Northwestern Mutual

Financial Markets Commentary For the week of Feb. 20, 2017

Despite the political drama caused by the resignation of Michael Flynn, the new head of the National Security Agency, American investors were unfazed.

In fact, the major stock exchanges set record after record last week in the resurgent “Trump rally,” buoyed by fourth-quarter earnings news, an upbeat outlook on the economy from the Federal Reserve’s Chairwoman Janet Yellen, and the prospect of the new administration’s plans to boost growth. All three of the major indexes once again closed the week at a new high – the Dow Jones Industrial Average has notched one seven days in a row and is now closer to 21,000 points than 20,000, while the Nasdaq is nearing the 6,000-point mark.

Yellen and Congress

Yellen visited Capitol Hill last week and offered a positive view of the economy, while also jousting with House Republicans over what the Fed has or hasn’t done since the financial crisis. During her appearance before the Senate Banking Committee on Monday, Democrats urged her to defend regulations designed to avoid another recession such as the Dodd Frank Act, which the new administration would like to revise or replace. She said that Dodd Frank worked and that it was not stifling the economy, noting the low jobless rate and the fact that inflation was finally nearing the Fed’s target of 2%. She wouldn’t say whether the Fed would raise its rate at its March meeting, but stood by the December forecast of three hikes in 2017, noting, “It is our expectation that rate increases this year will be appropriate,” and adding that waiting too long to raise rates “would be unwise.”

The next day, she was pressed to concede before the House Financial Services Committee that the Fed policy had failed and the economy was in a poor state. While she did admit that growth had been “quite disappointing,” she also said, “I think financial regulation has resulted in a stronger financial system and less risk than we had before the crisis. It’s allowed us to have stronger growth and a faster economy.”

The new budget

Representative Mick Mulvaney (R, SC) was confirmed as budget director on Thursday, and it was promptly announced that the government could reduce or end the funding of organizations that have been GOP targets for many years, such as the National Endowment of the Arts and the Corporation for Public Broadcasting, as well as the Export-Import Bank. The list is expected to be finalized by mid-March; funding for the current fiscal year ends on April 28.

Cutting back at the pump

The United States Energy Information Administration (EIA) reported that the price of a gallon of gas was up 31% in January from a year ago, and the higher cost impacted gas sales in January, which fell 4.4% from January 2016, according to the Oil Price Information Service. The EIA also said that storage levels rose last week to 259 million barrels, the most since 1990.

Around the eurozone: Slower growth and a new trade pact

Economic growth for the eurozone was 0.4% in the fourth quarter, according to Eurostat, slightly below the original estimate of 0.5%. And while President Trump has said he will review American trade pacts – and recently rejected the proposed Trans-Pacific Partnership Agreement – Canada and the European Union announced the Comprehensive Economic and Trade Agreement, the product of seven years of negotiations.

Another mega-merger?

On Friday, Kraft-Heinz bid $143 billion to acquire the UK-based Unilever Plc, though the offer was flatly rejected by Unilever’s board and was withdrawn by Kraft on Sunday. The proposed deal would have created a company with worldwide sales of $82 billion and, according to Thomson-Reuters, it would have been the third largest takeover ever.

Retail sales improve, small business confidence soars and inflation rises

Retail sales totaled $472.1 billion in January, up 0.4% from the month before and 5.6% from a year earlier – excluding autos, sales improved a solid 0.8%. The new president’s pledge to reduce regulations helped drive the National Federation of Independent Business’s Small Business Optimism Index to a 12-year high of 105.9 in January from December’s 105.8. As a result of higher prices at the pump – and supporting Yellen’s case that inflation is rising – January’s Consumer Price Index (CPI) increased at its fastest pace since February 2013, up 0.6% compared to 0.3% in December. CPI climbed 2.5% from a year earlier, the highest reading since March 2012. Core CPI, excluding food and energy, was up 0.3% from December and 2.3% from January of last year. Meanwhile, the Producer Price Index (PPI) rose 0.6% in January from December and 1.6% year over year. Core PPI, rose 0.4% month over month and 1.2% from January 2016. Industrial production fell 0.3% in January after December’s 0.6% gain, largely because the warm winter weather resulted in lower demand for heating oil. Manufacturing, however, was up 0.2% from the month before; capacity utilization declined to 75.3% from 75.6%. Housing starts in January fell 2.6% from December to 1,246,000, but increased 10.5% from a year earlier. Building permits, however, jumped 4.6% in January to 1,285,000, 8.2% higher than in January 2016. The Fed said that household debt rose 1.8% to $226 billion in the fourth quarter of 2016, the largest quarterly increase since the fourth quarter of 2013. Business inventories gained 0.4% in December from November. And first-time jobless claims for the week ending Feb. 11 rose 5,000 to 239,000; the four-week moving average increased 500 to 245,250.

A look ahead

With the stock market closed today for Presidents Day, it will be a short week of releases, highlighted by updates from Markit on manufacturing as well as reports on existing and new home sales and consumer comfort. The Fed will also release the minutes of its January meeting.