Northwestern Mutual

Market Commentary

For the week of Aug. 8, 2016

What a difference a week makes. The week before last ended with the news that second-quarter growth had limped in at 1.2%, less than half of what was expected, and hand-wringing about the American economy ensued.


This past Friday, however, the government announced that 255,000 new jobs were created in July, well above expectations for the second month in a row, while year-over-year wage growth hit a seven-year high of 2.6%. The news had a three-pronged effect, restoring, for now, faith in the United States economy; increasing the likelihood of the Federal Reserve raising its benchmark rate before year’s end; and propelling the S&P 500 and the Nasdaq to record highs on Friday. In fact, thanks to a rally in bank stocks (banks stand to gain from a higher Fed rate), every sector of the S&P 500 is now in the black for the first time in 2016. The Nasdaq, which set a new standard for the first time since last July, was driven by the recent run of better-than-expected second-quarter earnings reports for the likes of Amazon, Alphabet and Facebook. At the same time, investors moved away from bonds in a search for higher returns, and the yield on the 10-year Treasury rose to finish the week at 1.583%.

Even for the nitpickers, there was little in the way of bad news to be found in the jobs report. Not only were 255,000 jobs created – the estimate had been for 179,000 – but the totals for both May and June were revised upwards (the latter to 292,000). Wage growth, as noted, came in at 2.6%, the fastest pace since 2009. The labor force participation rate increased from 62.7% to 62.8%. The separately calculated unemployment rate was unchanged at 4.9%, but for the right reason, as more people were looking for work.

The Fed — back on track?

The outsized jobs report increased the odds that the Fed will finally raise its benchmark rate in 2016, a step that has variously been seen as a sure thing and a longshot as the year has progressed. The Fed has three more meetings this year, in September, November and December, and Wall Street is leaning toward December as the most likely time to raise it, which would mean the Fed would have waited one year since its first post-recession rate hike. In the meantime, investors will tune in to hear what clues Chairwoman Janet Yellen offers in her speech at the Fed’s annual meeting in Jackson Hole later this month.

The BOE acts

Though the impact of the Brexit has been mild so far, Great Britain began to mobilize given the expectation that growth is expected to falter over the second half of this year. On Wednesday, the Bank of England (BOE) lowered its benchmark rate for the first time since 2009, from 0.50% to 0.25%, its lowest level in the bank’s 322-year history. The BOE also increased its stimulus spending, committing to buying more bonds while making loans to banks more affordable. Mark Carney, the bank’s governor, said “There is a clear case for stimulus, and stimulus now, in order to be there when the economy really needs it.” The BOE said gross domestic product would be 2% this year but slow down in the second half. It lowered its forecast for 2017 to 0.8% from an earlier estimate of 2.3%. The bank meets next in September, and while Carney dismissed the idea of a negative interest rate, he left the door open to one more cut. Later in the week Philip Hammond, the nation’s new chancellor of the Exchequer, said he also stood ready to act: “I am prepared to take any necessary steps to support the economy and promote economic confidence.” The eurozone, meanwhile, seemed to be weathering the Brexit for now, with Markit’s Composite Purchasing Managers’ Index unexpectedly rising to 53.2 in July from 53.1 in June.

The trade pact

Despite the fact that both presidential candidates have come out against his Trans-Pacific Trade Pact, President Barack Obama said he would continue to push for its passage. “Right now, I’m president, and I’m for it” he said. The president argued that American workers will benefit from the pact’s lower tariffs and stricter labor standards.

Japan's stimulus

Japan’s Prime Minister Shinzo Abe provided the details of the new 28 trillion yen ($274 billion) stimulus plan announced the week before last. “We’ve put together a bold stimulus project that is an investment in the future,” he said. However, only 7.5 trillion yen is actually new spending; the rest would be in the form of low-interest loans and financial guarantees.

In other news, the Institute for Supply Management (ISM) reported that its Manufacturing Index declined to 52.6 in July from 53.2 in June, though any reading above 50 indicates expansion. The ISM’s Non-Manufacturing Index also slipped, falling from 56.5 in June to July’s 55.5. According to WardsAuto, U.S. car sales came in at an annual rate of 17.78 million in July, up 2% from a year earlier. The trade gap widened to $44.5 billion in June, the Commerce Department said, and was up 8.7% from June 2016 as imports rose 1.9% and exports gained 0.3%. The government reported that construction spending fell 0.6% in June from the month before. Factory orders declined 1.5% in June from May, while orders for durable goods dipped 3.9% month over month. Personal income rose 0.2% in June from May, with spending up 0.4%. Core personal consumption expenditures, excluding food and energy, increased 0.1%. And first-time jobless claims for the week ending July 30 rose 3,000 to 269,000; the four-week moving average for the week ending July 23 was up 3,750 to 260,250.

A look ahead

This week’s releases will include updates on small business optimism, nonfarm productivity, wholesale and business inventories, retail sales, the Producer Price Index and consumer confidence.