Avalon produces a variety of investment commentaries.
Our perspectives and quarterly commentary are issued throughout the year and cover a range of investment-related topics.
Throughout May, U.S. economic data remained moderately encouraging. Manufacturing growth, employment and personal consumption indictors were generally positive while inflation remained tepid. The U.S. economy as a whole appears to be growing at a modest pace, accelerating from a weak first quarter. Without any significant disruptions to the current trajectory, the U.S. economy should return to its post-recession trend growth of 2.5% for the remainder of 2017.
Taking a closer look at the fundamental health of the manufacturing sector, an April reading of 54.8 in the Institute for Supply Management (ISM®) manufacturing survey suggests that the U.S. manufacturing sector remains in an expansionary mode (any reading above 50 indicating expansion). But it is worth noting that this is below its February peak, and the Institute for Supply Management Purchasing Managers Index U.S. (PMI®) has been closely tied to oil prices over the past couple of years. It is currently "re-rating" and moving lower to solid, expansionary levels. However, it is no longer at multi-year highs. Given the Administration's focus on the manufacturing sector, this is a trend to monitor. Following the election, the index surged on the hope of regulatory changes and tax reform. The Trump Administration has been partially successful in its regulatory reform, but the tax reform lacks timeline and clarity.
The potential for timely policy changes, including changes to the current healthcare law, tax reform, and infrastructure spending, have become less likely as the Trump Administration faces significant headwinds to implementing its agenda. The push for healthcare reform is delaying tax and infrastructure legislation, due to taxes and costs embedded in the ACA law that the GOP needs to get rid of before it can fully rework the tax code. Unless there is a significant acceleration in the pace of legislation, tax reform now appears to be a late 2017 or early 2018 story.
The Federal Reserve kept to their recent policy stance in May, reiterating that the labor market and inflation were near their targets. The statement upgraded the FOMC's view on inflation, pointing out that monetary policy remains accommodative. This indicates further tightening in coming months to move toward "neutral", neither spurring nor slowing the U.S. economy. While inflation is a bit weak, there is little reason to believe that the Fed is backing away from its 3-rate hike plan for 2017. There will need to be a truly fundamental shift in the underlying data to derail their current plans.
Around the globe, there were numerous headlines that vied for attention during the month—but none quite like the election in France. The French election, which unsurprisingly went to Emmanuel Macron, should be a sigh of relief for the European Central Bank (ECB). Now, the ECB can concentrate, at least in the short term, on the Euro Area economy’s underlying fundamentals, which are currently improving. One ECB official has already stated that the risks to growth appear to be balanced. While the political risks have been reduced in the Euro Area, the ECB is unlikely to do anything rash with monetary policy that could squelch the tenuous expansion their policies have created.
Looking forward, some Fed officials have incorporated fiscal policy shifts into their models of growth, inflation, and employment. Presumably, the Fed officials who incorporated tax reform into their growth assumptions for 2017 (and possibly early 2018) will revise their assumptions and push out the impacts of fiscal stimulus, lowering their growth assumptions. In this way, the Fed, and therefore the dollar and other assets, are tied to what happens in Washington. It is their own doing, but the evolution of politics in Washington may have a direct and uncomfortable influence of the execution of monetary policy.
In sum, the U.S. is on track to bounce back from a slow first quarter with growth that is on trend with the rest of the recovery around 2.5%. Without clarity on tax and fiscal policy, it is difficult to foresee a significant acceleration. The Fed remains on track to tighten policy with two more rate hikes this year. There are some reasons to be tentative on growth accelerating, but few to warrant fear of a meaningful deceleration. The U.S. remains in the familiar 2%-2.5% growth range.
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Quarterly and Monthly Notes
Second Quarter, 2018
First Quarter, 2018
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Second Quarter, 2017
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Fourth Quarter, 2016
Third Quarter, 2016
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