Northwestern Mutual

Financial Markets Commentary For the week of Apr. 17, 2017

Testy diplomatic relations with Russia and then North Korea, as well as some mixed economic news, combined to pull the major indexes lower last week. Investors seeking a safe haven, meanwhile, drove the yield on the 10-year Treasury to its lowest point since last November.

The holiday-shortened week began with the United States and Russia jousting over America’s intervention in Syria. It ended with China trying to soothe rising tempers as North Korea threatened to attack the U.S., which was moving a fleet toward its ally South Korea, though the confrontation seemed to fizzle after North Korea’s failed missile test.

Back at home, stocks fell the last three days of the week (the markets were closed on Friday) as investors watched the two dramas unfold and sifted through some mixed economic news. On the plus side, the University of Michigan’s preliminary reading for consumer confidence in April closed near a decade high at 98, up from 96.9 in March. Better still, confidence in current conditions rose from 113.2 to 115.2, the highest level since April 2000. In addition, the Labor Department said that job openings rose 2.1% in February to 5.7 million and were up 3.2% from a year earlier. However, retail sales for March fell 0.2% from the month before, and February’s increase of 0.1% was revised to a drop of 0.3%. According to The Wall Street Journal, this was the first time there have been back-to-back declines since the first two months of 2015, though sales were up 5.2% from a year earlier. After the release, the Federal Reserve of Atlanta lowered its estimate for first-quarter gross domestic product growth to 0.5%, though weak first quarters have been something of a norm during the post-recession recovery. Inflation also dipped in March, as the Consumer Price Index (CPI) fell 0.3% from February, the first drop in 13 months and the biggest decline since January 2015 – the forecast had been for a 0.2% gain. Over the past year, CPI increased 2.4%. Core CPI, less food and energy, fell 0.1% for the month and was up 2% for the year. The Producer Price Index (PPI) dropped 0.1% in March from February but climbed 2.3% over the past year; Core PPI was flat month over month and increased 1.6% for the last 12 months.

Yellen speaks

At an event at the University of Michigan, Janet Yellen, chairwoman of the Fed, said the economy was “pretty healthy,” adding, “Our job is going to be to try to set monetary policy to sustain what we have achieved.” Yellen did not offer any details about reducing the Fed’s portfolio of securities or upcoming rate hikes, but she did defend the Dodd-Frank regulations put in place after the recession that the new administration has targeted: “We have accomplished a lot, and we have a much safer system,” she said.

On second thought

On the campaign trail, candidate Donald Trump promised to brand the Chinese as currency manipulators once elected and described the Export-Import Bank as “excess baggage.” Last week, however, he told The Wall Street Journal that China was not manipulating its currency, perhaps a result of his recent meeting with China’s President Xi Jinping. The Treasury Department likewise elected not to name China a currency manipulator in its yearly report (it never has), but did issue a stern warning, noting that the “Treasury will be scrutinizing China’s trade and currency practices very closely, especially in light of the extremely sizable bilateral trade surplus that China has with the United States” (in February, the trade gap with China was $31.7 billion). Trump also said the Export-Import Bank “was a very good thing” that “can make a lot of money,” nominating two candidates to fill the open spots on the bank’s board, including Scott Garrett, a former congressman from New Jersey, as president.

OPEC’s new target, America’s new record?

The Organization of the Petroleum Exporting Countries (OPEC), which is expected to extend its production cuts of 1.2 million barrels a day when its members convene in Vienna on May 25, is reportedly targeting a price of $60 a barrel for Brent crude (Brent closed at $55.89 on Friday). As for the U.S., the Energy Information Administration upped its forecast for U.S. production in both 2017 and 2018, with output in 2018 now projected to rise to 9.9 million barrels a day, which would eclipse the record of 9.6 million barrels a day set in 1970.

GM, Tesla, GM

The week before last, Tesla passed Ford in market value, and on Monday it moved past General Motors (GM) before falling back the next day. This recent surge in value has happened even though Tesla sold fewer than 80,000 cars last year and had no profits to speak of, while GM sold 9.8 million vehicles and posted $9.4 billion in profits.

Wells Fargo

In the largest such action in banking history, Wells Fargo’s board said that it was going to take back $75 million in compensation from its former chief executive officer and the former head of community banking as a result of further investigation into the bank having created fake credit card accounts for its customers. In other economic news, the Small Business Optimism Index fell 0.6 points to 104.7. According to the S&P Global Market Intelligence, there were $306.6 billion in mergers and acquisitions announced through April 12, the lowest total since 2014. And first-time jobless claims for the week ending April 8 fell 1,000 to 234,000, while the four-week moving average dipped 3,000 to 247,350.

A look ahead

This week’s economic updates will include the latest on housing starts, building permits, industrial production, capacity utilization and existing home sales, as well as more first-quarter earnings news. The Fed will also release its Beige Book report on economic conditions in its 12 districts. And on Sunday, France will hold its first round of elections, with the right-wing Marie Le Pen and the centrist candidate Emmanuel Macron expected to win enough votes to advance to the run-off election on May 7.