Week in Review: Reflation Narrative Bolstered; Stocks Set Records

For the week ending 17 February 2017

  • Upbeat US data fuel growth, inflation hopes
  • Yellen: Risky to wait too long to raise rates
  • Mnuchin confirmed as US Treasury Secretary
  • Greek bailout deadline in doubt

Global equities continued their advance on increasing evidence of improved US economic growth and rebounding inflation. Major US indices again notched record highs during the week, though bond yields held steady. Despite the strong data, the yield on the 10-year US Treasury note fell to 2.415% from 2.43% a week ago. Oil prices dipped, with West Texas Intermediate crude at $53.50 a barrel versus $54.10 last week and global Brent falling to $55.60 from $57.10. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), edged up to 12 from 10.9.

GLOBAL MACRO NEWS

US economy shows signs of strength
After a run of strong economic data from the United States, hopes intensified this week that the reflationary period underway since late 2016 would prove more durable than the four prior upturns during the current business cycle, which began in early 2009. January retail sales were a major bright spot, rising a better-than-expected 0.4%, while December sales were revised up 1% versus a previously reported 0.6% advance. Firmer consumer prices at both the headline and core level, buoyant manufacturing output and upbeat regional Fed manufacturing surveys—particularly the Philadelphia Fed's manufacturing index — which soared to a 33-year high — added to investor optimism. 

Fed’s Yellen reiterates case for rate hikes
After a string of strong economic reports, markets expect the US Federal Reserve to hike rates in the first half of 2017, perhaps as soon as next month’s meeting of the Fed’s rate-setting committee. In congressional testimony this week, Chair Janet Yellen said that it would be risky to wait too long to raise interest rates and that the committee would consider hiking rates in coming meetings. Yellen holds press conferences once per quarter, and the two rate hikes this cycle have both come at meetings that were followed by press briefings. Her next press conference is scheduled for 15 March, with another on 14 June.

Mnuchin confirmed as Treasury pick
US president Donald Trump’s pick for treasury secretary, Steven Mnuchin, was confirmed by the US Senate this week and sworn into office shortly thereafter. Tax reform is expected to be Mnuchin's early focus with Trump unveiling his tax reform package in the next few weeks.

Greek bailout lenders at loggerheads
The International Monetary Fund and eurozone finance ministers remain at odds over the direction of the Greek bailout process. The two sides hope to iron out a deal early next week to allow the IMF to release €7 billion in aid to Greece ahead of European elections, which kick off next month. The creditors hope to keep Greece from becoming a campaign issue in elections in the Netherlands in March and in France in April and May for fear that the matter could further fuel an anti-European Union populist backlash. IMF and Eurogroup finance ministers have been unable to reach agreement on the IMF’s proposal to grant Greece some level of debt relief. Without that relief, the fund says, Greece’s debt is unsustainable. Under the existing deal, Greece is forced to maintain a 3.5%-of-gross-domestic-product primary surplus, a level the IMF says is unrealistically high. Next week’s deadline is not as critical as many in the past as Greek funding does not become a major issue until July.

Comings and goings in Washington
It was an eventful week for appointees of President Trump. In addition to Mnuchin taking the helm at Treasury, the president accepted the resignation of his national security advisor, General Michael Flynn. Trump scrambled to nominate R. Alexander Acosta as labor secretary after fast food executive Andrew F. Puzder withdrew his nomination.

S&P 500 earnings on pace for back-to-back gains
With 75% of S&P 500 companies having reported (as of 15 February), aggregate earnings are up 5.2% year over year while revenues have grown 4.3%. According to Hedgeye Risk Management, if these trends hold up, the fourth quarter of 2016 will be the first time in two years that companies will have generated positive earnings for two straight quarters.

THE WEEK AHEAD

  • US markets are closed for President's Day on Monday, 20 February
  • China reports trade data on Tuesday, 21 February
  • Flash purchasing managers’ indices are released globally on Tuesday, 21 February
  • Eurozone consumer price data is reported on Wednesday, 22 February
  • UK Q4 gross domestic product are reported on Wednesday, 22 February
  • US existing home sales data are released on Wednesday, 22 February

 

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.

Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

Issued in the United States by MFS Institutional Advisors, Inc. ("MFSI") and MFS Investment Management. Issued in Canada by MFS Investment Management Canada Limited. No securities commission or similar regulatory authority in Canada has reviewed this communication. Issued in the United Kingdom by MFS International (U.K.) Limited ("MIL UK"), a private limited company registered in England and Wales with the company number 03062718, and authorised and regulated in the conduct of investment business by the UK Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS, has its registered office at One Carter Lane, London, EC4V 5ER and provides products and investment services to institutional investors globally. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation. Issued in Hong Kong by MFS International (Hong Kong) Limited ("MIL HK"), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the "SFC"). MIL HK is a wholly-owned, indirect subsidiary of Massachusetts Financial Services Company, a US based investment adviser and fund sponsor registered with the US Securities and Exchange Commission. MIL HK is approved to engage in dealing in securities and asset management regulated activities and may provide certain investment services to "professional investors" as defined in the Securities and Futures Ordinance ("SFO"). Issued in Singapore by MFS International Singapore Pte. Ltd., a private limited company registered in Singapore with the company number 201228809M, and further licensed and regulated by the Monetary Authority of Singapore. Issued in Latin America by MFS International Ltd. For investors in Australia: MFSI and MIL UK are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services they provide to Australian wholesale investors. MFS International Australia Pty Ltd (" MFS Australia") holds an Australian financial services licence number 485343. In Australia and New Zealand: MFSI is regulated by the US Securities & Exchange Commission under US laws and MIL UK is regulated by the UK Financial Conduct Authority under UK laws, which differ from Australian and New Zealand laws. MFS Australia is regulated by the Australian Securities and Investments Commission.

 

37162.7