Northwestern Mutual

Financial Markets Commentary For the week of Aug. 07, 2017

Propelled by upbeat earnings news – with Apple leading the way – and Friday’s better-than-expected unemployment report, the Dow Jones Industrial Average set a record every day last week on its way to crashing through the 22,000-point barrier, while the S&P 500 rallied on Friday to close just a point away from its all-time high.

On Friday, the week ended on a high note when the Labor Department said that 209,000 jobs had been created in July, well above the estimate of 180,000, and the unemployment rate had fallen to a 16-year low of 4.3% from June’s 4.4% (it had been at 4.3% in May, as well). So far this year, the economy has averaged 184,000 new jobs a month compared to 187,000 a month for the same period last year. The labor force participation rate inched up to 62.9% from 62.8%, and 2.16 million positions have been added in the last 12 months. Average hourly earnings inched up 0.2% or nine cents from the month before to $26.36 and are up 2.5% over the last year.

Second-quarter earnings

Earnings have played a major role in the stock market’s recent surge with Apple’s stock, to cite just one example, rallying to hit a new high last week after the company’s second-quarter earnings release. According to Thomson Reuters, S&P 500 companies are on track to post double-digit earnings for two consecutive quarters for the first time since 2011. With almost two-thirds of those companies having now reported, second-quarter earnings are forecast to rise 11%, following 15% in the first quarter, thanks to years of post-recession cost cutting, a weaker dollar and stronger consumer spending.

Congress goes home

Having failed to replace, repeal or revise Obamacare, Congress headed home for its summer break, but there were signs that when it reconvenes on Sept. 5 it may make progress on a number of fronts. Treasury Secretary Steven Mnuchin had urged Congress to raise the debt ceiling before leaving and avoid what has been a seemingly annual battle over spending. Though Congress failed to do so, Budget Director Mick Mulvaney said last week that he was in favor of a “clean” debt ceiling without equivalent spending cuts, which should simplify the process. In addition, in the wake of the health care meltdown, congressmen on both sides of the aisle called for bipartisanship. Senator Jeff Flake (R, Arizona), for example, said, “We’ve realized our limitations. I think we will work together to get more bipartisan legislation. We’ve just got to.” That spirit will be tested early on, however, as the GOP pushes its plans for tax reform that the Democrats are bound to resist. Mnuchin, for his part, said that he hoped to have a bill on President Donald Trump’s desk by Thanksgiving, adding, “This is a pass/fail exercise and we will pass tax reform.” And Senator James Lankford (R, Oklahoma), said, “On the next big thing, we can’t fail. We have to double down on tax reform.”

Around the eurozone

In the latest sign of life, the eurozone’s gross domestic product (GDP) was up 0.6% in the second quarter after having gained 0.5% for the first three months of the year. In addition, a recent poll showed that 56% of Europeans are now optimistic about the future of the European Union, an increase of six percentage points from the fall of 2016. Still, as expected, inflation was well below the European Central Bank’s target of 2%, coming in at an annual pace of 1.3% in July while core inflation, less food and energy, was just 1.2%.

OPEC falls short

Despite agreed-upon reductions, the Organization of the Petroleum Exporting Countries (OPEC) oil output rose 210,000 barrels a day in June to a total of 32.87 million, mainly because of increased output from Nigeria and Libya, which are exempt from the production cuts (Libya alone added 180,000 barrels a day). In addition, the 12 countries that are subject to the cuts were only 86% compliant.

Car sales slide

As expected, car sales have declined in 2017 after reaching a new high for two years in a row, partly because of a recent drop-off in truck sales. According to WardsAuto, vehicle sales came in at an adjusted annual rate of 16.76 million in July, up 1% from June’s figure, but down 6% from the 17.75 million vehicles sold in July 2016.

In other economic news, personal consumption expenditures (PCE) rose 0.1% in June and were up 1.4% over the last 12 months; core PCE also gained 0.1% and was up 1.5% over the last year. Personal income was down less than 0.1%, the first decline in seven months. The Institute of Supply Management (ISM) Manufacturing Index fell 1.5% in July to 56.3% (any number above 50% indicates expansion). The ISM Non-Manufacturing Index dropped to 53.9% in July from 57.4% the month before. The trade balance fell 5.9% in May to $43.64 billion, as exports rose 1.2% and imports dipped 0.2%. For the first six months of 2017, however, the trade gap is up 10.7% from a year earlier. The National Association of Realtors Pending Home Sales Index rose in June after having declined for three months in a row, rising 1.5% to 110.2 from May’s 108.6; sales were 0.5% higher than in June 2016, the first year-over-year increase since March. Construction spending slipped 1.3% in June from May. Automatic Data Processing, Inc. said that the private sector added 178,000 jobs in July. First-time jobless claims for the week ending July 29 decreased 5,000 to 240,000; the four-week moving average declined 2,500 to 241,750. And, in a boost for the American worker, Toyota and Mazda announced that they were going to open a new factory in the United States that would employ about 4,000 workers.

A look ahead

This week’s economic releases will include updates on consumer credit, small business optimism, nonfarm productivity, wholesale inventories, the Producer Price Index, Consumer Price Index and consumer comfort.