Q4
Quarterly
Economic
Report 2017
1017-0169GUEXP093018 SVB Asset Management| Quarterly Economic Report Q4 2017
Table of ContentsThoughts from thedesk3
Overview4
Domesticeconomy6
Central bank monetary policy12
Marketsand performance17
Globaleconomy22
Portfolio management strategy26
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1017-0169GUEXP093018 SVB Asset Management| Quarterly Economic Report Q4 2017
Thoughts from the desk
Economic growth was synchronized as the global economy expanded about 3.2
percent year to date. Growth has been led by emerging markets, showing
expansion of 4.9 percent. Developed markets are expanding at a more moderate
2.1 percent pace, although a sharp reversal from previous pessimistic forecasts.
In the Eurozone, economic activities picked up to 2.3 percent year on year with
expectations of continued momentum stemming from favorable business and
consumer surveys.
Economic rebound in the Eurozone provided more fuel to the euro currency rally
as it closed at US$1.18 at the end of Q3; the euro/dollar was near parity at the
start of the year. While the rise in the euro is viewed as a drag on inflation —in a
region where inflation is barely above 1 percent —market expectations for
tapering of the ECB’s quantitative easing program picked up in Q3.
Similar to the euro, the Chinese renminbi appreciated to its highest level in
recent years against the dollar —perhaps easing concerns of excess debt levels
in the region. Also, the recent rally in commodity prices may indicate that
demand in China is picking up, as the Chinese remain the world’s largest
consumer of these goods. However, short-to medium-term growth will be
dictated by the Chinese government, as President Xi Jinping will unveil his new
leadership team.
Global macroeconomic outlook
U.S. economic activity increased by 3.1 percent in the second quarter, a
significant ramp up over Q1 GDP of 1.2 percent and the fastest acceleration since
2015. Increase in private inventory investment, personal consumption
expenditures, federal government spending and a deceleration in imports
contributed to the strong growth.
On the labor front, the private sector continued to add, on average, 173,000 jobs
per month in H117 with a substantial drop off to 85,000 per month in Q3 due to
worker dislocation from hurricanes Harvey and Irma. However, most economists
expect a substantial rebound in Q417 and Q118 as rebuilding efforts in the
hurricane-affected areas take form. To put the recent hurricane season into
perspective, according to AIR Worldwide, a catastrophe modeling consulting
service, this season marked the first time ever that two Category 4 or higher
hurricanes came at the same time.
With economic growth and labor markets supporting tightening of monetary
policy, inflationary readings remain below the Fed’s 2 percent target. Despite
tepid core inflation, the FOMC remains committed to gradually lifting the federal
funds target rate, reducing their $4.5 trillion balance sheet while addressing
current financial conditions.
U.S. macroeconomic outlook1017-0169GUEXP093018 SVB Asset Management| Quarterly Economic Report Q4 2017
Overview
êHawkish comments reverberated across central banks. Recent projections from
the Federal Reserve imply one additional rate hike of 25 basis points in 2017
with three more to follow in 2018. This caused Treasury yields to break out of
their recent trading range.
êFavorable economic conditions in the United States and abroad have created a
tightening bias for monetary policy, either through a scaling back of stimulus
programs or projections for rate increases.
êUncertainties still remain, such as domestic fiscal policy, rising geopolitical
tensions, the composition of the Federal Reserve and effects from recent
natural disasters. However, the Fed appears to be committed to normalizing
monetary policy.
Central bank monetary policy
êEconomic activity increased by 3.1 percent in the second quarter, a significant
pickup over Q1 GDP of 1.2 percent and the fastest acceleration since 2015. The
strong GDP number supports the Fed’s interest rate move in June, when it cited
the Q1 slowdown as transitory.
êThe increase in real GDP was accounted for by an increase in private inventory
investment, personal consumption expenditures, federal government spending
and a deceleration in imports. The increases were partially countered by lower
residential fixed investment,a slowdown in exports anddecreased state and
local spending.
êThe pace of consumer spendingpicked up in Q2 to 3.3 percent, the biggest
increase in almost a year.
êIn Q3 the U.S. economy added 274,000 jobs. The labor market remains
healthy despite a distortion in recent data due to the hurricanes.
êSeptember experienced the first contraction in jobs in seven years due to
effects of the storms. In addition, the unemployment rate fell to a 16-year low
of 4.2 percent, and the participation rate increased to 63.1 percent.
êRecent inflation data has been mixed. Headline inflation rose 0.4 percent in
August and 1.9 percent on a year-over-year basis. However, core PCE, the Fed’s
preferred measure of inflation, continues to decline at 1.3 percent on a year-
over-year basis.
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