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Week 30 in Review: IMF Lowers US Growth Outlook

 

 

 

 

 

 

 

 

 

  • US growth sees modest Q2 bounce-back
  • Greece returns to the Bond Markets
  • Fed: Balance sheet run off to commence “relatively soon”
  • IMF lowers US growth outlook, raises others’
  • Abe’s support slides as scandals mount
  • Trump backs corporate, middle-class tax cuts

A busy week of corporate earnings injected volatility into the major European indexes. Soft manufacturing data, notably in Germany and France, at the start of the week weighed on the market. But by midweek, as earnings season was in full swing, telecommunication, technology, and utility stocks led the markets higher. However, by the end of the week, European technology stocks, hurt by earnings misses and profit taking, were a drag on Germany’s Dax and France’s CAC 40. The pan-European index Stoxx 600 finished the week lower along with the US S&P 500.

 

MACRO NEWS

 

US GDP rebounds from sluggish start to year

US economic growth accelerated in the second quarter, rising 2.6%, up from the first quarter’s 1.2% pace. Economists had expected a slightly stronger rebound, and the bounce is well short of expectations from earlier in the quarter. Wage pressures remain muted as hopes for sustained faster growth fade, given that pro-growth policies from Washington are looking less likely by the day. Modest growth averaging around 2% looks to be in the cards again in 2017. This should keep the US Federal Reserve on a gradual rate hiking path.

Greece returns to the Bond Markets

The financially strapped country returned to the financial markets for the first time since 2014 and sold about €3 billion of five-year bonds at an interest rate of 4.625%, a relatively high yield, to account for the inherent riskiness in holding Greek bonds. Greece is the rare sovereign that issues sovereign debt at a higher yield than some Greek corporates. The extra yield reflects the political risk posed by Greece’s relatively market-unfriendly Syriza government. Yields across most eurozone government bond markets broadly tracked U.S. Treasuries as they fell in the second half of the week following the Federal Reserve’s policy meeting on Wednesday.

Fed signals it’s ready to cut balance sheet soon

In a statement released after Wednesday’s Federal Open Market Committee meeting, the Fed indicated it is ready to begin trimming its balance sheet, which enlarged in the wake of the global financial crisis. In a statement, the Fed said it expects to begin allowing some of its bond holdings to mature “relatively soon.” This is a shift from earlier language, released after the June FOMC meeting, that indicated a move by the end of the year. Many expect an announcement to come at the September FOMC meeting. The Fed held rates steady while acknowledging that inflation is running below its 2% target.

IMF affirms global growth view

In a mid-year review, the International Monetary Fund maintained its forecast for 3.5% growth in gross domestic product this year. The fund lowered its outlook for US growth to 2.1% from a previous reading of 2.3% while raising its outlook for the eurozone and Japan. It downgraded its outlook for UK growth.

US health care push fizzles

Despite their effort being pronounced dead on several occasions, US Senate Republicans took up health care reform again this week after a dramatic return to the Capitol by Senator John McCain, who was recently diagnosed with brain cancer. Vice President Mike Pence broke a 50–50 tie to allow the Senate to begin debate on several Republican-sponsored legislative options. Ironically, McCain helped scuttle the final alternative, a “skinny repeal” bill that would have ended Obamacare’s individual mandate, among other provisions. Now that the health care bill has been defeated, Senate leaders hope to move on to tax reform and to passing a spending bill in order to avoid a government shutdown at the end of September.

Japan’s defense minister forced to step down

While much of the world has been focused on goings on in Washington, Japan has had to deal with a series of scandals that have undermined Prime Minister Shinzo Abe. Abe has been accused of cronyism, having helped a friend secure a license to open a veterinary school. Meanwhile, defense minister Tomomi Inada was forced to resign this week over an alleged cover-up of military documents from UN peacekeeping operations in South Sudan. Inada’s ministry is accused of concealing logs which show that Japanese troops were in increasing danger during their mission. The departure comes as support for Abe hovers near 20% in opinion polls. Despite Abe’s slide in popularity, the opposition Democratic Party has been unable to gain support, prompting the resignation this week of party leader Renho Murata after 10 months at the helm.

Trump talks taxes

Amid a swirl of controversy, US president Donald Trump, in an interview with the Wall Street Journal this week, reiterated his desire to slash the US corporate tax rate to 15% from 35% while lowering the tax burden on the middle class. Additionally, Trump kept open the option of raising taxes on upper-income earners. The president did not rule out reappointing Fed chair Janet Yellen, but said that economic advisor Gary Cohn, former president of Goldman Sachs, is also under consideration for the post. In a press release on tax reform on Thursday, congressional leaders and administration officials agreed to table the border-adjustment tax that would have taxed US imports.

Moody’s sees less China bank risk

Credit rating agency Moody’s has upgraded its outlook on the Chinese banking system to stable from negative. Moody’s sees receding concerns over China’s massive shadow banking sector following action from regulators to curb systemic imbalances. It also expects nonperforming loans to stabilize near current levels.

EARNINGS NEWS

According to Thomson Reuters I/E/B/S, with 48% of the members of the S&P 500 Index reporting, second-quarter earnings are expected to rise 10.7% versus Q2 2016. Excluding the energy sector, the rise is 8%. Revenues are expected to climb 4.9%. Excluding energy, a 4.1% earnings rise is expected

 

Week Ahead

 

 

 

 

 

 

 

All the Best and have a great week ahead

Stuart

CEO

Farringdon Group

+60 3 2026 0286

 

 

 

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