Global central-bank activity reached a crescendo early in the first quarter as currency volatility and diminishing price pressures invited a broad reorientation of policy stances. Aside from the European Central Bank (ECB), however, major central banks largely held firm. The U.S. Federal Open Market Committee maintained a near-zero interest rate, but removed its pledge for “patience” and endeavored to remind observers that an eventual rate hike would be a data- dependent decision. The Bank of England’s (BOE) Monetary Policy Committee reached consensus (rather than just a majority) during the quarter on holding rates at a record low for the sixth full year. The BOE also indicated it will account for the effects of foreign price pressures when considering eventual rate increases. The ECB announced a massive expansion of its asset-purchase program in January that served as the impetus for a chain reaction of central bank measures—primarily loosening actions—around the globe. The enhanced program, representing the largest of its kind in terms of sovereign-debt purchases relative to net new supply, began in earnest during March. The Bank of Japan maintained the status quo—near-zero interest rates and asset-purchases at an ¥80 trillion annual pace—as fourth-quarter economic growth figures were too low to avoid Japan’s first annual contraction since 2011.

The U.S. employment landscape made headway, starting with an uptick in the unemployment rate to 5.7% during January and finishing at 5.5% in March. Average hourly earnings growth improved over the quarter. Personal incomes increased 0.4% in both January and February, but consumer spending did not keep pace. Manufacturing data appeared mixed for March following a decline in February and soft growth during January, although factory orders rebounded slightly in February. Services sector growth, meanwhile, appeared set to reach a multi-month high in March. Consumer prices resumed their increase in February, while producer prices continued to decline, although at a slower pace than January’s largest one-month drop since the measure was introduced in 2009. New home sales gained in January and February, and existing home sales offset part of their January retreat with February gains. Retail sales slipped in February for a third consecutive month, although by less than in January. Consumer sentiment, which started January at multi-year highs, staged a small retreat in February before strengthening again in late March. While the U.S. economy grew by 2.2% in the fourth quarter, this was less than half of the pace seen in the third-quarter.

U.K. manufacturing activity began the quarter with a slowdown, followed by a rebound in February; March data was mixed. Retail sales traced a similar path, although the drop in January was partially attributable to retreating prices. Consumer prices rose through February and March as energy costs began to recover. Core prices (which exclude food, tobacco, alcohol and energy) actually edged downward in March. Average house prices continued a multi-month advance through January, and then retreated in February before rebounding for quarter end. Home price increases trended lower for the seventh-straight month, however, on a year-over-year basis. The labor market gained in January and February on a declining claimant count; the unemployment rate fell to, and remained at, 5.7%. Year-over-year average earnings, meanwhile, declined in February after rising in January. The U.K. economy expanded 0.6% in the fourth quarter, outpacing third-quarter growth. A year-over-year increase of 3% marked the fastest pace of growth since 2006.

Eurozone manufacturing activity reached multi-month highs in March, and services sector activity also accelerated, capping off a quarter that marked a return to growth. Consumer confidence reached four consecutive months of gains in March, reaching its highest level since 2007. Consumer prices rose during February, breaking a declining trend, although producer prices marked their sixth decline in the last seven months. The labor market also made progress through February as the unemployment rate fell to 11.3%, marking a 0.5% year-over-year decline, for the first time since 2012. Retail sales rose for the fourth consecutive month in January, accelerating at a rate not seen since 2013 due in part to the strength of non-food and non-auto fuel purchases. The eurozone economy grew by 0.3% in the fourth quarter, outpacing third-quarter growth and advancing 0.9% over the prior year.

Market Impact

Fixed-income market performance was influenced by currency volatility during the quarter, as U.S. dollar-denominated (external) and U.S. dollar-hedged (hedged) global securities tended to perform better than their local currency- denominated counterparts. U.S. high-yield debt was the strongest overall performer, joined closely by U.S. investment- grade corporate debt. External emerging-market debt had noteworthy performance, followed by hedged global-sovereign debt, and then hedged global non-government debt. U.S. Treasuries and Treasury Inflation-Protected Securities performed well, and U.S. mortgage- and asset-backed securities were also positive. Unhedged global-sovereign debt had the worst performance due to U.S. dollar strength, and was accompanied only by unhedged non-government debt in negative territory.

Equity markets were positive during the first quarter on a global-sector basis, with the exception of the energy and utilities sectors of the MSCI AC World Index. Healthcare and consumer discretionary delivered the most impressive performances, followed by information technology, consumer staples and then industrials. Performance was relatively consistent within global-geographic regions, with European countries representing nine of the top 15 performers. Russia delivered the best country-level performance, followed by Denmark and Hungary. Greece was the worst overall performer, and Turkey was also deeply negative. The Americas had an unimpressive quarter; Central and South America were negative, with Colombia notably so; Brazil had distinctly bad performance as well. Canada also struggled, leaving the U.S. as the only positive performer in the New World. Asia skewed positive, with three of the top ten performers—Japan, Philippines and China. Malaysia and Singapore had the continent’s only negative country-level performance, and both were mild relative to other negative performers.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.  Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. 

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.