Northwestern Mutual

Financial Markets Commentary For the week of May. 08, 2017

The major stock indexes continued to hover at or near record highs during what was, to put it mildly, an eventful week.

The week started with a bipartisan agreement to fund the government through the rest of the fiscal year, and ended with a vote in the House to overturn Obamacare that was nothing if not partisan. In between, the Federal Reserve convened, Puerto Rico filed for bankruptcy protection and the jobless rate fell to a 10-year low. By week’s end, the Dow Jones Industrial Average was back above 21,000 and the S&P 500 closed at a new high, as did the Nasdaq. Oh yes, and the French elected a new president, Emanuel Macron.

At the outset of last week, the two parties quickly, and, by all accounts, amicably agreed on a $1.1 trillion budget to keep the government running. The only acrimony came after the vote, when Democrats crowed about not including the money to build President Donald Trump’s wall along the Mexican border. The president responded by tweeting that perhaps the best thing for Washington would be “a good shutdown” in September.

The Fed stands pat, as expected

The Fed met last week and, as expected, did not raise its benchmark rate as it had in March. The committee indicated that it still expected to increase the rate twice more this year, with the usual caveat about the economy remaining on track (the market does expect the Fed to act at its next meeting in June). Committee members did, however, emphasize that they thought the economy would pull out of its recent doldrums, during which sluggish consumer spending has taken a toll on retail sales and, more recently, gross domestic product growth, which closed out the first quarter at a paltry 0.7%. The Fed’s statement characterized the slowdown as “likely to be transitory,” adding, “The fundamentals underpinning the continued growth of consumption remain solid.”

The jobless rate falls to 4.4%

Ample evidence of that economic solidity appeared on Friday when the Labor Department said that 211,000 jobs had been created in April and the unemployment rate dipped from March’s 4.5% to 4.4%, the lowest level since 2007. The report came on the heels of a disappointing report for March during which only (a revised) 79,000 jobs were added. Year-over-year wages were up 2.5% in April, and the labor force participation rate fell to 62.9% from last month’s 63%.

The House passes a health care bill

As noted, the GOP got a boost on Thursday when it passed a bill to replace Obamacare after much negotiating and some embarrassment (the first version was withdrawn before a vote when it became clear it wouldn’t pass in the House). The bill passed by a narrow 217-213 margin, without a single Democrat voting “yea.” It will now advance to the Senate, where it remains to be seen when it will come to a vote and whether it will survive in its current form, with one of the sticking points being the extent of coverage, or not, for Americans with pre-existing medical conditions. As Senator Lamar Alexander (R, Tennessee), the chairman of the Senate Health Committee, put it, “We can go to the conference with the House, or they can pass our bill.”

A new president for France

After a contentious week of debates, name-calling and accusations of what was described as a “massive” hacking attack, France went to the ballot box yesterday and elected the centrist Emanuel Macron over right-wing Marie Le Pen by a decisive margin. Macron, a political unknown a year ago, is, at 39, the youngest French head of state since Napoleon, and he has pledged to revitalize the nation while remaining part of the European Union.

Puerto Rico goes to court

On Thursday, with creditors filing lawsuits, Puerto Rico moved to seek bankruptcy protection (though, legally, it cannot file for Chapter 9). The island territory is estimated to have $123 billion in debt and pension obligations.”

Brexit back-and-forth; Greece gets the go-ahead

Tempers were flaring on another island, Great Britain, over the Brexit, before negotiations had even gotten underway, after a German newspaper leaked a conversation during which Jean-Claude Juncker, the president of the European Commission, reportedly described Britain’s Prime Minister Theresa May as in “a state of denial” about the negotiations. May shot back, saying the leak was designed to impact the elections on June 8 by which she hopes to strengthen her hand, while vowing to be a “bloody difficult woman” in the negotiations. Across the Channel, Greece and its creditors reached a deal by which Greece will get the next round of €7 billion ($7.6 billion) in bailout money in return for higher taxes and cuts to pensions and spending. The agreement needs to be approved by eurozone finance ministers and Greece’s Parliament.

In other news, the Institute for Supply Management’s (ISM) Manufacturing Index fell to 54.8% in April from 57.2% in March; the ISM’s Non-Manufacturing Index rose to 57.5% from 55.2%. Factory orders increased 0.2% in March, while factory good ex-transportation dipped 0.3%; orders for durable goods climbed 0.9%, but orders for durable goods ex-transportation were flat. WardsAuto reported that vehicle sales totaled 16.79 million in April, up 1.6% from March but off 3% from April 2016. Personal income rose 0.2% in March from the month before, as Personal Consumption Expenditures (PCE) were up less than 0.1%. Real PCE improved 0.3%, while core PCE, less food and energy, declined 0.1%. Headline PCE inflation fell, coming in at -0.2% in April but was up 1.9% year over year; core PCE inflation, less food and energy, edged down 0.1% in April but rose 1.6% over the last year. Construction spending fell 0.2% in March from February. The trade balance in March was -$43.7 billion. And first-time jobless claims for the week ending April 29 fell 19,000 to 239,000; the four-week moving average was up 750 to 242,250.

A look ahead

This week’s updates will include the latest on small business optimism, wholesale inventories, the Producer Price Index, Consumer Price Index, retail sales, business inventories and consumer confidence.