Week in Review: First-Quarter US Growth Revised Higher

For the week ending 26 May 2017

  • US Q1 GDP revised up to 1.2% from 0.7%
  • China downgraded by Moody’s
  • UK on highest alert after Manchester attack
  • US stocks set fresh records
  • EU says UK must honor commitments

Global equities continued to rally this week, led by the United States, where record highs were recorded. The yield on the 10-year US Treasury note remained essentially unchanged at 2.24% while oil prices dipped. West Texas Intermediate crude fell to $48.95 a barrel from $50.30 a week ago as OPEC extended its output cap for another nine months. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), slipped to 10.30 from 10.80 last Friday.

GLOBAL MACRO NEWS

US growth revised up
The second look at first-quarter growth in the United States was somewhat brighter than the first. Gross domestic product expanded at an annual rate of 1.2%, according to the Bureau of Economic Analysis, up from an initial 0.7% reading. After revisions, consumer spending was a bit stronger than the initial report, though capital expenditures were less robust.

China’s credit rating cut
For the first time in nearly three decades, Moody’s has downgraded China’s sovereign credit rating. The rating now stands at A1, with a stable outlook. Moody’s cited rising liabilities and weakening financial strength as reasons for the cut. China’s finance ministry dismissed the move as “groundless.”

UK terror threat level raised
Following an attack outside an arena in Manchester that killed 22 and injured scores more Monday, British prime minister Theresa May put the country on its highest alert level, warning of the potential for an imminent follow-on attack. The general election campaign was suspended, but was expected to resume on 26 May. In the wake of the attack the prime minister will cut short her participation in the G7 summit in Sicily this weekend.

US equities set fresh records
Upbeat corporate earnings and positive economic data helped underpin a continued rally in US equities, with both the S&P 500 Index and the Nasdaq Composite Index hitting fresh all-time highs on Thursday.

War of words heats up ahead of Brexit talks
Officials from the European Union and the United Kingdom are scheduled on 19 June to commence negotiations on the UK's exit from the European Union. Both sides are setting out fairly extreme positions in advance of the talks. The EU continues to float exit bill figures as large as €100 billion while the UK has said it may owe nothing.

Fed outlines proposed plan to shrink balance sheet
In the minutes of the May Federal Open Market Committee meeting, the US Federal Reserve began to lay out the methodology it could use to shrink the central bank’s $4.5-trillion balance sheet. Under the proposed approach, the Fed would set a gradually increasing cap on the dollar amounts of Treasury and agency securities it would allow to run off each month. The caps would be set at low levels and then raised every three months, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.

EARNINGS NEWS

With 477 of the S&P 500 companies having reported for Q1, earnings are expected to increase 15.3% compared with Q1 2016, according to Lipper. Stripping out the energy sector, earnings are expected to rise 11%. Revenue growth is seen up 7.3% versus a year ago, and up 5.4% ex energy.

THE WEEK AHEAD

  • G7 leaders meet in Sicily on Saturday, 27 May
  • Markets in the US and UK are closed for Memorial Day and the spring bank holiday on Monday, 29 May
  • ECB president Mario Draghi testifies before the European Parliament on Monday, 29 May
  • China reports purchasing managers’ indices on Wednesday, 31 May
  • Eurozone unemployment data are reported on Wednesday, 31 May
  • Manufacturing PMIs are released globally on Thursday, 1 June
  • The May US employment report is released on Friday, 2 June

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.

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