Northwestern Mutual

Financial Markets Commentary For the week of May. 15, 2017

In a week during which it was hard to find a headline that didn’t have the word “Comey” or “ransomware” in it, the S&P 500 fell for the first time in a month – if only slightly.

The decline had little to do with the firing of the FBI’s director, however, or the week-ending cyberattack on millions of computers, and was largely the result of weak first-quarter earnings news from major retail stores such as Macy’s, Kohl’s and Nordstrom. Even so, the three major indexes remained near their all-time highs, and the Nasdaq set a record three times last week.

Overall, first-quarter earnings for S&P 500 companies have been robust, with FactSet estimating that they’ll be up 14% from a year earlier, which would be the best quarterly showing since 2011 (90% of the S&P 500 companies have reported so far). In addition, retail sales for April rose a solid 0.4% from an upwardly revised gain of 0.1% in March, also good news, and sales were up 4.5% from a year earlier. But the numbers showed that non-store retail sales, which includes online shopping, gained 1.4% while sales at department stores were up only 0.2%. Worse still, over the past year, non-store sales jumped 11.9% while department store sales decreased 3.7%, which helps explain Friday’s sell-off of brick-and-mortar store shares.

A second quarter rebound?

The Federal Reserve Bank of Atlanta is estimating that second-quarter growth will be 3.6% compared to the initial reading of 0.7% for the first quarter, continuing what has come to be the norm since the Great Recession ended: a feeble first quarter followed by a second-quarter rebound. That positive outlook was echoed last week by the University of Michigan’s Consumer Sentiment Index for May which was 97.7, near the 13-year high hit in January. Given the retail report and April’s jobless rate of 4.4%, it’s not surprising that the CME Group says there’s a 78.5% chance that the Fed will raise its benchmark rate when it meets in June.

The Group of 7 meets in Italy

At the Group of 7 (G7) meeting of finance ministers and central bankers in Italy, the United States was reportedly told by fellow members that it must continue to cooperate with global economic policy. According to French Finance Minister Michel Sapin, the other six G7 members said explicitly, and sometimes very directly, to the representatives of the U.S. administration that "It is absolutely necessary to continue with the same spirit of international cooperation.” In response, Treasury Secretary Steven Mnuchin said, "We do not want to be protectionist but we reserve our right to be protectionist to the extent that we believe trade is not free and fair." In the closing communique, members pledged to use every means possible to boost global economic growth and also said they’d increase their collective effort to combat cyberwarfare after the attack at week’s end that infected computers in as many as 100 countries. The communique did not, however, explicitly promote free trade or reject protectionism, as some members had hoped.

China’s “New Silk Road”

While the U.S. is taking a more protective stance on trade, China is trying to establish itself as a leader in global cooperation. At a summit of his own on Sunday, China’s President Xi Jinping pledged $124 billion for the “New Silk Road” plan to foster global free trade while abandoning traditional rivalries and politics. At the opening of the two-day meeting, Xi said, "We should build an open platform of cooperation and uphold and grow an open world economy." First unveiled in 2013 and officially the “Belt and Road” initiative, the plan was designed to boost global growth with infrastructure investment around the world. All rhetoric aside, China and the U.S. did agree to a trade deal last week, though it avoided some of the more contentious products such as steel.

Oil, Russia and OPEC

It may be wishful thinking, but Russia’s Energy Minister Alexander Novak said he thinks that there will be a supply and demand balance for oil by late 2017 or early 2018 if the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC nations renew their production cuts due to expire in June “or maybe further than that.” Last week, the price of Brent crude moved back above the $50-a-barrel mark, but it remains down 11% for the year to date, according to The Wall Street Journal. OPEC has also recently raised the topic of bigger cuts or enticing new oil producers to join in, including Egypt and Turkmenistan. Later this month, OPEC members are expected to agree to extend the cut of 1.8 million barrels a day through the end of the year.

Time for the ECB to normalize?

Bundesbank President Jens Weidmann said on Saturday that in the wake of Emmanuel Macron’s victory in France and some positive signs of economic growth, the European Central Bank (ECB) could soon begin to normalize its policies. "The strengthening economic development in the eurozone and the robust outlook make a normalization conceivable," he said, adding, "The election victory of Macron gives a chance that the eurozone economy gets an additional momentum."

In other economic news, the Consumer Price Index (CPI) was up 0.2% in April from March and 2.2% from a year ago. Core CPI, less food and energy, rose 0.1% from March but only 1.9% over the last year, its slowest pace since October 2015. The Producer Price Index climbed 0.5% in April and 2.5% over the past year; core PPI gained 0.4% from March and 1.9% year-on-year. The National Federation of Independent Business Index dipped 0.2 points in April to 104.5, still near a record high, though future expectations tumbled after Congress failed on its first attempt to undo Obamacare, a priority for small business owners. Business inventories increased 0.2% in March from February, and wholesale inventories also rose 0.2%. Lastly, first-time jobless claims for the week ending May 6 fell 2,000 to 236,000; the four-week moving average rose 500 to 243,000.

A look ahead

This week’s releases will include updates on housing starts, industrial production, leading economic indicators and consumer comfort.