UBS: In focus

The US Federal Reserve largely delivered on expectations. It made no change to policy but neither closed the door to a rate hike in March nor opened it further. Uncertainty out of China and elsewhere is clearly on committee members’ minds based on this new statement: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Inflation would remain “low in the near term,” the committee reported; and by not mentioning that risks to growth and inflation were “balanced,” the committee implied that it is more concerned about inflation reaching its 2% target. In the near term, CIO expects to see continued higher risk premiums on equities, obstacles to interest rates rising, and large currency fluctuations based on incoming economic data.

ECB President Mario Draghi announced that the ECB will “review and possibly reconsider” its monetary policy stance on 10 March. It will also release new macroeconomic projections that will cover 2018 for the first time. Although the ECB enhanced its stimulus measures just six weeks ago, Draghi said that the global environment has changed markedly since then. CIO expects the ECB to increase its monthly QE purchases by EUR 10–20bn.

Eurozone purchasing managers’ indices cooled last month. The preliminary Markit reading for the services sector fell to 53.6 from 54.2, its lowest level in 12 months. The manufacturing component dropped to 52.3 from 53.2, and the composite was at 53.5, down from 54.3, to an 11-month low. The In focus silver lining was that the indices all remain above the 50 mark, pointing to continued expansion in activity. In addition, the services sector created jobs ata pace beaten only once since 2008. 

In the US in January, the Dallas Fed Manufacturing Index hit its lowest level since early 2009, hinting at the damage being inflicted on oil-dependent states by the sliding crude price. The index, based on data collected over the week ending January 20, declined from 12.7 in December to –10.2 in January. Given the importance of the oil industry to Texas, it shouldcome as no surprise that activity decelerated there.

China’s industrial profits declined for the seventh month in a row. Industrial profits fell 4.7% year on year in December versus November’s 1.4% contraction. The slump followed weak production and sales, as demand remained tepid. Given China’s overcapacity problems in the manufacturing and property sectors and the overall deflationary pressure, industrial profits and employment are likely to continue to suffer. 

UK house prices rose for a seventh consecutive month in January, according to the latest data from the Nationwide Building Society. The average house price climbed 0.3% month on month to GBP 196,829 (USD 282,100). The annual pace of growth slowed to 4.4% from 4.5% in December, however. Given ongoing supply-demand imbalances and the likelihood of the Bank of England postponing its first interest rate hike, today’s data is consistent with CIO expectations for 6% average UK house price growth in the next 12 months.

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