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Aon Retirement and Investment Blog

Weekly Update - 9 January 2018


  • U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of November 30, 2017. 
  • U.S. Discount Rate Update. Average discount rates fell in December, as the yield curve flattened further and equities continued their climb on the back of U.S. tax reform finally passing in December, eliminating the uncertainty that has lingered throughout 2017. The average plan sponsor’s discount rate decreased 59 basis points in 2017 to 3.72% from 4.31% as of December 31, 2016. In early January, rates have increased by 6 basis points through Thursday, January 4th.
MARKET MOVES - Week Ending January 07, 2018

  • In the first trading week of 2018 global equity markets rose, supported by encouraging economic data and a rise in crude oil prices. European markets saw the introduction of regulatory reform in the ‘Markets in Financial Instruments Directive II (MiFID II)’ to increase transparency in trading. The MSCI World Index rose by 2.5% over the week, marginally underperforming S&P 500 rose 2.6% over the same period.  In the year 2017, MSCI World outperformed S&P 500 (23.1% vs. 21.8.
  • US Large Cap stocks outperformed Small Cap stocks as the S&P 500 rose 2.6% whilst Russell 2000 returned 1.6% over the week. In the year 2017, S&P 500 has outperformed Russell 2000 (21.8% vs. 14.6%). Growth stocks outperformed Value stocks over the week (3.5% vs. 1.8%) as measured by MSCI USA Growth and Value Indices. Over the last year, Growth stocks have outperformed Value stocks (28.7% vs. 15.4%).
  • Both The 10 year US Treasury yield and the 30 year US Treasury yield rose by 7bps each to 2.48% and 2.81% respectively, despite disappointing employment reports.
  • The 20 year TIPS yield rose by 2bps to 0.57% and the 20 year Breakeven rose by 6bps to 1.92%.
  • The Bloomberg  Barclays Capital Long Credit Index spread over treasury yields fell by 1bps to 138bps whilst the BofA Merrill Lynch US Corporate Index spread was unchanged at 98bps. The US high yield bond spread over US treasury yields fell by 22bps to 336bps. The spread of USD denominated EM debt over US treasury yields finished the week 14bps lower at 271bps.
  • The S&P GSCI rose by 0.3% in USD terms over the week. The energy sector rose by 0.8% as the price of WTI crude oil rose by 1.7% to US$61/BBL. Crude oil prices rose as the political unrest in OPEC-member Iran remained in focus. Industrial metals fell by 1.6% as copper prices decreased by 1.8% to US$7,079/MT. Agricultural prices rose by 0.5% and gold prices rose by 1.2% to US$1,319/ounce.  
  • The US dollar depreciated against major currencies (except for the yen) over the week. The US dollar depreciated by 0.3% against sterling, ending the week at $1.36/£. US dollar weakened by 0.2% against the euro, finishing the week at $1.20/€. The Japanese yen weakened by 0.5% against the US dollar, ending the week at ¥113.23/$. 
Economic Releases
  • The keenly-watched US Labor Department report revealed that the US continues to add new jobs to the economy, albeit at a slower than expected pace. Non-farm payrolls data indicated 148k of newly-created jobs in December; down from the upwardly revised 252k job increases in the previous month and expectations of 190k. As expected, the unemployment rate was unchanged at 4.1% but average hourly earnings inched slightly higher to 2.5% for the year to December following a downwardly revised 2.4% wage growth figure for November. The manufacturing sector ended the year strongly with the Institute of Supply Management’s manufacturing index outperforming forecasts and increasing by 1.5 points to 59.7 from 58.2. A surge in new orders growth increased from 64.0 to 69.4 and supported the upward momentum in the manufacturing sector. Factory orders increased for the fifth consecutive month in November, rising by 1.3% versus the forecasted 1.1% increase.
  • In Europe, the final reading of December’s manufacturing Purchasing Managers' Index was unchanged at 60.6, the highest on record since data started in 1997. The services PMI for December was however revised one point lower to 56.5, leading the final reading for the composite index to be one point lower at 58.0. Germany’s manufacturing PMI remained at 63.3 and also the highest on record. Preliminary inflation data for the Eurozone was as expected, prices increasing by 1.4% year-on-year, although it was down from November’s 1.5% reading. However, core inflation stood at 0.9% year-on-year for a third month in a row, marginally undershooting expectations of a slight uptick to 1.0%. Lastly, retails sales for Germany rebounded more than what was expected, increasing 2.3% over the month, following a 1.0% decline in October. On an annual basis, sales grew by 4.4%, versus expectations of 2.3% growth.
  • In Japan, the final reading of the Nikkei manufacturing PMI for December came in at 54.0. Although it was slightly below the preliminary reading of 54.2, it remained higher than the previous reading of 53.6. Services PMI data showed a slight deceleration in the sector with the index inching 0.1 points lower to 51.1 from 51.2. The vehicle sales over the year to December fell by 1.0% following the 5.4% drop seen in November.
  • In China, as the government looks to curb excesses in both debt and property markets while also cracking down on air pollution, analysts had expected a softening in both the manufacturing and non-manufacturing sectors. This did not materialize however, as both the Caixin manufacturing and services PMI data, increased in December. The former increased to a four-month high of 51.5 from 50.8. Meanwhile, the services PMI increased to 53.9. 
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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