Northwestern Mutual

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

As expected, the Federal Reserve raised its benchmark rate last week for the first time in 2017 – and for only the third time since the financial crisis of 2008.

The major indexes rallied on the news but drifted for the rest of the week to finish only slightly up, while the yield on the 10-year Treasury fell after the Fed made its move.

The stock market had its best day of the week on Wednesday after the Fed, as telegraphed in speeches by committee members and Chairwoman Janet Yellen, raised its rate one-quarter point to a range of 0.75%-to-1.0%. At her post-meeting press conference, Yellen said, "The simple message is the economy is doing well,” adding, “We have confidence in the robustness of the economy and its resilience to shocks." Most committee members said they are expecting two more rate hikes this year – since the Great Recession, the rate has now been raised three times, most recently in December 2016.

The proposed health care act and the CBO

The non-partisan Congressional Budget Office (CBO) released its report on the impact of the proposed American Health Care Act, claiming that as many as 24 million people covered by the current Affordable Care Act could be without coverage by 2026 under the new plan. In addition, over the same period, the new plan is estimated to save $337 billion. The CBO’s numbers were challenged by Tom Price, the new secretary of Health and Human Services, who said, “We disagree strenuously with the report that was put out.” Nonetheless, Senator Susan Collins (R, Maine), said, the report was “cause for alarm,” and Senator John Thune (R, SD), said the GOP should work to make the plan more helpful to people “on the lower end.”

The president’s budget

The president released his first budget and it was as previewed – more spending on the military and homeland security, and substantial cuts to the Environmental Protection Agency, foreign aid (including the UN and the World Bank) and programs that support the arts. The budget also made good on President Trump’s campaign pledge to leave Social Security and Medicare untouched.

Mnuchin goes to Baden-Baden

Finance ministers from the Group of 20 met in Baden-Baden, Germany, this past weekend for the first time since Trump was elected president. The meeting included the debut of the new Treasury Secretary Steven Mnuchin. The post-meeting communique reaffirmed the Group of 20’s commitment to currency and banking regulation but did not address free trade, a hot topic going into the session. After the meeting, Mnuchin said, “Balanced trade has to be what’s good for us and what’s good for other people. It has to be a win-win situation.” Christine Lagarde, head of the International Monetary Fund, said that the global economy was improving but warned that “wrong” policies could “stop the new momentum in its tracks.”

The vote in the Netherlands

In a closely watched election in the Netherlands, the party of Geert Wilders, the far-right populist candidate, gained some seats but was a long way from a mandate or a parliamentary majority. More importantly, with elections featuring populist candidates looming in France and Germany, Wilders’ anti-European Union stance and xenophobic rhetoric were soundly rejected by Netherlanders, according to exit-poll data. After the vote, Prime Minister Mark Rutte commented that his country had “said ‘whoa’ to the wrong kind of populism.”

The Brexit and Scotland

The British government got the green light from Parliament to negotiate the Brexit. However, it appears as if doing so could lead to a second referendum on Scottish independence. After the vote, David Davis, the cabinet minister who will be the lead Brexit negotiator, said, “We are now on the threshold of the most important negotiation for our country in a generation.” But the First Minister of Scotland, Nicola Sturgeon, said she would ask Scotland’s Parliament to give her the go-ahead for a second referendum on independence in late 2018 or early 2019, before the Brexit negotiations are completed; Scots narrowly rejected independence three years ago, but also were against the Brexit by a decisive 62%-to-38% margin.

Signs of confidence

Though the National Federation of Independent Business Small Business Optimism Index fell 0.6 points in February to 105.3, it remained near a 40-year high as owners were upbeat about a new health care plan, tax reform and regulatory relief. And that was not the only sign of confidence. The National Association of Home Builders/Wells Fargo Housing Market Index rose from 65 in February to 71 in March, the highest reading since June 2005; the University of Michigan’s Index of Consumer Sentiment was 97.6 in March compared to February’s 96.3; and the Conference Board’s Index of Leading Economic Indicators climbed 0.6% to 126.2 in February, its highest level in more than a decade. In other news, the Producer Price Index improved 0.3% in February from the month before and was up 2.2% over the past 12 months. Core PPI, less food and energy, increased the same 0.3% from the month before and 1.8% from February 2016. The Consumer Price Index (CPI) rose 0.1% in February and 2.7% year over year; Core CPI was up 0.2% and 2.2%. Retail sales improved 0.1% in February from January and were up 5.7% from a year earlier. Manufacturing output rose for the sixth month straight in February, up 0.5% from an upwardly revised 0.5% in January. Industrial production was flat; mainly because utilities fell 5.7% due to the warmer weather. Capacity utilization dipped from 75.5% to 75.4%. Business inventories increased 0.3% in January from December. Housing starts gained 3% in February from the month before to an annual rate of 1.29 million. And first-time jobless claims for the week ending March 11 fell 2,000 to 241,000; the four-week moving average rose 750 to 237,250.

A look ahead

This week’s releases will include the latest on consumer comfort, existing and new home sales and orders for durable and capital goods.