Northwestern Mutual

Financial Markets Commentary For the week of Feb. 13, 2017

It only took two words to send stocks into uncharted territory last week: “tax cuts.”

On Thursday, President Donald Trump said he would unveil his plan to cut business and individual taxes by the end of February, and for two days straight all three of the major indexes set new highs. The yield on the 10-year Treasury, meanwhile, slipped to 2.41% by week’s end.

After the post-election stock-market surge, investors have been in a holding pattern to see if the new president can make good on his pledges to lower taxes, increase federal spending and undo industry regulations. Based on the way stocks rose at the end of the week, his statements about tax cuts were seen by investors as a step towards those goals, with Trump saying his plan was “ahead of schedule” and that it would be “phenomenal in terms of tax.”

Q4 earnings outperform

Stocks also benefited last week from better-than-expected earnings news for the fourth quarter. At the end of the quarter, earnings for S&P 500 companies were expected to be in the 3% range, but now, with 360 of those companies having reported, FactSet is forecasting an increase of 5% from a year earlier. And earnings have been on the rise across the Atlantic as well. With about half of the companies in the Europe Stoxx Index having reported, fourth-quarter earnings are up 5.05%, FactSet said. This is the first increase since 2012 and the fastest pace in five years.

Obamacare gets a reprieve

Tom Price, who’s been highly critical of the Affordable Care Act (ACA), was confirmed as the secretary of Health and Human Services last week. However, in an interview before the Super Bowl, Trump said the ACA would take longer to undo than previously stated, saying, “We should have something within the year and the following year.” And Senator Orrin Hatch (R, Utah), another staunch critic of the program, is among a handful of GOP legislators who have started to use the word “repair” rather than “replace” when discussing the ACA.

Remaking the Fed, reading the economy

On the campaign trail, Trump said he wanted to overhaul the Federal Reserve, and he’ll get that chance. There are now three openings to be filled on the seven-seat board of governors after Daniel Tarullo, described by The Wall Street Journal as “the de facto head of bank regulation,” said he’ll step down in April (his term would not have ended until 2022). On Saturday, the Fed’s Vice Chairman Stanley Fischer said he hoped Dodd Frank would not be repealed. He also weighed in on what he thinks the new administration will do, saying, “There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows.”

China’s reserves fall

China’s central bank said its currency reserves fell to $2.998 trillion in January – as recently as the summer of 2014 they were just short of $4 trillion. Reserves were last at $3 trillion in 2011 when the economy was growing at a double-digit pace and the reserves were rising alongside it.

OPEC follows through

Given a spotty track record on follow-through, there was some skepticism when Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members pledged to cut oil production for the first six months of the year. But, according to the International Energy Agency, OPEC members have reduced output by about 90% of the proposed 1.2 million barrels a day, the best compliance rate in its history at the outset of an agreement (non-OPEC members are cutting about half that total).

Around the eurozone: Germany’s trade gap, the Greek drama revived and a divisive Brexit?

Trump, who has made pointed remarks about what he sees as a “grossly undervalued” euro, is likely to be unhappy about the latest news from Germany as exports topped imports in 2016 by a record €252.9 billion ($270.58 billion). Greece, the country whose financial woes came to symbolize the eurozone’s economic dysfunction, is back in the news. The nation and its creditors are again arguing about the terms for the next bailout payment, which Greece needs by July. The European Commission President Jean-Claude Juncker said the deal was on “shaky ground,” while Greece’s Prime Minister Alexis Tsipras said he was ready to discuss anything “within reason,” but added, “We will not discuss demands which are not backed up by logic and by numbers.” Juncker also said he was concerned that the Brexit negotiations would hurt the European Union (EU) as Great Britain might negotiate separate deals with all 27 EU members. “They could promise country A this, country B that and country C something else,” he said, “and the end game is that there is not a united European front.”

In other news, home prices nationwide, including distressed sales, increased by 7.2% percent in December 2016 from a year earlier, and were up 0.8% from November, according to CoreLogic HPI. The trade deficit for December was -$44.3 compared to a revised -$45.7 billion the month before. The University of Michigan’s Consumer Confidence Index retreated from its decade-high reading of 98.5 in January to 95.7 in February, though there have only been five higher readings in the last 10 years. And first-time jobless claims fell by 12,000 to 234,000 for the week ending Feb. 4; the four-week moving average dipped by 3,750 to 244,250, its lowest level since November 1973.

A look ahead

This week’s long list of releases will include the latest on small business optimism, the Consumer and Producer Price Indexes, retail sales, industrial production and capacity utilization, business inventories, the Conference Board’s Leading Economic Indicators Index and building permits and housing starts.