Northwestern Mutual

Financial Markets Commentary For the week of Sep. 19, 2016

Fed-induced jitters led to volatility for stocks last week, but the three major indexes all zig-zagged to gains as investors seemed to conclude that the Federal Reserve was unlikely to raise its benchmark rate at this week’s meeting.

Yields on United States Treasurys were similarly buffeted and also up by the end of the week. As has been the case for some weeks now, members of the Fed’s Open Market Committee sent out conflicting signals about their thinking and the timetable for a rate hike, and the stock market rose or fell accordingly. On Monday, Fed Governor Lael Brainard demonstrated the influence that a single voting member can have when the Dow Jones Industrial Average gained 239.62 points after she again counseled “prudence.” Brainard also cited the lack of tools the Fed has left to wield to battle inflation and promote employment, saying, “This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation,” adding, “I believe that this approach has served us well.” Just a few hours earlier, Dennis Lockhart, president of the Atlanta Federal Reserve called for a “serious discussion” about a hike at this week’s meeting. Even so, going into the meeting the chance of a rate increase is only 15%, according to the CME Group.

Oil tumbles

Oil also played a role in last week’s volatility after the International Energy Agency’s forecast for slower growth in global demand, coupled with the ongoing production glut, sent the price of oil tumbling, taking the shares of energy companies with it. Despite rebounding Friday, U.S. crude was down for the week at $43.03 a barrel while Brent crude dipped to $45.77.

Apple soars, banks falter

Though the critical reception to Apple’s new iPhone 7 has been mixed, pre-orders have reportedly been strong. Apple’s stock soared 11.4% last week, increasing the company’s capitalization by $63 billion. Over the last month, in fact, technology has been the only S&P 500 sector that’s gone up, and the tech-heavy Nasdaq gained 2.3% last week. On the flip side, the financial sector suffered. Wells Fargo’s stock fell 6.8% because of the ongoing scandal over the creation of phantom customer accounts. On Friday, Deutsche Bank’s shares fell after it said it wouldn’t accept the U.S. government’s settlement proposal of $14 billion for the bank’s mortgage practices prior to the Great Recession.

The BOE stands pat

The Bank of England (BOE) left its benchmark interest rate unchanged at a record-low 0.25% and voted unanimously to continue with its stimulus program. The BOE also said it expected less of an economic slowdown in the second half of 2016 than previously reported, but noted that, in the wake of the Brexit, “business spending would slow more sharply than consumer spending in response to the uncertainty associated with the United Kingdom’s vote to leave the European Union.” Meanwhile, as further evidence of the nation’s post-Brexit resilience, the jobless rate in July fell to 4.7% according to the Office of National Statistics, its lowest level since 2005.

The looming election

The University of Michigan’s Consumer Confidence Index was 89.8 in September, its lowest level since April. It’s uncertain how much the upcoming election contributed to the reading, but, according to a Bankrate survey, 61% of Americans see the election as the greatest threat to the nation’s economy, regardless of who wins, with terrorism a distant second at 12%.

Income and net worth improve

The Census Bureau said that U.S. median household income rose 5.2% in 2015 to $56,516, the largest increase since 1967 when the government began tracing the data. In percentage terms, the biggest gains went to the families with the lowest incomes. Household net worth climbed to a record $89.1 trillion in the second quarter, the Fed reported, the third quarter in a row during which a new high was reached, mainly because of higher stock and real estate values.

Retail sales dip

After four consecutive months of increases, retail sales fell 0.3% in August to $456.3 billion, though they’re up 1.9% over the first eight months of 2016 compared to the same period in 2015. In other news, the Fed said that industrial production declined 0.4% in August after July’s increase of 0.6%, and manufacturing dipped 0.4%. Capacity utilization was down to 75.7%. The Producer Price Index (PPI) was unchanged in August from July and for the previous 12 months; core PPI, less food and energy, rose 0.1% month over month and 1% from August of 2015, well below the Fed’s target of 2%. However, the Consumer Price Index (CPI) was up 0.2% in August from July and 1.1% from August 2015. More importantly, from the Fed’s standpoint, core CPI advanced 0.3% in August from the month before, its largest gain since February, and increased 2.3% over the past year. Small business optimism dropped 0.2 points to 94.4 in August from July, the first decline after four straight month-over-month increases. In addition, first-time jobless claims for the week ending Sept. 10 rose 1,000 to 260,000; the four-week moving average for the week ending Sept. 3 fell 500 to 260,750. Lastly, after four months of negotiations, Bayer announced the largest deal of 2016, saying it would acquire Monsanto for $66 billion.

A look ahead

The upcoming week will revolve around the Fed’s meeting on Tuesday and Wednesday, which will be followed by Chairwoman Janet Yellen’s press conference. The Bank of Japan will also meet this week, and investors will be anxious to see its stance on additional stimulus. In addition, there will be updates on housing starts and building permits, existing home sales, consumer comfort and the Conference Board’s Leading Economic Indicators Index.