Northwestern Mutual

Financial Markets Commentary For the week of Jan. 09, 2017

What a difference a year makes.

At the end of the first week of 2017, however, thanks to a brighter economic outlook and optimism about the incoming Trump administration, both the S&P 500 and the Nasdaq closed at all-time highs. Additionally the Dow came within a hair’s breadth of the rarefied 20,000-point plateau, having reached 19,999.63 during the day before retreating.

There was more positive news about the economy on Friday with the latest jobs report. While only 156,000 new jobs were created, below expectations, wages were up 2.9% over the last 12 months. This is well above the pace of inflation and the highest reading since 2009. The unemployment rate inched up to 4.7% from 4.6% in November but was near the Federal Reserve’s target and less than half of what it was at the height of the Great Recession. It was also the lowest year-ending jobless rate since 4.5% in 2006. In addition, according to The Wall Street Journal, the economy has now added jobs for 75 months in a row, the longest such streak since 1939, though the labor force participation rate, which ticked up from 62.6% in November to 62.7% last month, remains where it was in the 1970s.

The Fed’s thinking

The minutes from the Fed’s meeting on Dec. 13 and 14 revealed that committee members expect growth to be “slightly higher” over the next few years but probably not reach the 4% gross domestic product growth rate that President-elect Donald Trump is looking for, partly because of weak productivity. The Fed said it expects to raise its rate three times this year. However, referring to the Trump administration, the report noted, “Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate supply and demand.”

Fourth-quarter earnings

According to FactSet, fourth-quarter earnings for S&P 500 companies are expected to come in at 3%. That figure is well off the firm’s September estimate of 5.2%. However, should earnings be in the black after having risen in the third quarter, it would be the first back-to-back quarters in positive territory since the last quarter of 2014 and the first three months of 2015.

China’s capital controls

China’s financial regulators have introduced new rules in an effort to slow the flow of capital from the country, and thus slow the decline in the value of the renminbi against the dollar because of speculators who’ve been converting it into greenbacks. The renminbi has bounced back in part because of these steps, but also because the U.S. dollar has slipped somewhat since the Fed raised its rate last month.

A Brexit setback?

Ivan Rogers, the man expected to be Britain’s chief negotiator with the European Union over the terms of the Brexit, unexpectedly resigned last week, less than three months before the negotiations are slated to begin. Rogers didn’t explain his reasons, but he’s been portrayed as pessimistic about the negotiations, having said that they could last a decade or even fail.

Oil drives inflation in the eurozone

Partly because of the rising price of oil, eurozone inflation increased 1.1% in December from a year earlier, the fastest pace since 2013 and one that may restart the debate about the European Central Bank’s stimulus spending. Core inflation, excluding food and energy, was up 0.9%.

Manufacturing and car sales end the year on a high note

The Institute for Supply Management’s (ISM) Manufacturing Index rose from 53.2% in November to 54.7% in December, its highest reading of 2016, which was also the case for the ISM’s indexes for new orders (at 60.2%), employment (53.1%) and production (60.3%), while the index of prices paid gained 11 percentage points to 65%. The ISM’s Non-Manufacturing Index for December was 57.2%, unchanged from the month before. Autodata reported that 1.69 vehicles were sold in December, up 3% from a year earlier. As a result, the auto industry set a record in 2016, selling 17.55 million vehicles (the previous record was 17.47 million in 2015). However, the record was only reached through deep sales incentives, so another record year in 2018 is seen as unlikely. In other economic news, the final figure for the trade balance for November was -$45.2 billion compared to -$42.4 billion in October. Construction spending rose 0.9% from a year earlier. Orders for factory goods fell 2.4% in November from the month before, and orders for durable goods were flat month over month after having gained 2.8% in October. First-time jobless claims for the week ending Dec. 31 plummeted 28,000 to 235,000; the four-week moving average for the week ending Dec. 24 dipped 5,750 to 256,750.

A look ahead

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