Northwestern Mutual

Financial Markets Commentary For the week of Jun. 05, 2017

Using global stock indexes as a yardstick, investors around the world are upbeat about the global economy and, in America in particular, the return of corporate profits.

They were also evidently unfazed by the fact that the United States Federal Reserve will raise its rate in June after the latest jobs report. On Friday, Great Britain’s Financial Times Stock Exchange 100 Index and Germany’s DAX Index both notched all-time records, while Japan’s Nikkei passed the 20,000-point mark for the first time in 18 months. The U.S. indexes did them one better, with the S&P 500, the Dow Jones Industrial Average and the Nasdaq all reaching new highs on Thursday and, for good measure, on Friday as well.

Cue the Fed

On Friday, the Labor Department released its unemployment report for May, and while the numbers didn’t wow anyone, they were good enough to all but guarantee that the Fed will raise its benchmark rate for the second time this year when it next convenes on June 13 and 14. Only 138,000 jobs were created (the estimate was for 182,000), and the totals for both March and April were revised down, but the jobless rate fell from April’s 4.4% to 4.3%, its lowest level since May 2001. The average for the past three months was 121,000 new jobs, well below last year’s pace but sufficient, some believe, as the job market seems to be near full employment. Even so, wages in May were only up 0.2% from the month before and 2.5% over the past year. Some investors concluded that the so-so numbers were good enough for the Fed to act in June but that the pace of hikes might slow, driving the price of the benchmark 10-year Treasury to its lowest point in 2017.

For the Fed, stage setting and (perhaps) a new line-up

Prior to the report, a number of Fed members had indicated that the time had come for the next rate hike. On Monday, John Williams, president of the Federal Reserve Bank of San Francisco, said, “My view is that three rate hikes this year makes sense.” (Williams is not currently a voting member of the committee.) And in a speech on Tuesday, Fed Governor Lael Brainard, seen as a dove when it comes to rate hikes, said that the Fed will act “soon,” though she added that “soft inflation” could lead her to “reassess the appropriate path of policy.” She also said, “For the first time in many years, we are seeing signs of synchronous economic expansions at home and abroad.” The Fed was also in the news when it was reported that the president was ready to announce his nominees for two of the three openings on the seven-member Board of Governors: Marvin Goodfriend, a professor of economics at Carnegie Mellon, and Randal Quarles, who was a Treasury Department official under President George Bush in 2006. Both men have been critical of the Fed’s recent policy decisions and are seen as a conservative counterweight to the more liberal Chairwoman Janet Yellen.

Pulling out

Though there was doubt about the decision until the last moment because of a reportedly heated debate in the White House, President Donald Trump announced that he was withdrawing from the Paris climate accord to protect America’s economy and save jobs. The decision was roundly supported by the president’s fellow Republicans and small businessmen, and denounced by Democrats, fellow signatories and many of America’s leading chief executive officers, including the heads of GE, IBM, Apple, Shell, Google and Goldman Sachs.

Oil tumbles

Even though the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members recently agreed to extend production cuts through March 2018, the price of oil tumbled last week, with U.S. crude dipping 4.3% and Brent 4.9% as both fell back below the $50-a-barrel mark. The drop was the product of disappointment over the fact that OPEC hadn’t increased its cuts and the fact that American drillers continue to pick up the slack, with Baker Hughes reporting that the number of active oil and gas rigs rose by eight to 916 last week; the number of active rigs was only 408 a year ago.

Eurozone inflation dips, as does the jobless rate

Inflation in the eurozone, stubbornly low since the recession, decelerated from 1.9% in April to 1.4% in May, the weakest reading this year, which means the European Central Bank will probably continue to resist calls to reduce its monetary stimulus. On the plus side, the eurozone’s unemployment rate fell to 9.3%, its lowest point since March 2009 (Germany’s jobless rate fell to a record low of 5.7%). In other news, the Institute for Supply Management’s (ISM) Manufacturing Index was 54.9% in May compared to 54.8% in April, while the New Orders Index climbed to 59.5% from 57.5% and the employment index rose to 53.5% from April’s 52%. WardsAuto reported that vehicle sales came in at 16.60 million in May, up 1% from the month before but down 3% from a year earlier. The trade balance for April was -$47.6 billion compared to -$45.3 billion in March. Personal income improved 0.4% ($58.4 billion) in April from the month before, while personal consumption expenditures (PCE) were up the same 0.4% ($53.2 billion) from March and 1.7% over the past year; core PCE, excluding food and energy, rose 0.2% month over month and 1.5% year over year. The S&P CoreLogic Case/Shiller Home Price Index increased 5.8% in March from a year earlier. However, the Pending Home Sales Index was down 1.3% in April to 109.8 from 111.3 in March; the forecast had been for an increase of 0.5%. As a result, the index was off 3.3% from a year earlier, the biggest decline since June 2014. Automatic Data Processing said that private sector employment was up 253,000 in May from the month before, well above the forecast of 170,000. First-time jobless claims for the week ending May 27 jumped 13,000 to 248,000; the four-week moving average rose 2,500 to 238,000. And the Conference Board’s Consumer Confidence Index for May was 117.9 compared to April’s revised reading of 119.4.

A look ahead

This week’s releases will include the latest on nonfarm productivity, the ISM’s Non-Manufacturing Index, factory orders, orders for durable and capital goods, consumer credit and wholesale inventories.