The FOMC’s US interest rate setting is perhaps the one thing that can move markets more than any other, and it always has major implications for asset allocation.
With the US accounting for around 54% of the world index, it is clearly one of if not the most important elements of asset allocation to get right, but also arguably the hardest.
Markets hang on every word that Chair Janet Yellen or her colleagues say, but she consistently throws them ‘curveballs’ as our American friends sometimes say.
Anybody expecting a clear, easily actionable message from Yellen when the latest meeting wraps up is more likely to be left twisting in the wind, more uncertain about their weighting to US equities or fixed income than before she spoke.
To compound this, the US economy continues to send mixed messages, with employment numbers undershooting expectation one month then trouncing them the next. GDP read-outs are similarly inconsistent.
"Markets hang on every word that Chair Janet Yellen or her colleagues say, but she constantly throws them ‘curveballs’ as our American friends sometimes say"
“The upturn in the rate of growth of business activity and increased inflows of new orders suggest the economy should see GDP rise at an increased rate in the second quarter, but growth is clearly far more fragile than this time last year,” said Chris Williamson, chief economist at Markit. “Viewed alongside the recent poor performance of the manufacturing sector, which reported its worst month since October 2009, the survey suggests the economy grew at an annualized rate of just 0.8% at the start of the second quarter, only marginally above the pace signalled for the first quarter.”
“The current pace of growth is also only being supported by price reductions, as an increasing number of firms offer discounts to win sales,” Williamson continued. “Job creation has also slowed as a result of cost cutting pressures and uncertainty over the outlook, but remains solid. The surveys point to another 150,000 non-farm payroll increase in April, as robust service sector hiring continues to offset factory job losses.”
Joshua Mahony, a market analyst at IG, pointed out that the stock market highs being reached despite this mixed macro picture give investors something else to ponder.
“A positive start to the day [on Tuesday 26th] for US markets does little to reflect what has been a largely discouraging batch of data, revealing falling consumer confidence, weaker-than-expected services sector growth and yet another fall in core durable goods,” said Mahony. “It is clearly a case of bad news is good news as any signs of a US economic slowdown would likely put the buffers on any plans for the Fed to tighten. However, it is worth considering that there is something wrong about a stock market near record highs amid stuttering Chinese growth, tumbling US earnings, an energy price crisis and inflation at rock bottom.”