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Aon Retirement and Investment Blog

Weekly Update - 23 April 2018


  • U.S. Discount Rate Update. Average discount rates decreased in March, as Treasury rates fell across the curve partially offset by widening credit spreads. Equity volatility remained high and fear over a broader trade war with China looms over the market. The average plan sponsor’s discount rate decreased 5 basis points in March.
  • U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of March 31, 2018.
MARKET MOVES (Week ending April 22, 2018)
  • Global equity markets rose over the week, supported by an encouraging start to first quarter earnings season and rising commodity prices. The MSCI World Index rose 0.6% over the week, marginally outperforming the S&P 500 Index, which rose 0.5% over the same period. Last week’s return now pushes the S&P 500 return into positive territory but is still underperforming the MSCI World Index (0.4% vs. 0.6%).
  • US Small Cap stocks outperformed Large Cap stocks over the week as the Russell 2000 Index rose 0.9% whilst the S&P 500 Index rose 0.5%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (2.2% vs. 0.4%). Growth stocks outperformed Value stocks over the week (1.1% vs. 0.1%) as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (3.8% vs. -2.6%).
  • The 10 year US Treasury yield rose by 13bps to 2.95% (the highest level since February 2014) while the 30 year US Treasury yield rose by 11bps to 3.14%. The upward movement in yields were supported by strong US retail sales data and rising energy prices which drove inflation expectations higher.
  • The 20 year TIPS yield rose by 9bps to 0.88% and the 20 year breakeven inflation rate rose by 4bps to 2.16%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over Treasury yields rose by 1bp to 149bps and the Bank of America Merrill Lynch US Corporate Index credit spread fell by 1bp to 110bps. The US high yield bond spread over US treasury yields fell by 5bps to 333bps over the week. The spread of USD denominated EM debt over US treasury yields remained unchanged at 295bps.
  • The S&P GSCI rose by 1.2% in USD terms over the week. The energy sector rose by 1.5% as the price of WTI oil increased by 1.5% to US$68/BBL helped by falling in US inventories. Industrial metals increased by 4.9% as copper prices increased by 1.6% to US$6,939/MT. Agricultural prices fell by 1.7% and gold prices fell by 0.5% to US$1,337/ounce.
  • The US dollar appreciated against major currencies over the week. The US dollar strengthened by 1.6% against sterling, ending the week at $1.40/£. The US dollar appreciated by 0.4% against the euro, ending the week at $1.23/€. The Japanese yen weakened by 0.2% against the US dollar, ending the week at ¥107.71/$.
Economic Release
  • Following three consecutive months of declines, US retail sales rebounded in March, exceeding forecasts of 0.4% growth. Sales increased by 0.6% after a 0.1% fall over February. Excluding auto-vehicle purchases, sales only grew by 0.2% which not only matched consensus estimates but also last month's increase. While the recent consumer weakness appears to have faded, industrial production in the US slowed. Growth in industrial production slowed to 0.5% in March which, although above expectations of 0.3%, was lower than February's downwardly revised 1.0% increase. Gains made in the mining and utilities sector were offset by a sharp slowdown in the manufacturing sector. The housing market improved over March with housing starts increasing by 1.9% over the month; up significantly from the revised 3.3% fall in February.
  • Eurozone inflation data also failed to meet expectations, with the final reading for March being revised marginally lower to 1.3% in annual terms. Meanwhile, core inflation was unchanged at 1.0% over the year to March. Different indicators showed contrasting changes in consumer confidence. Uncertainty stemming from global trade concerns appeared to have an impact on the keenly watched ZEW expectations index which dropped sharply in the Eurozone, measuring 1.9 in April from 13.4 previously. In Germany, the ZEW expectations index fell to -8.2 for April from 5.1 previously. The ZEW current situation index for Germany came in marginally shy of expectations at 87.9, from 90.7 in March. However, the Eurozone's consumer confidence indicator unexpectedly rebounded from 0.1 in March to reach 0.4 in April, ahead of expectations of a fall to -0.1. 
  • In Japan, headline consumer price inflation came in at 1.1% in March while core consumer prices grew for the fifteenth consecutive month, rising by 0.9% over the same period. Both inflation readings were in line with consensus estimates but below the previous month’s inflation rate. The trade balance posted a surplus of ¥797.3 billion in March as exports were up by 2.1% over the year to March whilst imports fell 0.6%.
  • The Chinese economy expanded by 6.8% (year-on-year) in Q1 2018, in line with analyst estimates and matching the previous quarter’s growth rate, as consumer demand remained strong for the quarter. Industrial production, however, slowed to 6.0% for the year to March, down from 6.2% previously and 6.3% forecasted. Fixed asset investment in urban regions also slowed, increasing by 7.5% for the year to March, from 7.9% in the previous month.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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