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Friday, June 23, 2017

Wow, one year already since Brexit? That was fast. Investors who bailed learned at least one thing from Brexit (British voting to exit Eurozone membership). Don’t sell when the facts tell you otherwise. To quote former president Franklin Roosevelt “the only thing to fear is fear itself”. In hindsight the Bank of England (BOE) had the ability to use a number of tools to cushion the blow with various tools of monetary policy. BOE Governor Mark Carney used ALL the tools at his disposal and a crisis was averted and the massive European Central Bank stimulus was finally helping the economy to gain traction at just that time. Today, we have way less to be concerned with. I know oil is in a bear market, rates are dropping as is inflation and more. But, the fundamentals are strong with U.S. corporate earnings surging nearly 14%, global manufacturing in expansion mode across the board, U.S. housing setting new cycle highs and initial unemployment claims at a 44-year low. Meanwhile, the markets are having the best returns in years so turn off your TV and enjoy the summer. Please review Voya Global Perspectives™ Weekly for a quick read of global financial markets.

Thursday, June 22, 2017
Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.

This morning brought with it an Initial Jobless Claims print of 241k, while up from 43-year low of 227k in February, still indicative of a tight labor market, also corroborated by May unemployment reading which stood at a low 4.3%. But where is the corresponding wage growth? Year-over-year growth in Average Hourly Earnings has recently slipped from to 2.5% from cycle highs of 2.9% reached last December, and remains below levels of over 3% reached in the previous economic expansion. Employers are retaining skilled workers, but restraining meaningful wage increases to maintain their bottom-line earnings. However, lukewarm wage growth could be indicating that there is greater slack in the economy than economists realize. For more on wage growth, please refer to page 64 of the Voya Global Perspectives™ Book. - Special Guest Blogger: Pavel Dekhman

Wednesday, June 21, 2017

The markets have been taking “two steps forward and one step back” all year. Investors should get fully invested as soon as possible to participate in that type of market and understand that it is folly to try to “game diversification”. Yesterday the markets hit new highs while today they are marginally giving back some of those gains. Meanwhile, May’s U.S. Existing Home Sales reported today continue to near cycle high while the median price at $252,800 was a new all-time high. Positive fundamentals continue to support this market’s relentless climb higher. Please see Monday’s Voya Global Perspectives™ Weekly for insights across global financial markets.

Tuesday, June 20, 2017
The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many high paying jobs.  The recent drop in oil prices has caused the energy sector to cut back.

Oil prices have been under pressure lately and moving lower. By now, everyone who can fog a mirror is aware there is an oil supply glut. Even the uptick in global growth/demand has not been able to significantly diminish the oversupply and when there has been a move up in prices based on OPEC supply limits, nimble shale producers have increased production, negating the upward price push. The bad news is that the energy sector has cut back its earnings expectations for the rest of the year (although earnings estimates are still much higher than 2016). The good news is that the market no longer considers oil prices as a proxy for global growth and has been able to mostly brush off the decline in oil. In addition, these lower prices come just in time for VACATION! So forget the lame staycation and get in the car and drive somewhere. Buy lots of souvenirs along the way. Please note the significant increase in U.S. oil rig count on page 75 of the Global Perspectives™ Book, which has been surging since its trough in May 2016.

Thursday, June 15, 2017

Fed Chair Janet Yellen and her FOMC committee raised rates and the markets responded mixed but largely unconcerned. That is good news. The Fed Funds rate is finally in a range above one percent on its way to “normalization”. Today’s economic reports confirmed that view with manufacturing reports “Empire State” surging to a three year high and “Philly Fed” just off of its 33-year high in February; Initial Unemployment Claims continue to hover around a 44-year low and a mining and factory rebound that is lifting producer sentiment, U.S. consumer confidence and small business confidence. Meanwhile, inflation as measured by CPI ex-food and energy lost momentum in May increasing 1.7% verses prior month 1.9%, while crude oil prices continued to get hammered on excessive supply concerns. Please see the latest Voya Global Perspectives™ Weekly to track global equity, fixed income, commodity and foreign exchange markets.

Wednesday, June 14, 2017
The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

The Fed’s statements appeared to me to be a bit hawkish on the outlook. The FOMC noted that the unemployment rate could go as low as 4.1% this cycle, they expect basically 2% growth with inflation heading back to towards the 2% target. As a result, the Committee hiked rates (no surprise there), but also maintained the outlook for at least one more hike in 2017 and three in 2018. What’s more, they added an “Addendum” to their 2014 “Policy Normalization Principles and Plans”. That document outlines that it will “decrease its reinvestment of principal payments…such payments will only be reinvested to the extent they exceed gradually rising caps”, set at $6bn annually per month of Treasuries (going to a $30bn cap) and $4bn of Agencies (going to a $20bn cap); not overdoing the reduction at this point.
I’d read this as a relatively hawkish road map, given the growth outlook. It seems that the Committee is signaling it will be less ‘data dependent’, given the emphasis on its current hiking path with a shrinking of the balance sheet, combined with sluggish growth, modest job growth and the (hope? Expectation?) that inflation will rear its head again. It seems the Committee feels the fundamentals are ‘good enough to hike’, so they can get off the floor, with perhaps another hike coming in September. I’d think it’s good for the dollar, except that growth is essential for the dollar and the Fed isn’t emphasizing growth. Could put downward pressure on commodities/bond yields, unless and until pro-growth policies finally push growth back above 2% sustained. Please see page 32 of the Global Perspectives™ Book. - Special Guest Blogger: Tim Kearney

Tuesday, June 13, 2017

Today the market is focused on the Fed meetings, waiting for a policy announcement to be released tomorrow. A rate hike is widely expected, but investors are also anxiously waiting clues in the minutes as to the path and timing of the balance sheet unwind. The tech selloff seems to have abated for now. Why? Because the earnings are so darn good, up more than 17% in Q1 and expected to increase 9% in Q2. As for the overall economic backdrop, the economic data continues to be impressive. The NFIB Small Business Optimism Index remains at all-time highs - 104.5 for May and the producer price index (PPI) excluding food and energy PPI ticked up a little higher than expected, up 2.1% y/y. However, the market and investors are still waiting for those pro-growth economic policies we were promised. When these policies finally make an appearance the economy and market will be rewarded for their patience. Please follow the latest sector earnings growth on page 7 of the Global Perspectives™ Book.

Friday, June 9, 2017

Hands down this is the best commencement speech I have ever heard. It is not surprising that this was from a former Navy Seal, Head of Joint Special Operations Command, “tip of the spear in the war on terror since 2001”. The speech was given by Admiral McRaven who commanded SEAL Team Six – need I say more? It is an awe inspiring, all-inclusive message on how to “change the world”. Meanwhile, in the markets, despite geopolitical tensions, the CBOE Volatility Index dropped to two decade lows while global economic activity continues to march forward. In the words of Admiral McRaven, have a plan and never, ever “ring the bell.” View the commencement speech here. Please review the Global Perspective Weekly™ for an insight into the global markets.

Thursday, June 8, 2017

Today has been dubbed “Super Thursday” because there are three major events poised to distract investors – an ECB rate/policy announcement, the U.K. general elections and the FBI testimony in Washington. Super Thursday could turn out to be super dud. The ECB is leaving rates unchanged upgrading its forecast for growth but downgrading inflation. Theresa May is the likely winner in the U.K. despite a late race surge by the socialist candidate Jeremy Corbyn of the Labour Party. And the FBI/Comey testimony doesn’t look like it is revealing any market moving tidbits of new information. Meanwhile the World Bank upgraded its forecast for global growth, estimating an acceleration to 2.7% growth in 2017 based on a pickup in manufacturing and trade, increasing market confidence, and more stable commodity prices. Please see the Investment Weekly for all of the latest market data.

Wednesday, June 7, 2017
The 10-Year U.S. Treasury yield has historically tracked closely to the change in nominal U.S. GDP.

The ISM report for May took a step upward on output, with another downturn on prices. Manufacturing moved a tick higher at 54.9, with the three month moving average holding high. Importantly, New Orders ticked back up to 59.5 from 57.5. Prices paid had been steadily rising until March, when the indicator peaked at 70.5. Other price indicators have taken a downtick as well, starting with oil prices (at $47/bbl down 18% since late-December); gold prices off 6% this year (despite global political jitters over North Korea, Syria, terrorism); broad commodity prices off a full eight percent. The dollar index is down 8%. Basically, the USD is flat-to-down against most major currencies this year. Sluggish growth and soft price pressures are consonant with a drop in 10-year bond yields. Since Q1, the Fed Five Year Forward breakeven is off by 20bp; the five-year bond yield is off by 44bp. I read this as the bond market pricing in continued sluggish growth. In this circumstance, it’s clear we will get a Fed hike in June. Further from here I think we go back to ‘data dependent’ mode, and the market is pricing just a 45% likelihood the FOMC does another hike by year end. While I share the market’s concern over growth policies, I do not share the pessimism that is embedded in the flattening of the yield curve. While tax reform has slowed, business tax reform is likely to be passed if not this year then early next. Deregulation (and the lifting of the threat of regulation) is growth positive. My forecast remains for a rise in bond yields; I don’t discount the risk, but I doubt we’ll see a collapse of inflation/growth to push bond yields sub-2%. In the meantime, please see page 33 of the Global Perspectives™ Book on growth and reflation. - Special Guest Blogger: Tim Kearney


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