Northwestern Mutual

Financial Markets Commentary For the week of Jul. 10, 2017

In a holiday-shortened week, the major stock indexes all remained in the neighborhood of their recently set record highs, partly because of some better than expected reports about manufacturing and jobs.

The Federal Reserve also released its mostly positive semiannual overview of the economy which, when combined with Friday’s unemployment report, indicated it was likely to raise rates at least once more this year, helping boost bank stocks.

The week began with the Institute of Supply Management (ISM) reporting that its Manufacturing Index rose from 54.9% in May to 57.8% in June, its highest level since August 2014 (the estimate was for a modest increase to 55.1%). In addition, the New Orders Index jumped from 59.5% to 63.5%, while the Employment Index climbed to 57.2% from 53.5%. Then on Friday, the Labor Department announced that 222,000 new jobs had been added in June, well above the forecast of 178,000. The unemployment rate rose from 4.3%, a 16-year low, to 4.4%, but for the right reason: because more people were looking for jobs. However, wage growth continued to be sluggish, coming in at an annual rate of 2.5%. The labor force participation rate, meanwhile, ticked up to 62.8% from 62.7%.

The G-20

President Donald Trump was in Hamburg, Germany, on Friday and Saturday for the Group of 20 (G-20) meeting, which was punctuated by violent protests and a statement supporting the Paris climate accord that the United States did not endorse. Prior to the meeting, the eurozone and Japan announced a new trade deal that will lower tariffs on Japanese cars imported to Europe and some European foods exported to Japan. In a statement seen as a rebuff to the protectionist stance of the new U.S. administration, Donald Tusk, president of the European Council, said, “Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case.” There were also rumors that President Trump was preparing to introduce new tariffs on imported steel, and members of the G-20 said they would be ready to respond, with Jean-Claude Juncker, European Commission president, saying, “We are prepared to take up arms if need be.” However, Treasury Secretary Steven Mnuchin said there were “very substantive” discussions on trade, among other issues, and the president, taking to Twitter, said the meeting was “a wonderful success and carried out beautifully by [Germany’s] Chancellor Angela Merkel.”

The Fed’s report …

The Fed released its twice-a-year Monetary Policy Report on Friday, which, as noted, was generally positive about the state of the economy – with a caveat or two such as less demand for loans than expected and low productivity (seen as a headwind to higher wages). The Fed noted that while business spending was up in the first quarter, businesses remained reluctant to spend, partly because of uncertainty about President Trump’s ability to push through his pro-business agenda. (In a speech on Thursday, the Fed’s Vice Chairman Stanley Fischer said, “Providing more clarity on the future direction of government policy is highly desirable.”) The report also weighed in on high stock valuations, noting, “Vulnerabilities in the U.S. financial system remain moderate on balance.”

… and its meeting minutes

The Fed also released the minutes of its June meeting last week, at which it again raised its benchmark rate and said it would soon begin to reduce its $4.5 trillion portfolio of bonds and mortgage-backed securities. However, the minutes showed that Fed committee members don’t agree as to when they should start to reduce those holdings. Some officials wanted to start “within a couple of months,” while others were looking to later in 2017. As for inflation, the committee’s minutes noted the “surprisingly low recent readings,” which was previously attributed in part to the decline in the cost of cell phone plans.

Congress reconvenes

Congress will get back to work today, and the Senate Majority Leader Mitch McConnell (R, Kentucky) will apparently have a tough time getting the votes he needs to pass the GOP’s health care plan. Over the holiday recess, two more Republican senators said they couldn’t support the current version, meaning he’s well short of the votes needed to pass the plan. In addition, in a speech during the break, McConnell said, “No action is not an option,” indicating that he wasn’t likely to champion the “repeal now” and “replace later” plan promoted by some of his colleagues and endorsed by President Trump. With only 33 working days before the end of the fiscal year, Congress needs to address the debt ceiling and the budget.

China’s foreign reserves increase

For the fifth straight month, China increased its foreign-exchange reserves as the nation’s currency stabilized and investors were less eager to move money abroad. The total rose to $3.0568 trillion in June from $3.0536 trillion in May. In other news, WardsAuto said that car sales came in at an annual rate of 16.41 million in June, down 1% from May and 2% from June 2016, a year during which the auto industry set a record for vehicles sold. The ISM’s Non-Manufacturing Index was 57.4% in June compared to 56.9% in May. The trade balance for May was -$46.5 billion. Automatic Data Processing, Inc. said that the private sector added 158,000 jobs in June, below the consensus forecast of 178,000. And first-time jobless claims for the week ending July 1 were up 4,000 to 248,000; the four-week moving average increased 750 to 243,000.

A look ahead

This week’s releases will include updates on consumer credit, small business optimism, wholesale and business inventories, the Fed’s Beige Book, the Producer Price Index, Consumer Price Index, retail sales, industrial production, capacity utilization and consumer sentiment. Also, the Fed’s Chairwoman Janet Yellen will visit Capitol Hill to discuss the Monetary Policy Report.