Northwestern Mutual

Financial Markets Commentary For the week of Dec. 05, 2016

If there were still any doubt about whether the Federal Reserve is going to raise its rate when it meets later this month – and the odds were already better than 90% – they evaporated with Friday’s jobs report.

The report showed that the unemployment rate had fallen to 4.6%, a nine-year low, while the economy added 178,000 jobs. Even so, the post-election stock market surge finally slowed as the S&P 500 was down for the week for the first time since Donald Trump was elected president, though the Dow Jones Industrial Average eked out a 0.1% gain. The falling price of Treasurys also stabilized somewhat, and the yield on the 10-year Treasury pulled back from 2.45% on Thursday, its highest point since July 2015, to close the week at 2.39%.

Despite the fact that the unemployment rate fell from 4.9% to 4.6%, the latest report had some less positive news as hourly earnings were off 0.1% from October and were up 2,5% over the past year compared to 2.8% in October. The labor force participation rate ticked down to 62.7% from October’s 62.8%.

GDP hits a two-year high

The government’s second estimate of third-quarter gross domestic product (GDP) growth was up from the first reading of 2.9% to 3.2%, its fastest pace in two years. This is mainly because of stronger consumer spending, which was revised from 2.1% to 2.8%. Growth was only 0.8% in the first quarter and 1.4% in the second; it’s expected to come in at around 2% for the last three months of 2016.

Oil's latest rebound

The price of oil has struggled to get back to, and stay over, the $50-a-barrel mark, mainly because of skepticism about the Organization of the Petroleum Exporting Countries’ (OPEC) ability to get its squabbling members to agree on a production cap. Early last week United States crude and Brent fell to $45.49 and $46.38, respectively. But on Wednesday, OPEC announced that it would cut daily production 4.5% or 1.2 million barrels for six months beginning in January, its first reduction in eight years. The impact of the deal is contingent on the cooperation of non-OPEC members such as Russia; no sure thing. Even so, the price of oil soared nearly 9% on Wednesday on the news and for the week U.S. crude rose 12%, its best weekly showing since 2009, to $51.68, while Brent closed at $54.56.

Italy's referendum, Austria's election, and Hollande's decision

Italians went to the polls on Sunday and rejected a referendum to overhaul and streamline their political system, adding yet another variable to the eurozone’s post-Brexit uncertainty. Prime Minister Matteo Renzi said he would resign as a result of the vote, and the rising Five Star Movement may ride the momentum to a referendum of its own on leaving the European Union (EU). Also, Austrians voted for a new president yesterday. Though it’s a largely ceremonial post, the vote was also seen as a barometer of whether or not EU-skeptical parties were in the ascendant, and in this case the far-right candidate was defeated. Earlier last week, another European leader, France’s President François Hollande, said he wouldn’t seek reelection in 2017, ostensibly to protect the Socialist Party, but more probably because the latest polls showed that his approval rating was in the single digits.

Better news for the eurozone

With the European Central Bank set to meet this week, there was some good news for a change as the stubbornly low rate of inflation rose to 0.6% in November from a year earlier and the unemployment rate unexpectedly dipped to 9.8%, its lowest level since July 2009.

Obamacare’s fate, a new Treasury Secretary, “too big to fail”

Healthcare stocks rose last week after Trump nominated Representative Tom Price (R, Georgia), an adamant opponent of the Affordable Care Act, to be secretary of Health and Human Services. The next president also nominated Steven Mnuchin, his campaign finance chairman, to be treasury secretary. On Saturday, William Dudley, president of the Federal Reserve Bank of New York, pushed back against Trump’s pledge to undo parts of the Dodd Frank Act, saying the work to police the “too-big-to-fail” banks that triggered the Great Recession was an “absolutely must” to make the financial system “less prone to panics.”

Are Vehicle sales heading for an all-time high?

Autoweek reported that vehicle sales rose 3.6% in November from a year earlier to 1.378 million, breaking the previous November high of 1.328 million in 2001 and giving the industry a chance to surpass last year’s record of 17.47 million vehicles sold. In other news, the Institute for Supply Management (ISM) said its Manufacturing Index increased to 53.2% in November from 51.9% in October. The Fed’s latest Beige Book report indicated that most of America is enjoying economic growth ranging from “modest” to “moderate.” Consumer spending was up 0.3% in October from the month before and the personal consumption expenditures deflator climbed 0.2% in October and 1.4% over the past year. October’s core Personal Consumption Expenditures Price Index, excluding food and energy, improved 0.1% month over month and 1.7% year over year. Personal income ticked up 0.6% in October from September, while the savings rate came in at 6%. Construction spending rose 0.5% in October from the month before, and pending home sales inched up 0.1% in October from September. The S&P CoreLogic Case-Shiller Home Price Index jumped 5.5% in September from a year earlier. The Conference Board’s Index of Consumer Confidence increased to 107.1 in November, its highest level since July 2007. And first-time jobless claims for the week ending Nov. 26 rose 17,000 to 268,000, a five-month high; the four-week moving average for the week ending Nov. 19 was up 500 to 251,500.

A look ahead

Investors will be biding their time this week as they wait for the Fed’s final meeting of the year on Dec. 13 and 14. In the meantime, they’ll consider updates on the ISM’s Non-Manufacturing Index, the trade balance, factory orders, orders for durable and capital goods, nonfarm productivity, consumer credit and wholesale inventories.