumer spending and more investment activity. Growth was dampened by foreign trade. The labour market is continuing to grow. Thus, the growth in newly created jobs accelerated from 156,000 in December to 227,000 in January and 235,000 in February 2017. Despite high job growth, the unemployment rate remained stable at 4.7%. This is due to an increase in the so-called participation rate. Americans who had become discouraged from participating in the labour market after the financial crisis are starting to actively seek work.
According to preliminary estimates, the Purchasing Managers' Index fell by 0.9 percentage points in February to 53.2% - a six-month low. This fall can be attributed to both the service sector and the industrial sector. A source of concern is the decrease in the "employment" subcomponent, which fell to its lowest level since September 2016. Although jobs are still being created, the increase compared to the previous month is marginal. However, other sentiment indicators are optimistic. Consumer confidence has risen to its highest level since December 2000. Core inflation fell slightly in February to 2.2% and the inflation rate including energy and food prices accelerated to 2.7%. The Federal Reserve raised its key interest rate to a target range of 0.75% -1.00% in March and is predicting two more interest rate hikes in 2017.
Figure 5 shows the development of the (industrial) Purchasing Management Indices since March 2016 for selected economies, which together make up a large proportion of total global production. The Purchasing Managers’ Index (PMI) is a highly respected and promptly available indicator of economic activity. The indicator is based on a survey of purchasing managers regarding production, their order books and other key figures. In each case, they state whether the respective subcomponent is improving, deteriorating, or whether there has been no change compared to the previous month. If 25% of respondents indicate an improvement, 25% a deterioration, and 50% no change, the index stands at 50 points. If the value is above 50, the economy is expanding and below 50, it is contracting. In the USA, growth has accelerated somewhat since the end of 2016 after cooling down in the second and third quarters of 2016. In the eurozone, the PMI has been in the blue region for the entire period and has grown continually since the middle of 2016 from 52% to a strong 56%. The Swiss economy is also benefiting from the upturn in the economy in Europe. Despite the high value of the Swiss franc, the Purchasing Managers' Index rose recently to 59%. The only shrinking economies are currently Brazil and South Korea.
Content: Switzerland, Europe, USA
After Swiss bond yields rose relatively sharply up to the end of 2016 following the surprising US election result, the yield on government bonds with a ten-year term was between -0.06% and -0.26% up to the end of February 2017. The yield then rose above zero to 0.05% within just under two weeks for the first time since the third quarter of 2015, before a counter-swing saw the yield drop to -0.09% on 31 March 2017. The Swiss National Bank also left the reference interest rate and the target range for the three-month Libor interest rate unchanged at -1.25% to 0.25% in the fourth quarter. The negative interest rates on sight deposits also remained the same at -0.75%. The players on the financial markets do not expect any hikes in the key interest rate in Switzerland in the foreseeable future (see Figure 9).
Yields on 10-year German Federal bonds made a sideways move in the first quarter of 2017, ranging from 0.19% to 0.49% and closing at 0.33% as of 31 March 2017. At its March meeting, the European Central Bank did not adjust its short-term interest rates and announced its intention to continue its bond purchasing programme (EUR 60 billion per month) until at least the end of the year. At the same time, Mario Draghi emphasised the need for the ultraexpansive monetary policy course that the central bank embarked on two years ago with the introduction of the QE programme.
However, given the better economic outlook and slightly higher core inflation rates, there was no longer the pressure to expand monetary policy. Following the ECB press conference, the market was expecting the ECB to make a first key interest rate increase in March 2018. People associated with the ECB Council then qualified the ECB communication and said that the ECB press conference had been "overinterpreted," resulting in a slight fall in interest rate expectations.
As expected by the market, the Federal Reserve decided on a further hike in the key interest rate by 0.25 percentage points to a target range of 0.75%-1.00% at its March meeting. The median interest rate forecast by the members of the Open Market Committee for 2017 and 2018 remains unchanged at 1.375% and 2.125%. A slightly higher interest rate of 3% is now being forecast for the end of 2019. The yield on ten-year Treasuries fluctuated around 2.4% up to the beginning of March, rising to 2.63% as of 13 March 2017. The yield then fell back down to 2.39% as of 31 March 2017. This was triggered by the initial failure to repeal the Affordable Care Act, which prompted investors to doubt whether the new US administration will be able to implement other electoral promises in the foreseeable future.
The EUR/CHF exchange rate fell from 1.072 to 1.064 up to the end of January and bounced back from this level up to the end of February, probably thanks to exchange rate interventions by the SNB. In the run-up to the ECB's March meeting, the euro began to gain in value and rose briefly to 1.079 during the press conference, before a trend reversal set in which pushed the exchange rate down to 1.069 as of 31 March 2017. The US dollar started the year with a weak phase, which was accelerated from 17 January 2017 due to an interview with Donald Trump in the Wall Street Journal. In it, the US President said: "Our companies can’t compete with the [Chinese companies] now because our currency is too strong. And it’s killing us." The US dollar lost 2.9% against the CHF in January. The dollar then recovered to 1.015 as of 08 March 2017, before dropping down to 1.003 by the end of the first quarter. An important factor in this was the Fed's key interest rate forecast and communication. Both were somewhat less "aggressive" than had been expected beforehand. Following the recovery of the British pound up to mid-December, the subsequent depreciation continued up to mid-January 2017. An increase in value to CHF 1.263 Swiss francs was followed by a volatile sideways movement, which took the exchange rate down to 1.259 as of 31 March 2017.
After stock markets embarked on a year-end rally following the surprise US election result, ending the year with a good performance in 2016, the momentum remained largely positive in the first quarter of 2017. However, in January, the SMI and the S&P500 advanced by 0.9% and 1.9% respectively, while the EuroStoxx50 fell by 1.7%. In February, the upward trend on the stock exchanges accelerated thanks to good economic data from the USA and Europe. The SMI increased by 3.1%, the S&P500 rose by 4.0% and, after a disappointing start to the new year, the EuroStoxx50 gained ground with a performance of 4.0% . The Fed's increase in the key interest rate in March also failed to shock the markets, as the hike had already been completely priced in in December: The probability of an interest rate hike based on futures contracts was 100% for a while.
Accordingly, the stock markets also experienced positive developments in March. While the SMI and EuroStoxx50 advanced by 2.9% and 5.6% respectively, the US stock market stood still with a performance of 0.1%. The extremely low volatility on the stock markets since the US elections is striking. For example, the S&P500 did not experience a daily loss of more than 1.0% for 109 days up to 22 March 2017. Since 1950, there have only been nine other times when the US stock market has gone for a longer period without a daily loss of more than 1.0%.
The good stock market performance since the end of 2016 is mainly valuation-driven. This means that stock prices are rising more strongly than the underlying company profits. This phenomenon is illustrated in Figure 14 on the basis of the S&P500. This shows the normalised ratio of the index price to company profits (EBITDA: Earnings before interest, tax, depreciation and amortisation). The ratio is currently over two standard deviations above its normal value. US equities were valued at similarly high levels in 1999 and 2000. Figure 15 also illustrates the high valuations on the US stock market. While Swiss and European equities are currently only moderately overvalued as measured by the price-earnings and price-book ratio, the valuation of US equities is significantly higher than the normal level.
The EuroStoxx50, S&P500 and SMI recorded quarterly increases of 6.8%, 6.1% and 7.0% respectively. The stock markets of the emerging markets delivered the best performance with an increase of 11.4%.
The oil price ranged from USD 53 to 57 per barrel up to 7 March 2017, subsequently falling by more than 10% to USD 51 per barrel within a few days. The fall was a reaction to the publication of statistics on US oil stocks, which rose to a record level despite the cuts in production by OPEC. In addition, the US Energy Authority published new forecasts for global oil production which were higher than expected. The figures on oil stocks published by OPEC also made it clear that there is still an oversupply. After a further drop in the oil price up to 23 March 2017, the price recovered to USD 53 per barrel up to the end of the quarter.
The price of gold rose in the first quarter from USD 1,148 to USD 1,249. The factors quoted as drivers for this are the lack of a further increase in the interest rate level and the weaker US dollar.
Content: Shares, Bonds, Currencies
The improved state of the world economy points to positive stock market performance. In particular, the recently published macro data from the eurozone is optimistic. In the USA, however, there are signs of a slight slowdown in growth (drop in the Purchasing Managers' Indices). Investor expectations have risen significantly since the US elections. Global profit growth of more than 12% is expected for 2017 (MSCI ACW Index). Since 2013, stock analysts have expected a similar growth in profits at the beginning of each year, but this has then always had to be gradually corrected downwards.
The majority of the positive news seems to have already been priced into the stock markets. Indicators that measure investor sentiment are still at multi-year highs. At the same time, the implied volatility has fallen to an extremely low level. In the past, this combination has often heralded a price correction. In addition, investors currently seem to be ignoring many risks, such as the upcoming elections in Europe and the medium-term effects of Trump's election agenda. In the short term, however, there might be further price advances as a result of the positive momentum. There is currently a balance between opportunities and risks.
The assessment of the yield potential of bonds has hardly changed compared to the preceding quarter. We are currently facing a slight counter-swing after the rapid, sharp rise in interest rates since the US elections. Thus, the so-called "reflation trade", which saw investors speculating on higher inflation rates and interest rates after the US elections, seems to have come to a standstill for the time being. However, another major drop in interest rates is currently unlikely. For this, the economic figures in the coming weeks and months would have to be worse than is currently expected by financial market participants despite the optimistic early indicators. However overall, the current yield level is still unattractive, especially in Switzerland and Europe. Interest rates are only expected to stabilise at a higher level following further interest rates increases in the USA and an announcement by the ECB of a reduction in its bond purchases, which could happen towards the end of 2017.
In order for the US dollar to gain in value in the coming quarters after its recent weakness, the Fed would have to raise its key interest rates much more quickly than is currently expected. The EUR/CHF exchange rate is unlikely to change noticeably from around the 1.07 level in the coming quarter as the ECB will attempt to prevent the euro from appreciating more strongly.
Bloomberg Finance L.P., BIS, FRED, Eurostat, OECD, IMF, SNB, ECB, FED, KOF, SECO, editorial deadline: 31.03.2017
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