Market Commentary

Financial Markets Commentary For the week of August 21, 2017

Key Market Data

08/11/2017 08/18/2017 One Week Change YTD One Year
S&P 500 Index 2,441.32 2,425.55 -0.65% +9.76% +13.22%
MSCI EAFE Index 1,916.65 1,916.68 +0.01% +16.59% +15.89%
Barclays Capital U.S. Aggregate Bond Index 2,038.35 2,039.82 +0.07% +3.21% +0.06%
10-year Treasury Note Rate 2.190% 2.195% -0.5 basis points -25.0 basis points -65.9 basis points

Controversy in Washington and terror in Barcelona combine with weak earnings news to pull stocks down for the second week in a row.

However, once again, investors were rattled but far from panicked, and the major indexes, while down for the week, are still well up for the year.

In Washington, much of the drama revolved around President Donald Trump’s response to the events in Charlottesville, which led to a number of business leaders leaving his advisory councils before the president moved to disband two of them to avoid, as he tweeted, “putting pressure on businesspeople.” Then on Friday, Stephen Bannon, the president’s high-profile chief strategist, stepped down from his job, though the Dow actually went up immediately afterwards, as some investors felt that Bannon’s departure might make it easier for President Trump to move his economic agenda forward. The terrorist attacks in Spain on Thursday and some disappointing second-quarter earnings news, in contrast, pulled the indexes down, notably reports from Cisco, Dick’s Sporting Goods and Foot Locker, which tumbled 27.9% on Friday. Even so, with most of the S&P 500 companies having reported, second-quarter earnings have, overall, been strong and are expected to be up by double-digits.

The Fed and inflation

The minutes of the Federal Reserve’s July meeting indicated that most members expect inflation to climb next year to hit the Fed’s target of 2%, but there was no consensus. The Fed has made two rate hikes this year and originally forecast three, but low inflation, which is expected to come in below the target of 2% for the fifth year in a row, may complicate matters. The minutes said that, given the low unemployment rate, the committee “could afford to be patient under current circumstances,” though some members were concerned that the strong labor market might lead to “overshooting” the 2% goal if they waited too long as inflation might spike. At the July meeting, the Fed said it would begin unwinding its portfolio of mortgage-back securities and Treasuries “relatively soon,” and the minutes showed that while “several” committee members were ready to announce a start date, “most” remained cautious (the expectation is that a date will be announced at the Fed’s next meeting in September). The minutes also said, “Uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade and health care, was tending to weigh down firms’ spending and hiring plans.”

NAFTA negotiations begin

Negotiations on restructuring the North American Free Trade Agreement (NAFTA) began last week, with the three principals – the United States, Canada and Mexico – delivering very different messages that indicate how complicated the negotiations may be. U.S. Trade Representative Robert Lighthizer said that NAFTA had “fundamentally failed many, many Americans and needs major improvement.” He also reiterated the president’s concern about inequitable trade deficits. However, Canada’s Minister of Foreign Affairs Chrystia Freeland said, “Canada doesn’t view trade surpluses or deficits as a primary measure of whether trade works.” And Mexico’s Economy Minister Ildefonso Guajardo said his country sees NAFTA as “a strong success for all parties.”

Japan’s GDP surprises

Last week began with some good news for the world’s third largest economy when Japan announced that its gross domestic product (GDP) expanded a better-than-expected 4% on an annualized basis in the second quarter. That added up to six consecutive quarters of growth, the best such run for Japan in 11 years. The result appeared to be a vindication of the stimulus plans put in place by Prime Minister Shinzo Abe and the Bank of Japan, as the gain was the result of spending by consumers and businesses, the former up 3.7% on an annualized basis, the latter almost 10%.

China moves to curb overseas investment as growth slows

In an effort to halt the flight of capital and slow borrowing, China said it would take steps to slow overseas investment, including the creation of a “blacklist,” though there were few details of next steps. This news came during a week in which several reports showed that China’s economy, which outperformed in the first half of the year, may be slowing down, with the latest readings for industrial output, retail sales, fixed-asset investment and retail sales all coming in short of expectation. Even so, the International Monetary Fund (IMF) raised its forecast for China’s GDP growth through 2020 to 6.4% from 6%, though the IMF noted the risk of rising debt.

Retail sales and industrial production rise in July

In other news, retail sales for July came in at $478.9 billion, up 0.6% from the month before and 4.2% from July 2016. Industrial production increased 0.2% in July from June, though manufacturing declined 0.1%. Capacity utilization was unchanged at 76.7%. Business inventories rose 0.5% in June from May. Housing starts fell 4.8% in July from June to an adjusted annual rate of 1,155,000, which was down 5.6% from a year earlier. Building permits declined 4.1% to an annualized rate of 1,223,000 in July from the month before, but were up the same 4.1% from July 2016. The National Association of Home Builders/Wells Fargo Housing Market Index of builder confidence climbed to 68 in August from 64 in July. The Conference Board’s Leading Economic Index was up 0.3% in July from June. The University of Michigan’s preliminary consumer confidence reading for August rose from July’s 93.4 to 97.6, its highest level since January. And first-time jobless claims for the week ending Aug. 12 fell 12,000 to 232,000; the four-week moving average dropped 500 to 240,500.

A look ahead

This week’s list of releases is a short one, highlighted by updates on manufacturing, new and existing home sales, and orders for durable and capital goods.