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Aon Hewitt Retirement and Investment Blog

Weekly Update - 09 October 2017

NEW INTELLECTUAL

  • U.S. Discount Rate Update. Average discount rates increased by three basis point in September, as rising Treasury rates were largely offset by tightening spreads. In early October, rates have decreased by one basis point through Tuesday, October 10th. The average plan sponsor’s discount rate has now decreased by 39 basis points in 2017.
MARKET MOVES - Week Ending October 13, 2017
Equities
  • Global equity markets advanced in a week in which the International Monetary Fund (IMF) upgraded global economic growth forecasts. The MSCI World Index rose by 0.7% over the week, outperforming S&P 500 which rose by 0.2% over the same period. On a year to date basis, MSCI World has outperformed S&P 500 (18.2% vs. 15.9%).
  • US Large Cap stocks outperformed Small Cap stocks as the S&P 500 rose by 0.2% whilst Russell 2000 fell by 0.5% over the week. On a year to date basis, S&P 500 has outperformed Russell 2000 (15.9% vs. 11.9%). Growth stocks outperformed Value stocks last week (0.3% vs. -0.1%) as measured by MSCI USA indices. On a year to date basis, Growth stocks have outperformed Value stocks (21.8% vs. 10.4%).
Bonds
  • 10 year US Treasury yields and the 30 year US Treasury yields fell by 9bps each to 2.27% and 2.81% respectively as the Federal Open Market Committee meeting minutes revealed that many policymakers were concerned about sluggish US inflation amid a tight labour market.
  • 20 year TIPS yield fell by 7bps to 0.57% over the week. 20 year Breakeven fell by 2bps to 1.75%.
  • The Barclays Capital Long Credit Index spread over treasury yields rose by 2bps to 148bps whilst the Merrill Lynch US Corporate Index was unchanged at 104bps. The US high yield bond spread over US treasury yields rose by 8bps to 360bps. The spread of USD denominated EM debt over US treasury yields ended the week 3bps higher at 287bps.
Commodities         
  • The S&P GSCI rose by 2.6% in USD terms over the week. The energy sector rose by 3.6% as the price of WTI crude oil increased by 4.2% to $51/BBL as Saudi Arabia seeks to cut future oil exports to reduce surplus inventories. Industrial metals rose by 1.6% as copper prices increased by 3.7% to $6,859/MT. Agricultural prices rose by 0.8% and gold prices rose by 2.2% to $1,300/ounce. 
Currencies
  • The US dollar depreciated against major currencies over the week. The US dollar depreciated by 1.9% against sterling, ending the week at $1.33/£. US dollar weakened by 0.9% against the euro, finishing the week at $1.18/€. The Japanese yen rose by 0.8% against the US dollar, ending the week at ¥111.93/$.
Economic Releases
  • The disruption caused by the recent hurricane season in the US was evident in September's inflation figures. Consumer price inflation for the year to September rose to 2.2% from 1.9% in the previous month; surging gasoline prices accounted for three-quarters of the increase in the Consumer Price Index (CPI). However, inflation narrowly missed expectations of 2.3%. For a fifth consecutive month, core inflation remained at 1.7%. Although falling short of a forecasted 1.7% increase, retail sales bounced back strongly following a disappointing August (a revised 0.1% drop), rising by 1.6% in September. There was also unanticipated improvement in consumer confidence with the University of Michigan's Consumer Sentiment index rising sharply by six points to 101.1. Analysts had expected a 0.1 point decline to 95.0.
  • Industrial production in the Eurozone exceeded expectations by a wide-margin and rose by 1.4% in August. This was above the revised 0.3% increase recorded in July and also ahead of an estimated 0.6% increase. In particular, German industrial production was strong, rising by 2.6% over August after slightly contracting by 0.1% in the previous month. International trade in Germany was also a positive with exports growing strongly by 3.1% (against forecasts of 1.1% growth) following a mild 0.2% expansion in July. Import growth slowed down to 1.2% from a revised 2.4% in August, but was ahead of consensus estimates of 0.5%. Investor sentiment in the wider Eurozone, as measured by the Sentix Investor Confidence index, surpassed forecasts of a modest 0.3 point increase and rose from 28.2 to a ten-year high of 29.7.
  • In Japan, core machine orders beat expectations of a 1.0% increase and rose by 3.4% in August. This was a second consecutive month of growth although it was a marked deceleration from last month's impressive 8.0% increase. The Tertiary Industry Index slipped by 0.2% in August, below the previous and expected growth rate of 0.1%. The current account surplus outperformed expectations of a narrowing of ¥96.7bn and widened by over ¥60.0bn to ¥2380.4bn. The Economy Watchers’ survey current index rose to 51.3 in September while the outlook component rose to 51.0. Both beat analyst forecasts.
  • Similar to the slowing trend observed in the manufacturing sector for small and mid-sized businesses recorded last week, the Caixin services Purchasing Managers' Index (PMI) fell from 52.7 to 50.6. Although falling short of a 10.0% increase, export growth rose to 8.1% in the year to September, up from a revised 5.1%. Imports meanwhile surged by 18.7%, up from an upwardly revised 13.5% and beating an expected 14.7% increase. As a result, the trade surplus missed forecasts of a fall to $38.0bn and moved even lower to $28.5bn.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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