Northwestern Mutual

Financial Markets Commentary For the week of Mar. 27, 2017

Stocks and bonds seemed like a sideshow to last week’s main event: the rise and fall of the American Health Care Act (AHCA), which, in the end, never even came to a vote in the House.

Still, the weeklong uncertainty about the AHCA led investors to worry about the fate of some of the other items on President Donald Trump’s agenda such as tax reform and infrastructure spending. This sent stocks to their worst week since November, before the election. In fact, on Tuesday, the S&P 500 fell more than 1% for the first time in 161 days, the longest such streak since 1985. Bond yields – not surprisingly – also fell last week as some investors shifted to safety.

The AHCA’s chances for passage in the House – not to mention the Senate – were hurt after the Congressional Budget Office said that it would leave 24 million Americans without healthcare coverage. But the bill was undone by the inability of Republicans to agree on the details (and the fact that, as the president noted, no Democrats were going to vote for the bill). In an effort to assure passage, Trump agreed to changes to the bill from the far-right Freedom Caucus that left GOP moderates unhappy and the Freedom Caucus still asking for more.

With the bill shelved and the Affordable Care Act intact, the question now is whether the president and Speaker of the House Paul Ryan (R, Wisconsin) can move past the setback to tackle taxes and spending because, as an editorial in The Wall Street Journal noted on Saturday, the failure of the bill to survive the House reveals that Trump “doesn’t have a reliable governing coalition.” Nonetheless, on Friday, only hours after Ryan had pulled the bill, Trump had already turned his attention toward taxes, telling reporters, “We are going, right now, for tax reform.” He also predicted that Obamacare will “explode” and that Democrats will come to him looking to make a deal. Ryan, speaking of the impact of the defeat on the GOP’s legislative agenda, said, “This does make tax reform more difficult, but doesn’t make it impossible.”

Keystone back on track

While the AHCA hung in the balance, the president made good on one of his other campaign promises by greenlighting the Keystone XL pipeline – long a GOP goal – which had been turned down by President Obama in 2015 for environmental reasons. The pipeline will run from oil fields in Canada and North Dakota to Nebraska where it will join existing pipelines to carry oil to the Gulf Coast. The president called it the beginning of a “new era” for infrastructure and energy projects designed to create jobs and generate tax revenues, adding, “It’s going to be an incredible pipeline; greatest technology known to man.” Though approving the project by issuing a presidential permit to TransCanada, work will not begin on the pipeline until it is also cleared by the state of Nebraska.

Oil producers considering an extension on cuts

In another story about oil, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members including Russia, who have reduced production by about 1.8 million barrels a day since January, met in Kuwait yesterday and recommended renewing the plan beyond its original ending date in June to the end of 2017. The agreement has helped push the price of Brent crude back over $50 a barrel, but it has also encouraged American drillers to open more wells which has sent the price of United States crude below $50 a barrel.

The EU’s not-so-happy birthday

The European Union (EU) celebrated its 60th birthday in Rome over the weekend, but there was a pall over the party as one of its more prominent members, Great Britain, was absent. Furthermore, the future of the alliance and the euro are both seen as tenuous with a number of populist parties pushing to leave the EU. As for Great Britain, having been given the go-ahead by Parliament, Prime Minister Theresa May said that she’ll officially begin her country’s negotiations for leaving the EU this Wednesday by triggering Article 50, starting what’s expected to be a two-year extrication process. David Davis, who will be her lead negotiator, said his goal was “a deal that works for every nation and region of the UK and indeed for all Europe – a new, positive partnership between the UK and our friends and allies in the European Union.”

Existing home sales fall, new home sales hit a seven-month high

In other economic news, the National Association of Realtors said existing home sales fell 3.7% in February from the month before to an annualized rate of 5.48 million. However, January’s 5.69 million was the highest reading since February 2007, and sales in February were up 5.4% from a year earlier. The number of homes on the market in February rose 4.2% to 1.75 million, but was still close to December’s all-time low of 1.65 million and was down 6.4% from a year earlier. New home sales, which account for about 10% of the market, climbed 6.1% to an annualized rate of 592,000, the best showing since July 2016. Thanks to orders for aircraft, which jumped 47.6%, durable goods orders rose 1.7% in February from the month before from an upwardly revised 2.3% gain in January; durable orders less defense were up 2.1%, while demand in the category that excludes transportation improved 0.4%. Orders for non-defense capital goods, excluding aircraft, fell 0.1% in February after a 0.1% gain in January. IHS Markit’s U.S. Purchasing Managers’ Index (PMI) for Manufacturing for March was 53.4, a five-month low, after 54.2 in February, while the composite PMI dipped to a six-month low of 53.2 from 54.1 in February (any reading about 50 indicates expansion). And first-time jobless claims for the week ending March 18 were up 15,000 to 258,000; the less-volatile four-week moving average increased 1,000 to 240,000.

A look ahead

This week’s releases will include the latest on wholesale and retail inventories, the S&P CoreLogic Case-Shiller Home Price Index, pending home sales and consumer confidence. The government will also issue its revised projection of fourth-quarter gross domestic product, expected to be raised from 1.9% to 2.0%.