Northwestern Mutual

Market Commentary

For the week of Sept. 6, 2016

Sometimes the porridge is really hot; sometimes the porridge is really cold; this one is in between.”- Labor Secretary Thomas Perez on the August unemployment report.

Key Market Data

Vacationing investors were thinking that the jobs report for August would tip the Federal Reserve’s hand one way or another regarding its plans for raising its benchmark rate, but a so-so report only muddled the issue. As a result, Wall Street now thinks a hike is unlikely, though not impossible, in September, and that the Fed will probably wait until after the election before acting. On Monday, in contrast, the S&P 500 Financial Index was trading at its highest level since Dec. 17, a day after the Fed raised its rate for the first time in nearly a decade. The major indexes were up on the news on Friday and for the week, but investors seemed more concerned that Hillary Clinton unveiled a drug pricing plan that includes penalties for “unjustified” price increases, hurting the shares of pharmaceutical companies. The yield on the 10-year Treasury rebounded at week’s end to close up at 1.6%.

Going into Friday, it was thought that a robust jobs report might clear the way for a Fed hike when it meets on Sept. 20 and 21, but only 151,000 new jobs were created in August, well below the estimate of 180,000 and July’s outsized 275,000. (The report for the month of August, however, is notorious for being off the mark and is often revised upward.) The unemployment rate remained unchanged at 4.9%. In addition, income was up 2.4% over the past year — solid but down from July’s reading of 2.7% — while the total participation rate was unchanged at 62.8%. All things considered, the market took the news well, perhaps because, as some analysts have noted, we’ve almost achieved full employment in the wake of the recession and the rate of job creation was due to slow down. On Thursday, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said that 75,000 to 150,000 jobs a month was all that was needed “to keep the unemployment rate constant.”

The G-20 summit

In his opening remarks as host of the Group of 20 summit, China’s Premier Xi Jinping said the global economy had arrived at a “critical juncture” and warned against protectionism. He also said, “We should turn the G-20 group into an action team, instead of a talk shop.” On the sidelines, China and the United States agreed to “refrain from competitive devaluations.” Russia’s President Vladimir Putin also met offline with Saudi Arabia’s oil minister Mohammed Bin Salman, and they agreed that working together will help stabilize oil prices. Jean-Claude Juncker, the president of the European Commission, took his Chinese hosts to task, saying China must address its overcapacity. He also took a poke at Great Britain, saying it would have to respect the rules if it wanted to access the eurozone’s common market. The Brexit was, of course, a major topic, and Japan warned Prime Minister Theresa May that its financial institutions might relocate from London once Britain leaves the European Union (EU). The meeting culminated with a communique committing member nations to use all policy measures to achieve sustainable global growth.

China’s new bank

Before the summit, Canada, reversing a previous decision, applied for membership to the Asian Infrastructure Investment Bank, China’s alternative to the World Bank and an institution that the U.S. had worked hard to keep its allies from joining, to no avail. The bank, founded last year, now has 50 member countries, including Germany, France and Great Britain.

Apple and Ireland

The EU ordered Ireland to collect €13 billion ($14.5 billion) from Apple, complaining that the nation and company had colluded on a sweetheart deal to reduce taxes. The Treasury Department said the order jeopardized “the important spirit of economic partnership between the U.S. and the EU.” Tim Cook, Apple’s chief executive officer, said the ruling had “no basis in fact or in law.” Ireland, concerned about losing U.S. business investment, said it would appeal the ruling.

Strike two in Spain and strike three in Brazil

The bid by Spain’s caretaker Prime Minister Mariano Rajoy to form a government was twice rejected by Parliament last week. Spain, which hasn’t been able to form a ruling coalition after elections in December and June, is now expected to hold yet another one in December. As expected, the Brazilian Senate voted 61-to-20 to remove President Dilma Rousseff, saying she has manipulated the budget to hide economic problems.

Manufacturing slows, as do car sales

The Institute for Supply Management’s (ISM) Manufacturing Index fell into contraction in August, dropping to 49.4 from July’s reading of 52.6; the forecast had been for 52. And vehicle sales dipped 4.2% in August from a year earlier, Autodata reported, to 1.51 million as the annualized rate fell to 16.98 million from July’s 17.88 million. In other news, the trade gap narrowed 11.6% to $39.47 billion in July, as exports jumped 1.9%, the biggest gain in more than two years. The National Association of Realtors’ Pending Home Sales Index rose 1.3% in August from July to 111.3, its second highest reading in a decade. Personal income increased 0.4% in July from June, but the Personal Consumption Expenditures Index excluding food and energy, the Fed’s preferred gauge of inflation, was up only 1.6% from last July, well below the Fed’s target of 2%. Factory orders rose 1.9% in July from the month before; orders for durable goods jumped 4.4% (1.3% ex-transportation), while capital goods orders climbed 1.5%. The Conference Board’s Consumer Confidence Index® was 101.1 in August from a revised 96.7 in July, the highest level since September 2015. And for the week ending Aug. 27, first-time jobless claims rose 2,000 to 263,000; the four-week moving average for the week ending Aug. 20 fell 1,000 to 264,000.

A look ahead

The market was closed yesterday and the next four days will offer only a handful of economic updates as the kids head back to school and Wall Streeters go back to work, including the ISM’s Non-Manufacturing Index, the Fed’s Beige Book report, and the latest on consumer credit, job openings and wholesale inventories.