Indicators released this week will give better outlook on global economy

The latest economic data released in the United States were the durable goods orders, which rose a less-than-expected 0.7 per cent month-on-month. A sluggish advance estimate of Gross Domestic Product growth was also released, at 0.7 per cent for the first quarter of this year.

Given the weaker economic numbers from the US in recent weeks, financial markets have had diverging results. The US and global stock market indices are near record highs, while US government bond yields and the US dollar have given up most of their gains since rallying after the US presidential election result and are trading near their lows year to date.

This mixed performance suggests a split in outlook for the different asset markets. Bond and foreign exchange investors are expecting slower economic growth, more muted inflation and lower interest rates, due to the risk in lower support for Mr Donald Trump’s fiscal policies. The US President has been facing challenges in pushing through his agenda as evidenced by the failure to repeal the controversial healthcare plan Obamacare.

However, equity investors are counting on more positive economic data to support growth, not only in the US, but also globally.

Economic indicators to be released this week may help determine which outlook will materialise. Later today, we will see the latest data on US personal income and spending, as well as the personal consumption expenditure deflator, which is the US Federal Reserve’s favoured measure of inflation.

These indicators will show more clearly if inflation is accelerating and if the Fed is likely to be more aggressive in its interest rate increases.

Also to be released today is data from the Institute of Supply Managers Purchasing Managers Index (PMI), which will provide insight into the US manufacturing sector’s performance. Levels of 50 and above on the PMI reflect increasing manufacturing activity and signal a stronger economy. In addition, changes in non-farm payroll and average hourly earnings data due on Friday will offer clues on the health of the US labour market.

In Singapore, we are expecting on Tuesday the release of PMI for April. The data will show if the positive momentum that the Singapore economy enjoyed in the first three months of the year could sustain into the second quarter.

Overall, the global economic growth trend remains positive.

As such, investors should stay overweight in equities in their investment portfolios. As stronger growth also leads to higher inflation and interest rates, investors may also consider reducing holdings in bonds and bond-like equities such as real estate investment trusts and telecommunications stock.

ABOUT THE AUTHOR: Mr Dharmo Soejanto is director, Multi-Asset Strategy, UOB Asset Management