Northwestern Mutual

Financial Markets Commentary For the week of May. 22, 2017

For one day last week – Wednesday – it looked as if the ongoing drama in Washington, D.C., was going to finally take a toll on stocks.

On the day that the Justice Department said a special investigator had been chosen to look into Russia’s involvement in last fall’s election, when the ominous word “Watergate” surfaced in headlines, and only two days after the S&P 500 and Nasdaq notched new highs, stocks had their worst day in eight months. Also on Wednesday, the yield on the 10-year Treasury had its biggest drop since last June as investors sought higher ground, and the VIX Volatility Index, which has been hovering near record lows, jumped 46%. And it certainly didn’t help when Ben Bernanke, the former chairman of the Federal Reserve, speaking at a conference of hedge fund managers in Las Vegas, said, “Over the next four years, there is a pretty good chance we’ll have a slowdown.” By week’s end, however, two days of gains largely wiped out the losses, and though the major indexes were down for the week, the “Trump bump” that has driven them to record heights since the election seemed to be back on track.

The Trump tour

President Donald Trump, meanwhile, has left the chaos behind for his first trip abroad, traveling to the Middle East and Europe – he returns this Saturday. At his first stop, in Saudi Arabia, a number of deals were announced, including a $110 billion sale of arms to the Saudis, agreements between Saudi Aramco and American oil companies, and multi-billion-dollar deals for General Electric Co. and Blackstone, among others.

The price of oil rebounds; U.S. drilling expands

Speaking of oil, shares of oil companies rebounded as it seemed all but certain that the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC nations meeting in Vienna this week will extend their oil production cuts, due to expire at the end of June, into March 2018. Last Monday, Saudi Arabia and Russia issued a joint statement saying they would do “whatever it takes to achieve the desired goal of stabilizing the market.” Then on Saturday, Saudi Arabia's Energy Minister Khalid Al-Falih said, "We think we have everybody on board" for the extension, adding, "Everybody I've talked to indicated that nine months was a wise decision." Last week, United States crude rose 5.2% and Brent crude 5.4% as they both closed back above the $50-a-barrel mark. However, American oil drillers have continued to move to take advantage of the OPEC cuts, and last week the number of rigs rose to 720, according to Baker Hughes, more than double the low of 316 in mid-2016.

Congress: tax talks begin, renegotiating NAFTA

The House began to discuss taxes last week. There was little to agree on except that both parties wanted to reform the tax code without increasing the deficit, an indication that nothing is likely to happen anytime soon. In addition, the administration notified Congress that it plans to renegotiate the North American Free Trade Agreement (NAFTA), which the president has called “the worst deal ever.” Robert Lighthizer, the new U.S. trade representative, who sent Congress a one-page letter outlining the plan, said, “Today, President Trump fulfilled one of his key promises to the American people.”

Record debt

The New York Federal Reserve reported that consumer debt rose $149 billion in the first quarter to hit a new all-time high of $12.73 trillion, breaking the record of $12.68 trillion set back in 2008. "This record debt level is neither a reason to celebrate nor a cause for alarm," said Donghoon Lee, a research officer at the New York Fed. Rising debt can be problematic, but is seen as less so when gross domestic product (GDP) is expanding.

Around the eurozone

Emmanuel Macron, the new president of France, traveled to Berlin to meet with Germany’s Chancellor Angela Merkel last week. The two vowed to keep the European Union together. Merkel also made a pledge to spur growth to address the discontent that has driven populist movements in Europe, saying, “I would gladly develop concepts with Emmanuel Macron which can quickly bring hope to people who have no work.” In Greece, hundreds of thousands of workers walked off the job on Wednesday to protest the latest pension cuts and tax hikes that Greece has had to agree to in order to get its next bailout payment, austerity steps that have yet to be approved by that nation’s Parliament.

Japan on the mend?

Thanks to exports, Japan’s economy advanced at an annualized pace of 2.2% in the first quarter from the last three months of 2016, the fifth straight quarter of growth, which adds up to Japan’s longest economic expansion in a decade. In other news, industrial production climbed 1.0% in April from March, its largest gain since February 2014; manufacturing output also increased 1.0%. Total industrial production was up 2.2% from April 2016, and capacity utilization rose to 76.7% in April from March’s 76.1%. The National Association of Home Builders/Wells Fargo Housing Market Index gained two points in May to 70, the second highest reading since the downturn. Housing starts were 1,172,000 in April, down 2.6% from March, but up 0.7% from a year earlier. Building permits also declined, falling 2.5% in April to 1,229,000, but were 5.7% higher than in April 2016. The Conference Board’s Leading Economic Index increased 0.3% in April from March. And first-time jobless claims for the week ending May 13 fell 4,000 to 232,000; the four-week moving average dipped 2,750 to 240,750.

A look ahead

This week’s releases will include updates on new and existing home sales, retail and wholesale inventories, orders for durable and capital goods, the advance trade balance and consumer confidence. The Fed will release the minutes of its meeting on May 2 and 3, and the government will issue its second estimate of first-quarter GDP growth, expected to be revised up to 0.9% from the original 0.7%. Also note, the markets will be closed next Monday, May 29, for Memorial Day.