Northwestern Mutual

Financial Markets Commentary For the week of May. 30, 2017

The week before last, the major stock indexes plunged and volatility spiked when it looked as if turmoil in Washington, D.C., might derail President Donald Trump’s economic agenda.

Since then, however, stocks have steadily climbed, turmoil or no, and both the S&P 500 and the Nasdaq closed the past week at record highs, while the Dow Jones Industrial Average moved back above the 21,000-point mark. In addition, the VIX Volatility Index fell back near its all-time low. According to The Wall Street Journal, the S&P 500 has reached a new high 20 times so far this year, while the Nasdaq has turned the trick 35 times.

The president wrapped up his first overseas trip in Europe on Saturday, attending the Group of 7 (G7) meeting in Sicily. At the conclave, his fellow G7 members persuaded Trump to include a commitment to fight protectionism in the post-meeting communique, but he refused to affirm America’s support for the Paris climate pact, despite pressure from his peers.

The president’s budget

While the president was away, his $4.1 trillion budget was released. The plan, titled “A New Foundation for American Greatness,” includes balancing the budget in 10 years, along with an increase in military and infrastructure spending, and reduced taxes. It would also cut funding for foreign aid, farm subsidies and some programs for less wealthy, older and disabled Americans, all while leaving Medicare and Social Security untouched. The budget was decried by Democrats and received a lukewarm reception from the president’s fellow Republicans, with Representative Don Young (R, Alaska) observing, “I hate to say it, but I would say the budget was dead before the ink was dry.” In addition, as The Wall Street Journal opined, the budget “sets a worthy objective of sustained 3% economic growth, but offers no rigorous plan to back it up” – the Federal Reserve’s long-term gross domestic product (GDP) estimate for the coming decade is 1.8%. However, any president’s budget is only the starting point for extended debate and negotiation and, as Senate Majority Leader Mitch McConnell (R, Kentucky), noted, “We’ll be taking into account what the president recommended. They will not be determinative.”

First-quarter GDP revised upwards

Whatever GDP may be over the coming decade, the government’s second estimate for first-quarter growth was 1.2% compared to the original 0.7%, mainly because the estimate for consumer spending was doubled from 0.3% to 0.6%. The Federal Reserve Bank of Atlanta is projecting 3.7% GDP growth for the current quarter.

The Fed abides

The minutes from the Fed’s May meeting indicated that the committee would raise its benchmark rate “soon” but “judged that it would be prudent to await additional evidence indicating that the recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation.” The minutes also indicated that the Fed will start to reduce its holdings of $4.5 trillion in Treasurys and mortgage-backed securities later this year; the Fed isn’t expected to sell securities, but to not reinvest the proceeds when they mature.

Chinese debt gets a downgrade; the yuan is linked to the dollar

Concerned about China’s high level of borrowing to power growth, Moody’s lowered that country’s debt rating from A1 to Aa3, the first time the rating had been cut since 1989. Later in the week, China’s central bank said it was taking steps to prevent the yuan from making big swings relative to the dollar.

A change in Ford’s driver’s seat

Concern that Ford, the world’s number two automaker – and the one of the “Big Three” that was not helped out by the government during the recession – was not keeping up with market trends, led to Chief Executive Officer Mark Fields being replaced last week by the turnaround specialist Jim Hackett.

The eurozone, OPEC and new home sales

In signs that the eurozone may be on the mend, Germany’s Business Climate Index rose to 114.6 in May, its highest level since 1991; and the IHS Markit Flash Composite Purchasing Managers’ Index for the eurozone was 56.8, the same as in April, but that was its highest reading since 2011. As expected, the Organization of the Petroleum Exporting Countries (OPEC) leaders met in Vienna and agreed to extend the production cuts that began on Jan. 1 and were due to expire at the end of June through March; even so, the price of oil fell last week. New home sales tumbled 11.4% in April from March, down to an annualized rate of 569,000 – they had risen for three months straight – but were up 0.5% from a year earlier. Orders for durable goods fell 0.7% in April from March; orders ex-transportation were down 0.4%. Orders for nondefense capital goods excluding aircraft were flat. Wholesale inventories were 0.3% lower in April than in March; retail inventories fell 0.3%. The University of Michigan’s Consumer Confidence Index for May was 97.1 compared to an earlier estimate of 97.7. And first-time jobless claims for the week ending May 20 rose 1,000 to 234,000; the four-week moving average decreased 750 to 235,250, its lowest level since 1973.

A look ahead

It will be a short week with the market having been closed for Memorial Day, but it will nonetheless be a busy one when it comes to economic data for investors to pore over, with updates on personal consumption expenditures, the S&P CoreLogic Case-Shiller Home Price Index, the Conference Board’s Consumer Confidence Index, the Fed’s Beige Book, pending home sales, nonfarm productivity, manufacturing, construction spending, vehicle sales, the trade balance, and, on Friday, the unemployment rate for May, expected to remain unchanged at 4.4%.