Week in Review: Outlook for Central Banks Turning Cloudy

For the week ending 18 August 2017

  • Fed, ECB wrestling with weak inflation backdrop
  • Trump disbands business councils
  • North Korea backs off Guam threat
  • USTR to investigate China trade practices
  • UK lays out Brexit positions

Global equities gave up midweek gains and headed into the weekend little changed. A renewed surge in volatility was sparked by concerns that fresh White House turmoil could imperil President Donald Trump’s pro-growth agenda. Adding to volatility was a terrorist attack in Barcelona that killed 14. The combination helped drive the Chicago Board Options Exchange Volatility Index (VIX) back up to 14.75 early Friday after the index declined to 11.25 on Wednesday. US 10-year Treasury note yields edged lower on the week, to 2.19% from 2.21% a week earlier, while the price of West Texas Intermediate Crude oil slipped to $47.20 a barrel from $48.20 last week.

MACRO NEWS

Lack of inflation has central banks rethinking
In recent months markets have been anticipating that the European Central Bank will join the US Federal Reserve in beginning a long process of monetary policy normalization. However, in minutes of recent policy discussions, both the Fed and the ECB sent more dovish signals than the markets were expecting. Some policymakers were concerned that inflation is not moving toward the central banks’ 2% targets despite recent upticks in economic growth. These concerns call into question the pace of future Fed hikes and the timing of an expected taper in ECB asset purchases. The FOMC minutes show that members were split, with some calling for caution on further rate hikes while others expressed concern that delaying tightening measures might fuel financial instability. The tone of the ECB minutes has lowered expectations that Mario Draghi will use next week’s speech at an annual Fed symposium in Jackson Hole, Wyoming, to set the stage for a shift toward a less accommodative monetary policy. Any discussion on that matter will now wait until fall.

Trump disbands CEO councils
After several high-profile defections of corporate CEOs from two business advisory councils, President Trump this week dissolved the councils. Friction between the business leaders and the president came to a head in the wake of a Trump press conference on Tuesday in which the president blamed both sides for violence at a rally in Charlottesville, Virginia last weekend rather than single out racist hate groups.

North Korea backs off Guam threat
North Korea regime announced this week that it will not target the area around Guam, a US island territory in the Pacific Ocean, quelling fears that its recent standoff with the US could lead to war. This week, China implemented United Nations sanctions, cutting off imports of North Korean coal, iron ore and seafood, further isolating the country and depriving it of hard currency that it often uses to bolster its nuclear program.

US investigating China trade
President Trump signed an order this week directing the Office of the United States Trade Representative to conduct an investigation into China’s trade practices with regard to intellectual property theft and the forced transfer of technology in order to be granted access to Chinese markets. If China is found to be in violation, Trump can skirt the World Trade Organization and order tariffs under the Trade Act of 1974. Meanwhile, NAFTA negotiations are set to begin this week between the United States, Canada and Mexico. US Trade Representative Robert Lighthizer said the US is not looking for mere tweaks in the existing treaty, but substantial changes that assure balance and reciprocity.

UK publishes Brexit positions
After being criticized by European Union negotiators for months, the British government published several position papers this week, laying out detailed viewpoints on border issues between Northern Ireland and the Republic of Ireland as well as on the need for a transitional customs union following Brexit. British negotiators are trying to meet the EU demand that sufficient progress be made on a series of issues, including the Irish border, the rights of EU citizens living in the United Kingdom and the financial settlement, before negotiations on future relations between the UK and EU are taken up.

Japan’s economy kicks into gear
Fueled by increases in consumption and capital expenditures, Japan’s economy expanded at a 4% annualized rate in the second quarter, far exceeding expectations of a 2.5% rise. The economy grew for a sixth straight quarter, while inflation, though mild, ticked up for a sixth month in June. The current robust pace is not expected to be sustained as economists forecast a slower pace of economic growth for the balance of the year amid lackluster wage gains.

EARNINGS NEWS

With 92% of the members of the S&P 500 Index reporting, Q2 earnings are expected to increase 12% compared with Q2 2016. Excluding the energy sector, earnings are expected to advance 9.3%. Revenues are seen growing 5.1% overall and 4.2% when excluding energy companies.

THE WEEK AHEAD

Date

Country/Area

Release/Event

Tue, 22 Aug

eurozone

Economic sentiment survey

Tue, 22 Aug

Canada

Retail sales

Wed, 23 Aug

global

Preliminary purchasing managers’ indices

Wed, 23 Aug

United States

New home sales

Thu, 24 Aug

US

Jackson Hole Fed symposium begins

Fri, 25 Aug

US

Durable goods orders

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.

 

37162.33