Northwestern Mutual

Financial Markets Commentary For the week of Mar. 06, 2017

Just over a month after crossing the 20,000-point barrier for the first time, the Dow Jones Industrial Average roared past 21,000 the day after President Donald Trump delivered his first address to Congress.

The S&P 500 and Nasdaq also rose to new highs. This happened less due to policy specifics in Trump’s speech, but more because, during a sometimes tumultuous first 100 days in office, the public perception was that the new chief executive was now firmly in command and ready to follow through on the promises he’s made to strengthen the economy, leading to “a new chapter of American greatness.” Saying that the time had come to put “trivial fights behind us,” Trump added, “I am asking everyone watching tonight to seize this moment. Believe in yourselves. Believe in your future. And believe, once more, in America.” Perhaps not surprisingly, investors moved out of bonds last week, and the yield on the 10-year Treasury climbed to 2.5%.

The budget

One of the key components of Trump’s economic plan will be his first budget. Though there will be months of congressional wrangling before the final draft is produced, it’s expected to include an increase in military spending at the expense of domestic programs and foreign aid. Such a budget could set up a showdown between the president and the GOP-controlled Congress as it’s expected to leave intact Social Security and Medicare, programs long targeted by Republicans for reform. The Democrats, meanwhile, will staunchly defend domestic programs.

“Unbelievably complex”

Trump also met with the nation’s governors last week to discuss, among other topics, the Affordable Care Act (ACA). He said his plans to quickly undo the ACA were slowed because health care was “unbelievably complex,” adding, “Nobody knew that health care could be that complicated.” Still, he said, “People hate it,” and he described it as a “disaster.” He also told the governors, “We’re going to start spending on infrastructure big.”

Yellen speaks

There’s no greater evidence of how transparent the Federal Reserve has become than the fact that on Friday Chairwoman Janet Yellen said the Fed would probably raise its benchmark rate at its meeting on March 14 and 15. The Fed raised its rate just once in 2015 and 2016, each time in December, and though it had said it anticipated three hikes in 2017, as recently as Feb. 24 the CME Group put the odds of an increase in March at only 27%. Speaking in Chicago, Yellen was unusually forthright, saying that because of the stronger job market and rising inflation, “a further adjustment of the federal-funds rate [in March] would likely be appropriate.” At almost the same moment, Stanley Fischer, the Fed’s vice chairman, was in New York echoing Yellen’s comments. The Fed has been increasingly clear that it doesn’t want to wait too long to raise its rate and then have to manage an overheated economy.

The National People’s Congress convenes

China’s lawmakers began their annual meeting yesterday, and Premier Li Keqiang lowered the nation’s forecast for gross domestic product (GDP) growth in 2017 to “around 6.5%, if possible,” compared to last year’s target of 6.5-7% (the final figure was 6.7%). Defending the estimate in the face of issues such as a growing debt load and manufacturing overcapacity, not to mention pollution, Li said the target was “realistic,” and added, “An important reason to stress the need for stable growth is to ensure employment and improve people’s lives.” He didn’t mention Trump, who has been vocal about getting tough with China on trade, but did say that China would eschew “protectionism” and “always be on the side of peace and stability.”

Inflation on the rise; eurozone growth

Mainly because of the recent rebound in the price of gas, inflation in Japan and the eurozone is finally on the rise. Japan’s core consumer prices, excluding food and energy, were up 0.1% in January from a year earlier, the first increase in a year. Meanwhile, consumer prices in the eurozone rose 2% in February, the highest rate since January 2013, with energy costs jumping 9.2%. Also last week, IHS Markit said that its Purchasing Managers’ Index for the eurozone climbed to 56.0 in February from January’s 54.4, putting it near a six-year high.

It’s a snap

Looking for some further evidence of the current economic enthusiasm? How about the opening performance of the stock of Snapchat, or more properly, its parent company, Snap, Inc. Snap, Inc. lost $516 million last year (and has never earned a profit), but after its initial public offering on Wednesday, the stock surged 44% on Thursday, leaving the company with a market capitalization of $34 billion after its first full day of trading (it rose another 11% on Friday).

In other economic news, the government left its first estimate of fourth-quarter growth unchanged at 1.9%. The Institute for Supply Management’s (ISM) Manufacturing Index was 57.7% in February after 56% in January, with the New Orders Index jumping to 65.1% from 60.4% the month before. The ISM’s Non-Manufacturing Index rose from 56.5% in January to 57.6% in February, the highest reading since October 2015. Personal income was up $63 billion or 0.4% in January from the month before, as personal consumption expenditures (PCE) increased $22.2 billion or 0.2%. Real PCE increased 0.4% from December and 1.9% from a year earlier, while core PCE, less food and energy, was up 0.3% for the month and 1.7% for the year. Construction spending fell 0.1% in January from December. WardsAuto said that 17.47 million vehicles were sold in February, down 1% from the month before and unchanged from a year earlier. And first-time jobless claims for the week ending Feb. 25 fell 19,000 to 223,000, while the four-week moving average dropped 6,250 to 234,250 – both readings were at their lowest point since 1973.

A look ahead

This week’s releases will include the latest on factory orders, orders for durable and capital goods, the trade balance, consumer credit, wholesale inventories and, on Friday, the unemployment rate for February, forecast to fall to 4.7% from January’s 4.8%.