Northwestern Mutual

Financial Markets Commentary For the week of Oct. 24, 2016

The three major indexes all edged back into the black after two down weeks.

Third-quarter earnings and proposed mergers and acquisitions drove stocks last week rather than the Federal Reserve’s rate-cutting timetable. The yield on the 10-year Treasury, meanwhile, also changed direction, falling after a two-week climb.

The biggest story of the week, AT&T’s $85.4 billion acquisition of Time Warner, didn’t actually happen until Saturday, though the rumor mill was already hard at work on Friday. The deal, which will create a multimedia giant that can both create and deliver content on a number of platforms, is expected to face intense scrutiny by regulators because, even though the two companies are not direct competitors, their combination could nonetheless lead to unfair pricing and limit competition (AT&T also bought DirecTV last year). Further, both presidential candidates have spoken against such combinations, and Donald Trump decried the deal on Saturday. AT&T’s bold move was not the only mega-deal announced last week: British American Tobacco bid $47 billion to gain complete control of Reynolds American, which would create the world’s largest listed tobacco company by revenue and market value; BAT already owns 42.4% of Reynolds.

Q3 earnings better than expected, so far

As noted, third-quarter earnings news triggered market swings last week, for better and for worse. The week’s outperformers included Netflix, UnitedHealth Group, Morgan Stanley, Goldman Sachs, American Express and Microsoft, whose stock hit a new all-time high on Friday. With about one quarter of S&P 500 companies having reported, earnings are down 0.3%, according to FactSet. This is far better than the Sept. 30 forecast of -2.1%.

China on track, with help, and now the king of imported oil

China's gross domestic product (GDP) was 6.7% for the third quarter, hitting the government’s full-year target. Expansion was keyed by increased government spending, record lending by banks, and a still-sizzling property market, all adding up to more debt. Taking advantage of the low pricing, China is now the world’s biggest oil importer, unseating the United States, as its crude imports climbed to a record 8.08 million barrels a day in September, a year-on-year increase of 18%.

A deal on oil?

U.S. crude rose to its highest price per barrel in 15 months last week, and there are signs that that upward trend may continue. On Saturday, Venezuela’s Vice President Nicolas Maduro was quoted as saying that the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers were “very close” to a deal limiting production. Venezuela, like Russia, has been economically battered by the ongoing oil glut. Maduro made his comments after visiting Iran, which has been against any production limits. OPEC, which has already informally agreed to modest reductions, will reportedly make those cuts official when it next meets on Nov. 30.

The ECB stands pat; the euro does not

The euro fell to its lowest level against the dollar since March last week after the European Central Bank (ECB) concluded its meeting without taking any new stimulus steps and leaving its interest rate unchanged. The ECB’s President Marion Draghi said, “Our approach at today's meeting was not wait and see, but work and assess.” The bank next meets on Dec. 3.

The Brexit

British banks are expected to report strong third-quarter results this week despite the Brexit, thanks to the boost provided by consumer spending. Still, a senior executive at one of the nation’s largest banks was quoted in The New York Times as saying, “This is a period of calm – maybe a false period of calm – before the storm, but don’t be fooled by it.” At the end of last week, there were some signs that consumer spending might be challenged when the rate of inflation for September was up 1% from a year earlier, its fastest pace since November 2014, while core inflation hit 1.5% year over year, a two-year high. Prime Minister Theresa May is said to be weighing a plan by which Britain would pay the European Union billions of pounds to maintain access to the single market after the Brexit.

Consumer prices and industrial production bounce back

Consumer prices had their fastest gain since February in September, up 0.3% from August’s 0.2%. Over the last year, Consumer Price Indexes (CPI) rose 1.5%, the biggest year-over-year increase since October 2014. Core CPI, less food and energy, was up 0.1% from August and 2.2% for the year. In other news, industrial production gained 0.1% in September after having dipped 0.5% in August. For the third quarter, production increased at an annual rate of 1.8%. Manufacturing increased 0.2% in September from August and at an annual rate of 0.9% during the third quarter. Capacity utilization inched up to 75.4% from 75.3%. The National Association of Realtors said sales of previously owned homes improved 3.2% in September from the month before to a seasonally adjusted annual rate of 5.47 million. Housing starts plunged 9% in September from August to an annualized rate of 1.04 million, off 11.9% from a year earlier. Building permits, however, climbed 6.3% in September from August to 1.2 million, and were up 8.5% from September 2015. The National Association of Home Builders/Wells Fargo Housing Market Index of builder confidence fell to 63 in October from 65 in September. And first-time jobless claims for the week ending Oct. 15 rose 13,000 to 260,000; the four-week moving average for the week ending Oct. 8 climbed 2,250 to 251,750.

A look ahead

This week’s releases will include the S&P CoreLogic/Case-Shiller Home Price Index, new and pending home sales, consumer confidence, the advance trade balance, wholesale inventories, orders for capital and durable goods, personal consumption and more earnings news. The government will also release its advance estimate for third-quarter GDP, forecast to come in at 2.5% after a final reading of 1.4% for the second quarter.