Northwestern Mutual

Financial Markets Commentary For the week of Apr. 10, 2017

The major stock indexes were essentially unchanged last week despite several dramatic events: a visit by China’s President Xi Jinping; the confirmation of a new Supreme Court justice; the jobs report; and, overshadowing all of the other stories, the United States launching a missile strike in Syria to retaliate for that nation’s use of chemical weapons against civilians.

When it comes to the economy, the week’s headline was that only 98,000 new jobs were created in March – the forecast was for 175,000 – though the household employment rate fell from February’s 4.7% to 4.5%, its lowest level since May 2007. Neither politicians nor investors were pushing the panic button after the report for a number of reasons. First, the number of jobs created in March was seen as being impacted by warmer-than-usual weather in January and February, which meant more hirings in construction earlier in the year. Next, the average for the first quarter was 178,000 new jobs a month, about the same pace as in 2016. In addition, wages were up a solid 2.7% over the past year, and the labor force participation rate was unchanged at 63%. And, above all, the jobless rate fell despite the fact that more people were looking for work, a sign that enough positions are being created to accommodate job seekers. Taken together, the numbers are unlikely to deter the Federal Reserve from moving ahead with its plans to raise its rate two more times in 2017.

The Fed’s March meeting; Lacker’s resignation

The Fed released the minutes of its mid-March meeting, which showed that it was getting ready to reduce its $4.5 trillion portfolio of mortgage and Treasury securities, a strategy that had been telegraphed in remarks made by William Dudley, president of the Federal Reserve Bank of New York. Though the Fed did not announce a timetable, the minutes noted that most committee members “judged that a change in the committee’s reinvestment policy would likely be appropriate later this year,” assuming the economy continues to expand. While saying that the economy was “at or near maximum employment,” the Fed remained cautious about its other mandate – inflation. It reported, “the committee has not yet achieved its objective for headline inflation on a sustained basis.” The minutes cautioned that the stock market was “quite high relative to standard valuation measures,” and that the market could inhibit growth “if, for example, financial markets were to experience a significant correction.” Further, committee members again offered a caveat based on the unfolding plans of the Trump administration, saying, “there was significant uncertainty about the effects of possible changes in fiscal or other government policies.” The Fed was also in the news when Jeffrey Lacker, president of the Federal Reserve Bank of Richmond since 2004, resigned, saying he had violated the Fed’s rules by talking with a financial analyst in 2012 about what he described in his letter of resignation as “important nonpublic detail.”

Around the eurozone

In an indication that its economy is rebounding, eurozone unemployment fell to 9.5% in February, the lowest level since May 2009 (it was at 12% in 2013). And, meeting in Malta, Greece, its creditors reportedly made headway on a deal to release the next round of bailout money, €7 billion ($7.5 billion), which Greece needs in July. The next step will be for the creditors to return to Athens to work out the fine print, which will reportedly include cuts in spending and reduced pension payments.

China’s foreign reserves

In a sign that China’s government is taking a break from selling off its foreign exchange reserves to prop up the value of the renminbi, that nation’s reserves were up in March for the second month in a row after seven months of outflows, closing the quarter at $3.009 trillion.

A changing of the guard as car sales slip

By one measure, the list of the nation’s “Big Three” automakers changed last week when Tesla surpassed Ford in total market value. Tesla’s stock soared after the maker of electric cars announced that sales were up a whopping 69% in the first quarter from a year earlier. Meanwhile, auto sales for the industry as a whole in March fell 1.6% from a year ago to an annualized rate of 16.6 million, according to Autodata. The drop came amid concerns that sales were being sustained by an overreliance on incentives as inventories are at their highest level during any economic expansion since 1989.

In other economic news, the number of U.S. oil rigs climbed by 137 in the first quarter, the steepest quarterly rise in nearly six years, according to Commerzbank. The number of working rigs has now more than doubled from the 2016 low of 316. The Fed reported that consumer credit was up 6.2% in January to inch pass the $1 trillion mark. The Institute for Supply Management’s (ISM) Manufacturing Index fell to 57.2% in March from 57.7% in February (any reading above 50% indicates expansion). The ISM’s Non-Manufacturing Index dipped from 57.6% in February to 55.2% in March. Construction spending was up 0.8% in February from the month before to $917.3 billion. The trade balance was -$43.6 billion in March compared to a revised -$48.2 billion in February. Factory orders rose 1% in February from March, while orders ex-transportation increased 0.4%. Orders for durable goods improved 1.8% in February from the month before, while orders ex-transportation climbed 0.5%. Orders for nondefense capital goods excluding aircraft fell 0.1%. And first-time jobless claims for the week ending April 1 dropped 25,000 to 234,000; the four-week moving average declined 4,500 to 250,000.

A look ahead

This week’s releases will include the latest on small business optimism, the Producer Price Index, Consumer Price Index, business inventories, consumer sentiment and retail sales.