More Central Bank dovishness in March


Monthly Fund Commentary
18 Apr 2016


March followed a familiar pattern of mixed economic indicators. Employment-related statistics continued to show encouraging developments, with good progression of payroll numbers and a notable increase in the participation rate, showing that while slack may indeed exist it is being absorbed, contributing to overall purchasing power. However, aggregate wage growth was muted, reversing some of the surprise momentum seen in the previous month, and hours worked also came in below expectations.

Supply-side indicators were rather positive, with a welcome stabilization of manufacturing indicators such as the ISM Manufacturing Index, the Richmond Fed and Philadelphia Fed Index but there was some softness in core durable goods orders. GDP for the fourth quarter was revised slightly upwards. Retail sales disappointed, even after adjusting for the contribution from lower gasoline prices. With negative revisions to the January number, the U.S. Consumer, the supposed vector of the next growth leg, is seemingly not yet pulling its weight, although some argue that after the pass-through of USD strength and commodities weakness, the real numbers could in fact be stronger than the nominal ones suggest. Supporting this, consumer confidence, while marginally down, remains in the elevated territory usually associated with strong growth. All in all, these developments continue to suggest a soft economic landscape, but with little evidence of either a significant rebound or a fall.

Further confirming its ongoing reservations about the strength of the global economy, the Federal Reserve announced its decision to refrain from raising interest rates at this time, and implied via its dot plot that the outlook had been revised to the downside, or at least that more accommodation was needed to reach the targeted trend. While global economic and financial developments continue to pose risks, the committee reiterated its cautious optimism regarding the U.S. economy, with Chair Yellen expressing scepticism towards the recent rebound in core CPI inflation. In another round of support from central banks, Mr. Draghi surpassed high expectations with further measures to expand the reach of bond purchases and support the banking system via a new TLTRO program. An important goal of the operation was to credibly demonstrate a remaining ability and potency for economic support via monetary tools. Currency markets were roiled by the net effect of heavy long USD positioning and more stimulus but less focus on negative rates, and EURUSD ended up +4% from the announcement to end of month in a major, surprising reversal of trend. The resulting “détente” in USD appreciation certainly did not hurt the strong rebound in US equity markets initiated in mid-February.

The upcoming earnings season, generally expected to be soft in the US, should continue to bring further clarity on the various impacts of the current macroeconomic environment, including a stabilizing USD, on American businesses. The Investment Adviser believes that a better than expected earnings season will be needed for the index to keep or exceed its 2015 levels in the near term, but that companies held by the Fund will achieve this as they are exhibiting continued growth and compelling valuations. In certain cases, the Fund increased its call overwriting strategy in the month of March to benefit from rebounding markets and generate extra yield in the eventuality that markets remain correlated and range-bound.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 15/04/16 and are based on internal research and modelling.