Market Commentary

Financial Markets Commentary For the week of June 19, 2017

Key Market Data

06/09/2017 06/16/2017 One Week Change YTD One Year
S&P 500 Index 2,431.77 2,433.15 +0.06% +9.74% +19.94%
MSCI EAFE Index 1,892.97 1,892.93 -0.01% +14.71% +22.56%
Barclays Capital U.S. Aggregate Bond Index 2,024.12 2,029.48 +0.26% +2.69% +0.83%
10-year Treasury Note Rate 2.201% 2.152% -4.9 basis points -29.3 basis points +54.3 basis points

What a difference four years makes. In mid-2013, the prospect of the Federal Reserve reducing its monthly bond purchases led to a market meltdown that the Fed’s Vice Chairman Stanley Fischer recently referred to as the “taper tantrum.”

In mid-2017, the Fed not only raised its rate for the second time this year – and the third time since December – but also announced that it would begin to sell off some of the $4.5 trillion it holds in mortgage-backed securities and Treasurys. The response from investors? The Dow Jones Industrial Average finished the week at a new high of 21,384.28 on Friday, and both the S&P 500 and the Nasdaq remained within hailing distance of their record closes. It was not an entirely smooth ride for stocks, thanks to the volatile price of oil, which hit a 2017 low before rebounding on Friday, weak retail sales for May and Amazon’s announcement of its acquisition of Whole Foods. In fact, at midweek, investors hedging their bets sent the price on the 10-year Treasury to its lowest point this year.

After raising its rate to a range of 1% to 1.25% and announcing its plans to reduce its portfolio, Chairwoman Janet Yellen said, “Our decision reflects the progress the economy has made and is expected to make.” The Fed is expected to raise its rate again this year. The Fed’s statement noted the strength of the labor market, and Yellen said that she felt inflation had been held back by low prices for cellphone service, a good thing for consumers and a one-time event. As for the portfolio, beginning later this year, the Fed will shed $10 billion a month and then gradually raise the pace $10 billion in three month intervals over 12 months before leveling off at $50 billion a month.

One and done?

Yellen’s term as chair ends in February, and there has been talk that President Donald Trump will replace her – on the campaign trail he said he was “most likely” to do so. The main issue between the two is not, reportedly, policy, but regulation: Yellen has been a vocal supporter of the Dodd Frank Act and its oversight of bank risk, and Trump has been an equally vocal critic. If Yellen is not nominated for a second term, she would be the first one-term chair of the Fed in 40 years, though she could remain on the board until her term expires in 2024.

Amazon to consume Whole Foods

On Friday, Amazon announced that it will find a new use for its warehouses, and perhaps its drones: delivering food. Amazon entered the grocery business in earnest by announcing its plans to purchase Whole Foods and its 460 stores for $13.4 billion (it already runs AmazonFresh, a food delivery service for its estimated 49 million Amazon Prime subscribers, and a handful of grocery stores). The move is seen as a step in the battle for retail supremacy with Walmart, the brick-and-mortar behemoth that has in turn been delving into e-commerce. And Walmart made a move of its own last week by acquiring Bonobos, which sells men’s clothing both online and from stores, for $310 million. On Friday, the stock of Whole Foods jumped 29.1% to a two-year high as investors speculated that another suitor might appear, and Amazon was up 2.4%. Walmart’s stock, in contrast, had its worst day of the year, dropping 4.7%.

Greece avoids default

Looking to avoid a mid-summer meltdown, the European Union (EU) and Greece came to terms on the next round of bailout money, €8.5 billion, €7 billion of which Greece needs to pay its debts in July. As part of the deal, the due dates on some Greek debt were extended and a plan is being developed to link debt payments to growth, though few specifics were revealed. Jeroen Dijsselbloem, the president of the Eurogroup, said the plan would “enable Greece to stand on its own feet again over the course of the next year.” Less upbeat, Greece’s Finance Minister Euclid Tsakalotos, said of the agreement, “Is it as much clarity as the Greek people deserve after all the reforms that have been carried out and all the sacrifices that have been made? Perhaps not. But we recognize that we do not want the perfect to be the enemy of the good.”

Brexit negotiations set to begin

Great Britain and the EU will begin discussions about Britain’s withdrawal from the EU today, with Britain’s Prime Minister Theresa May having seemingly lost some of her bargaining power because of the recent election fiasco which cost her a ruling majority in Parliament. Trying to hold onto her job in the face of a party uprising, May began the week by shuffling some cabinet positions and telling her fellow Conservative Party members, “I got us into this mess, I’m going to get us out of it.”

Retail sales dip

Thanks in part to lower prices at the pump, retail sales were down 0.3% in May from the month before to $473.8 billion, but were up 3.8% from a year earlier. In other news, the Producer Price Index (PPI) was flat in May from the month before and up 2.4% over the past year; core PPI, excluding food and energy, rose 0.3% for the month and 2.1% for the year. The Consumer Price Index (CPI) fell 0.1% in May and was up only 1.9% over the past year; core CPI increased 1% month over month and 1.7% year over year. Industrial production was unchanged in May from April, while manufacturing dipped 0.4%. Capacity utilization inched down to 76.6% from April’s 76.7%. Business inventories declined 0.2% in April from March. Housing starts fell for the third month in a row, down 4.5% in May from April to an annualized rate of 1.092 million. The National Federation of Independent Businesses Optimism Index was 104.5 in May, unchanged from April. The National Association of Home Builders /Wells Fargo Index of builder’s confidence dropped to 67 in June from 69 in May. And first-time jobless claims for the week ending June 10 fell 8,000 to 237,000; the four-week moving average climbed 1,000 to 243,000.

A look ahead

The coming week’s releases will include updates on the current account balance, new and existing home sales, the Conference Board’s Leading Economic Index and Markit’s Manufacturing Purchasing Managers’ Indices.