Weekly Market Review: Consumers say they’re optimistic, so why aren’t they spending?

Analyzing the ‘Bradley Effect,’ the ‘Shy Tory Factor’ and the US consumer

Hooper_Kristina_sm_72dpi_RGBLast week the Conference Board’s Consumer Confidence Index was released, showing that consumer confidence is at a 16-year high. We saw slightly less effusive but similarly positive attitudes from the University of Michigan’s Consumer Sentiment Index. (It is worth noting that the former was conducted before the failure of the health care bill while the latter was conducted after.)

Digging down into the consumer confidence report, we see that consumers today are much more positive about their current situation as well as their expectations for the near future. Not only do consumers expect more jobs to become available in coming months, they also expect their incomes to increase.

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Why we are not afraid of the Fed

Global growth is picking up, and the Fed seems unlikely to disrupt the momentum

Waldner_Rob_sm_150dpi_RGBThe Federal Reserve (Fed) raised interest rates in March and is likely to raise them again twice this year, yet the financial markets have taken this news in stride. Why is this? Simply put, the Fed is behaving dovishly, considering the positive growth pattern we are seeing.

We are in the midst of a global growth pickup that began in the second half of last year. The three largest economic blocs — the US, Europe and China — are showing solid growth.1

  • In the US, a pickup in expectations and “animal spirits” due to the US election in November has boosted growth to above-trend levels.
  • In Europe, monetary stimulus has supported domestic growth, and the eurozone economy is now also growing above trend after lackluster performance in recent years.
  • The Chinese economy stabilized at the end of last year, and it too is showing upside growth momentum.

For the first time since

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Fiscal policy and the muni market: Five areas to watch

We examine the potential effects of Trump’s tax and infrastructure proposals on the muni market

Larosiliere_Stephanie_sm_150dpi_RGBIn recent months, the Trump administration has discussed a number of initiatives that could impact the US municipal market — some potentially adversely. At the top of the list are tax reform and major increases in infrastructure spending. Concern over the impact of these policies — particularly changes in tax exemptions currently enjoyed by US municipal investors — has caused some volatility in municipal bonds since the US election. However, while policy uncertainty remains, Invesco’s municipal bond team believes the US municipal market may offer opportunity in 2017. Below, we assess five likely implications on the municipal market in the coming year and beyond.

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In an online world, do malls matter?

Suburban shopping malls are still an important real estate sector, but quality is critical

Rodriguez_Joe_sm_150dpi_RGB Chris Faems

For decades, real estate watchers have periodically claimed that suburban shopping malls are dying. Catalogs and TV shopping channels have been seen as serious threats — yet the mall has remained a suburban staple. Today, as online shopping dominates the market and high-profile department stores experience closures and bankruptcies, we’re hearing this familiar refrain once again. Despite the challenges, Invesco Real Estate believes brick-and-mortar locations will continue to be crucial to retailers — but identifying the properties with the potential to succeed may be more critical than ever.

Retail stores have a history of adapting to change

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The UK triggers Brexit with Article 50. So what happens now?

With key European elections ahead, post-Brexit relationships remain unclear

Arnab DasConnery_Sean_se_150dpi_RGBThe Brexit process started today, when British Prime Minister Theresa May formally notified the European Union (EU) of the UK’s intention to withdraw from the EU under Article 50 of the Lisbon Treaty.

The invocation of Article 50 kicks off a scheduled two years of formal talks with the European Commission, the EU’s executive branch, on the terms of the UK’s exit. Talks will likely lead to a new UK-EU relationship or — in the event of a failure to strike a new deal in time — to the UK “crashing out” of the EU, with the potential for serious economic disruption to trade, investment and general relations.

The nine months since the June 2016 referendum on EU membership has been full of preliminaries, doubts, soul-searching and posturing on both sides of the English Channel. At Invesco Fixed Income, we expect a good deal of posturing to continue as actual negotiations get underway.

Key elections will shape the future of the UK-EU relationship

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Tapping into the growth of emerging market water infrastructure

Expanding the world’s access to clean water could present investment opportunities

Boccellari_Thomas_sm_lowrezAuthor’s note: In 2015, I blogged about a growing shortage of fresh water in many parts of the world and how some companies are providing much-needed water infrastructure in these areas. Given continued strong interest in water-related investments, I believe this information bears repeating. – Tom Boccellari

While we in North America tend to take fresh water resources for granted, fresh water is an increasingly scarce commodity in other parts of the world. There is a fixed amount of water available worldwide, with 97.5% of it in the form of salt water unfit for human consumption.1 Of the remaining 2.5%, more than two-thirds of it is frozen in ice caps.1 The world’s population now stands at roughly 7.3 billion, and is expected to grow by a third to 9.7 billion by 2050.2 The United Nations estimates that only 1% of the world’s fresh water supply is accessible enough to meet the needs of a rapidly expanding world population.2

Water demand increasing with population growth

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Will Trump’s fiscal stimulus lead to inflation?

Without a surge in monetary growth, fiscal policy alone doesn’t indicate inflation

John GreenwoodFinancial markets have reacted strongly to the election of US President Donald Trump. While equities in the US and elsewhere have risen strongly (reflecting expectations of stronger growth and therefore improved corporate earnings), bond prices have fallen (reflecting higher yields, in turn a result of higher inflation expectations). As debate continues around President Trump’s fiscal stimulus program, a key question has emerged: What role might his policies play in creating inflation?

A large fiscal deficit does not necessarily lead to inflation

Among the main drivers of higher inflation expectations, one is

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Fourth-quarter 2016 earnings largely positive for large-cap growth companies

Investments in R&D lay the groundwork for potential future growth

JohnFrank_smAs fourth-quarter earnings season winds down, it appears that US large-cap companies are on solid footing. Average year-over-year earnings for the S&P 500 Index grew two consecutive quarters to close out 2016 — the first time that has happened in more than two years.1

Large-cap growth companies fared especially well during the fourth quarter, with the Nasdaq-100 Index recording its third consecutive quarter of year-over-year earnings growth. Both the Nasdaq-100 Index and the S&P 500 Index exceeded Wall Street earnings expectations in the fourth quarter — beating average consensus estimates by 7.1% and 2.6%, respectively.1

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Fed hikes short-term rates for third time in 15 months

Fed’s constructive growth and inflation outlook likely paves the way for further hikes

CorumJames OngThe US Federal Reserve (the Fed) hiked its benchmark short-term interest rate by 25 basis points today, as expected. The statement was generally neutral, in our view, with upbeat commentary around the current growth backdrop. Inflation commentary was more mixed, stating that headline inflation has moved closer to the Fed’s target, yet emphasizing that core inflation continues to run below the Fed‘s target. Overall, the statement was similar to the January‒February statement, meaning that little has changed to alter the Fed’s view since then.

The Fed also released its widely anticipated Summary of Economic Projections (SEP), which includes the forecast of the federal funds rate or the so-called “dots.” The projected year-end 2017 federal funds rate indicates three rate hikes, unchanged from December’s SEP release, while the bond market had only been pricing in two prior to today’s announcement.1 The longer-run federal funds rate was unchanged at 3.0%. Growth and inflation projections were largely unchanged with only a slight upward revision to 2017 core inflation, from 1.8% to 1.9%.2

In her press conference, Fed Chair Janet Yellen stated that an unchanged SEP is consistent with gradual rate increases over time. The Fed is discussing and monitoring fiscal policy changes but has not yet included potential impacts in its projections. Therefore, federal funds rate projections were left unchanged.

Looking ahead

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Fed hikes short-term rates, citing expanding economic activity

Rate hike is third in 15 months, two more likely in 2017

Bloom Jason_sm_150dpi_RGBThe Federal Reserve raised interest rates today by 0.25% — the third such rate hike in the past 15 months. The Fed’s decision was largely priced into the financial markets, which assigned a 98% probability to the rate increase in the days leading up to today’s announcement.1 In keeping with its two previous rate hikes, the Fed explained today’s decision as an appropriate response to an economy expanding at a moderate pace and a labor market experiencing solid jobs gains.

Rate hike seems unlikely to derail US economic growth

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