Markets across all asset classes produced positive returns in January. While stock market performance waned and became more defensive towards month-end, stock indexes still finished the month higher. Bonds edged a positive return in January after a tough several weeks of rising interest rates. Interest rates across the yield curve moved ever so slightly lower or maintained their levels, allowing bond investors to earn their interest and maybe gain a bit of price.
Economic data in both the U.S. and developed international markets remained firm with most observations continuing to meet or exceed expectations, although upside surprises are not as large as experienced during the fourth quarter of 2016.
The U.S. labor market created 227,000 new jobs during January, exceeding expectations. The revision to the past six months' average job growth was revised higher by an average of 30,000 per month. The unemployment rate rose to 4.8% from 4.7% in December thanks to a rise in the labor force participation rate. This means some discouraged workers are re-entering the job market. Wage growth in January also slowed. The combination of slower wage growth and a higher participation rate suggested slightly less tightness in the labor market. As a result, financial market expectations for another Federal Reserve interest rate move in March declined.
Perhaps most noticeable in the many items of data reported each month are the confidence numbers. Surveys of confidence across consumers, small businesses, large businesses, and investors began to climb last summer, accelerated during the fourth quarter, and have held mostly steady since. Internationally, economies are mostly firm across developed markets. Producer Manufacturing Indexes (PMIs) across Europe are in the mid-50s (50 is considered neutral) reflecting an expansionary environment.
Emerging countries' results are less firm. China's PMIs hover just above 51, slightly disappointing versus expectations. Emerging market currencies are quietly experiencing volatility without much financial media fanfare. China is attempting to slow capital outflows from the yuan, India is taking large bills out of circulation and limiting ATM cash withdrawals in an attempt to move its monetary base to an electronic format, and the Mexican Peso has declined sharply as a result of protectionist trade talk.
While higher interest rates and higher oil prices are factors that could slow economic growth later in 2017, the chief near-term risks to the financial markets seem to be geopolitical in nature. The financial markets have been surprisingly calm given all the rhetoric of the past few weeks. Elections coming up in Europe are taking on a familiar, nationalistic tone. As the electorate of developed nations push their governments more in this direction, the equilibrium of the past is likely to change.
