- U.S. GDP growth in Q4 fell shy of expectations, coming in at +2.6% (vs. expectations of +3%). Inventories and trade were larger drags than anticipated. The pace of global economic growth remains robust, however, and global forecasts have been moving higher. The Atlanta Fed’s initial forecast for Q1 2018 GDP growth is now at 5.4%. Expectations for Euro area growth are also being raised (growth has jumped by 1% over the last year). The region grew 0.6% in the fourth quarter of 2017 and 2.5% for the year.
- The current economic expansion has been remarkable for its longevity (we are entering the ninth year of the recovery). The Index of Leading Economic Indicators rose 0.6% in December, more than the 0.5% gain expected. January Consumer Confidence, continuing the positive momentum from last month, hit a record high 59.5%. Data on housing released in January was solid: home prices increased 6.2% in November, household formation surged in the fourth quarter, and the home ownership rate also rebounded in the final three months of the year.
- The Fed left its benchmark rate between 1.25% and 1.50%, as expected, at its January policy meeting. Credit conditions have remained relatively easy, with high yield spreads moving lower as sovereign yields have increased, helping keep the absolute level of borrowing costs low. But investors expect that inflation will rebound later this year. The Fed has projected three quarter-point increases to its benchmark policy rate this year, but some investors believe the pace could speed up if inflation, long missing from the economic recovery, starts to rise. Private sector wages are starting to firm, and oil prices have moved higher.
- The U.S. Dollar has been declining since November of last year and the dollar index reached a cycle low of 89.1 in January. Extreme dollar weakness year to date is puzzling, given strong U.S. economic growth, tax cuts, better news on inflation, a repricing of Fed expectations from two to three hikes this year and a widening of yield differentials in favor of the currency.
- The roaring start of the S&P in 2018 has been accompanied by record equity inflows. Global equity funds broke a record for inflows in January (the previous record was December 2014) with the pace of inflows five times higher than at this point last year.
- The U.S. Energy Information Administration (EIA) issued a prognostication that U.S. oil production would overtake that of Saudi Arabia and Russia in 2019. New crude supply has been released by the shale oil boom and output from the U.S. now stands at just under 10.04 million barrels a day. Inventories rose in the last week of January, following 10 weeks of declines.
- In his first State of the Union address, President Trump focused on jobs and the economy, infrastructure, immigration, trade and national security.
* This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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