Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Grey)  Growth

Revised U.S. GDP growth remained at 4.2%. U.S. manufacturing showed continued strength in the PMI and ISM manufacturing indexes. On the services side, although PMI hit an 8-month low over housing concerns, the reading was still solid, while the ISM non-manufacturing index showed a considerable jump. Business activity across both services and manufacturing remains robust.

Jobs Icon (Grey)  Jobs

The unemployment rate fell to 3.68%, its lowest level since December 1969. Wages rose for production and non-supervisory workers by a solid 0.3% m/m, although the year-over-year gain slipped from 2.8% to 2.7%. Nonfarm payroll job gains were 134,000, well below consensus estimates. However, the reading may have been depressed due to the impacts of Hurricane Florence. Overall, even though wage inflation remains relatively stubborn, the labor market continues to tighten and should leave the Fed on track to hike three more times by next June.

Profits Icon (Grey) Profits

With 500 companies having reported (99.2% of market cap), our current estimate for 2Q18 S&P 500 operating EPS is $38.72 ($30.95 ex-financials), representing a 26.9% y/y growth rate. We are seeing particular strength in energy, technology, financials and telecom, though all sectors are currently forecasted to have positive earnings growth. So far, 80% of companies have beat on earnings, while 62% have beat on revenue. Margins continue to be a major driver of earnings growth this quarter and are set to expand to 11.6%, their highest level on record. This margin growth has been driven by tax reform and a focus on efficiency, which has led to an increase in operating income without a significant rise in costs.

Inflation Icon (Orange)  Inflation

Headline CPI cooled in September, up just 2.3% y/y vs. 2.7% last month, and a rise of 0.1% m/m. Core CPI (ex-food and energy) held steady at 0.1% m/m and 2.2% y/y to match August’s readings. This month's report highlights still stable inflation despite record low unemployment and robust U.S. economic growth.

Rates Icon (Grey)  Rates

As expected, the Federal Reserve raised its target range for the federal funds rate to 2.00%-2.25% at its September meeting. Although projections on economic growth were marginally more positive and the Fed slightly increased the neutral rate, the removal of the word “accommodative” creates uncertainty about the path of hikes going forward. This suggests one additional rate hike this year and at least two more in 2019.

Risks Icon (Grey)  Risks
  • Extensive fiscal stimulus in a full employment economy could lead to overheating.
  • Weak labor force growth could hinder economic growth in the future.
  • Trade tensions and political turmoil may result in a slowdown in global growth.
Investment Themes Icon (Grey)  Investment Themes
  • Risk assets have reasonable valuations and momentum heading towards the end of this cycle.
  • Credit and short duration tend to perform well late cycle, while core fixed income protects heading into a downturn.
  • Long term growth prospects and cheap absolute and relative valuations support international equities.
Weekly Economic Update (October 15, 2018)
Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.

Data are as of October 15, 2018

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.

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© JPMorgan Chase & Co., October 2018