The Daily Update - 2018 Outlook

So, here we are at the last daily of 2017. Looking back at last year’s last daily we forecast two Fed hikes in 2017 and we got three, twelve months on and here we are again, forecasting out expectations for US rate hikes over the next 12 months.

Groundhog day. So, here we go:

Broadly we expect 2 or 3 Fed rate hikes (depending on outcome of the US tax cuts package), bringing the Fed Funds Rate to a 2-2.25% range (a bit of hedging here then). We also expect the yield on longer-dated US Treasuries to continue to fall, thus flatten; with 10 and 30 year debt moving towards a 2.25% yield level and possibly lower. Inflation expectations are key to our strategy; whilst a small rise is expected short term, we believe this is already priced into the market. Longer-term the outlook for inflation remains positive for longer dated high quality bonds; we will continue to monitor inflation and react accordingly.

So we are optimistic for 2018 looking for a continuation of spread tightening in better rated credits hence our stance is to retain our longer duration profile and our higher average credit positioning across all our funds.

Our offshore Guernsey based Renminbi Bond portfolio, having just seen out its tenth year since launch has seen stellar performance and currently is up about 15%c ytd on the USD class, 14% on the sterling class and 13.5% on the euro class; very pleasing. We do expect the Chinese currency to continue to add value when overlaid across our bond portfolio as we actually get paid to buy the renminbi from all three of the above quoted currencies adding to returns. Of course, this also helps alleviate some of the risk associated from currency exposure but we do expect further renminbi appreciation over the coming years as further deregulation and acceptance of the Chinese currency as a core holding grows from a heavily underweight investor base.

As usual a last daily needs some humour and so here goes:

What is it called when Santa gets stuck in the chimney…….Claustrophobia,

What do you call an Elf that sings…….A wrapper,

Why was Santa’s little helper depressed…….he had low elf esteem,

What’s the difference between snowmen and snowladies…….snowballs,

What do you call a blind reindeer……..No eye deer,

What do you call the Head of Sales wearing ear muffs…….Anything you want he can’t hear you.

Have a great holiday and may Santa be kind. The team will be back writing more insightful dailies the week of the 8th January.

Jingle bells, jingle bells, jingle all the way…

Wealthy Nations Daily Update - US Data

Following yesterday’s note we thought we would add a bit more flesh to the bones. There’s going to be a lot of second-guessing about the Fed’s next move if the data continues to run the way they have of late.  Consumption and investment numbers have both dipped since officials pulled the trigger on 17 December last year. Yesterday we spoke about the ISM data with a December drop to 48.2, the lowest since June-2009. It was the second month in a row of sub-50 (contractionary) readings and it confirmed what the hard data have been showing for some time: the industrial sector is in a recession and it appears to be deepening. Manufacturing output hasn’t grown in three months and is up only 1% over the past year, and the broader industrial sector – which also includes mining and utilities – is much worse; with year-on-year (yoy) ‘growth’ of -1.2%.

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