Could the bond and stock markets be heading for a bubble? Is Britain desperate for growth after leaving the European Union? And where do we forecast U.S. GDP in 2018? Read on to get the answers to these questions.

Farewell, Janet Yellen – the now former Federal Reserve Chairman oversaw her last meeting this week, and Fed governors voted unanimously to keep the fed funds target range at 1.25% -1.5%. As the economy seems to continue to chug along on firm footing and inflation remains within arm’s length of the target rate, it appears to us that the Fed has a solid case for raising interest rates in 2018. We believe that the unanimous decision not to do so in this meeting was part of a well-telegraphed, calculated effort to make rate increases incremental to avoid disturbing the markets. Our view is that the next rate increase will come under Federal Reserve Chairman Jerome Powell, in March.

Manufacturing Data Released – it was a busy week for manufacturing data, and also a busy month for factories across the world. In January, Japanese factory activity showed its strongest growth in almost four years, while China’s Caixin-Markit manufacturing PMI remained steady and slightly in expansion mode with a reading of 51.5. In Europe, manufacturing activity continues to be a shining spot, as activity entered the new year with near-record momentum. Here in the U.S., ISM said its manufacturing index in January slipped to 59.1% from 59.3% in December, and the IHS Markit manufacturing reading showed that final U.S. PMI held steady at 55.5 in January from flash estimates. Overall, manufacturing activity seems strong across the globe.

3% GDP Growth in the US? – could 2018 be the year the U.S. finally returns to full-year 3% GDP growth? In our view, early signs indicate that it’s possible. Initial estimates of Q4 GDP growth have it at a firm 2.6%, which is down slightly from a 3.2% reading in Q3. The U.S. economy hasn’t posted three consecutive quarters of at least 3% growth since early 2005, but we believe that a series of strong quarters of growth on the back of tax cuts and wage pressures could change that in 2018. Meanwhile, in the eurozone, growth capped off 2017 on what appreas to be a strong note, the bloc’s GDP expanding at 2.5%. Optimism is abound in Europe, even as Brexit negotiations remain tense – regional economic confidence in the eurozone remains close to a 17-year high.

Is Britain Desperate for Growth? – Prime Minister Theresa May sought an unlikely partner for a new free trade agreement this week – China. She flew to the country this week for talks with Chinese leaders, asserting that any deal would require Beijing’s commitment to international trade rules. The deal comes as the news outlet, Buzzfeed, leaked documents from the British government forecasting a materially negative economic impact of leaving the European Union. In the report, titled “EU Exit Analysis – Cross Whitehall Briefing,” it was stated that “no deal” with the European Union would reduce growth by 8% over a 15-year period, while continued single-market access would lower growth by 2%. That’s a fairly significant difference, in theory. This all comes as European Commission officials have rejected the City of London’s proposal to keep a free trade deal on financial services, since about 6 trillion euro, or 37% of Europe’s financial assets are managed in the U.K. capital. London also dominates Europe’s 5.2 trillion-euro investment banking industry.

Former Fed Chair Alan Greenspan Sees Bubble in Stocks and Bonds – 91-year old Alan Greenspan made a (very small) wave this week when he raised a flag on bond and stock markets, indicating, in his view, that both are in a bubble. His thesis is based on widely known facts about a growing fiscal deficit on the heels of tax cuts and the call for more infrastructure spending, with a view that not enough attention is being paid to the government deficit.

 

Even with these insights, it’s hard to predict exactly what events will shape the course of the market…but you can try to prepare for it.

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