Market Update: Thursday, May 3, 2018

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Daily Insights

  • Fed acknowledges inflation rise but doesn’t alter course. The Federal Reserve (Fed) largely met market expectations at the conclusion of its meeting yesterday, holding the fed funds rate at its current level and seemingly maintaining its course for gradual rate hikes in the future. The post-meeting statement added another mention of the inflation target being “symmetric” in that members would tolerate inflation slightly above or below the 2% target. Despite the Fed’s acknowledgment that inflation is likely to soon meet its 2% target, language in the statement did not change investors’ expectation for 2-3 additional rate hikes in 2018, with the market effectively split between the two potential outcomes.

  • Expectations are low for trade negotiations in China. There are a number of reasons for investors not to get their hopes too high for immediate progress on U.S.-China trade discussions as U.S. trade officials arrive in Beijing today. While we remain hopeful for a negotiated outcome that markets will tolerate, the process to get there will likely be uneven and take more time. Despite some common ground, negotiations are sure to be difficult as the United States seeks a level playing field for U.S. companies doing business in China. We think a lot of the trade-related risk to economic growth and corporate profits has been appropriately priced in to the stock market at this point but will continue to monitor developments closely.

  • Surveys suggest global manufacturing is in good shape. A series of Purchasing Managers’ Index (PMI) data released this week paints a picture of a global manufacturing sector that remains solidly expansionary. Markit’s Global Manufacturing PMI rose to 53.5 in April. Europe has experienced the biggest drop of about four points, but remains solidly expansionary at 56.2; Japan saw a small uptick, and China held steady. We continue to expect developed international economies to grow GDP at a near 2% pace in 2018. Emerging market economies may grow 5% this year (our forecast remains +4.8% but Bloomberg consensus is +5.0%), supporting our preference for those markets over European-dominated international developed markets.

  • U.S. earnings revisions are still rising as international estimates dip. Over the past month, since earnings season in the United States began, estimates for S&P 500 Index earnings per share for 2018 have continued to climb. Overseas earnings have not experienced this same bump, perhaps in part because of the slightly softer economic growth along with currency impact. The strong domestic earnings environment continues to underpin our preference for U.S. equities exposure.

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