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Market Commentary, October 9, 2017 For the week of October 9, 2017

Key Market Data

09/29/2017 10/06/2017 One Week Change YTD One Year
S&P 500 Index 2,519.36 2,549.33 +1.19% +15.67% +20.42%
MSCI EAFE Index 1,973.81 1,972.37 -0.07% +20.40% +20.11%
Barclays Capital U.S. Aggregate Bond Index 2,038.46 2,035.35 -0.15% +2.98% +0.45%
10-year Treasury Note Rate 2.334% 2.360% +2.6 basis points -8.5 basis points +62.2 basis points

Propelled by some strong economic reports and renewed confidence in President Donald Trump’s chances to cut taxes, among other pro-business steps, the major stock indexes continued to notch high after high last week (the S&P 500 did it for six days straight) before finally being slowed by Friday’s unemployment report.

Although that report included the first decline in job creation since 2010, it was largely seen as a one-time event caused by the recent hurricanes, and not only were the indexes up for the week, but the Nasdaq hit another high on Friday. However, the market’s record run came against a somber backdrop, as Americans tried to come to terms with the tragic mass shooting in Las Vegas.

The stock market was jump-started on Monday when the Institute for Supply Management (ISM) said its Manufacturing Index climbed to 60.8 in September, its highest reading since 2004 (any reading above 50 indicates growth). On the same day, the government reported that construction spending increased 0.5% in August from the month before to $1.21 trillion, though partly because July’s reading was revised to a 1.2% decrease from the original estimate of -0.6%. Even so, construction spending was up 2.5% from a year earlier. On Thursday, there was still more good news when the Commerce Department said that orders for factory goods were up 1.2% in August, higher than originally estimated, after having plunged 3.3% in July. Orders for nondefense capital goods excluding aircraft, a key proxy for business investment, improved 1.1%, and orders for durable goods advanced 2%. And the ISM’s Non-Manufacturing Index soared to 59.8 in September, its highest level since 2005. These reports came as economists and investors calculated how big a toll Hurricanes Harvey and Irma would take on third-quarter gross domestic product, with estimates ranging as high as six-tenths of a percentage point.

The jobs report

On Friday, stocks were finally slowed when the Labor Department said that the economy lost 33,000 jobs in September. It was the first decline in seven years, the longest such streak on record, according to the Wall Street Journal. The dip was far from unexpected given the impact of Harvey and Irma as 105,000 jobs were lost in restaurants and bars alone. On the plus side, the household jobless rate fell back to 4.2% from 4.3% in August. The difference between the two readings is because the 33,000 reflects workers who were employed but couldn’t get to work because of the hurricanes; the household survey only asks respondents if they had jobs. And, all told, 1.47 million people with jobs couldn’t get to work in September, the second highest total ever recorded. Another positive was the fact that wages were up 2.9% from a year earlier, the best year-over-year reading since 2009. In any event, analysts expect job creation to bounce back as Texas, in particular, rebounds from Harvey. And despite the report, the CME put the chances of a rate hike by the Federal Reserve in December at 92%.

The hurricanes

The hurricanes were also in the news when the White House asked Congress for an additional $29 billion in aid and debt relief; the first round came last month when lawmakers allocated $15 billion in the wake of Hurricane Harvey. After visiting Puerto Rico, President Trump, appearing on Fox News, suggested that its massive debt of $73 billion might be forgiven to help it recover from the hurricanes, but Mick Mulvaney, director of the Office of Management and Budget, pushed back, saying, “I wouldn’t take it word for word with that.” And while Puerto Rico’s debt traded down on the news, the impact of any potential debt relief on investors remains to be seen.

Dodd Frank’s fate

Last week, the administration took two steps towards undoing the Dodd Frank Act, put in place after the Great Recession. First, the Senate approved the nomination of Randal Quarles to become one of the Fed’s governors. Quarles, who has said that he thinks the terms of Dodd Frank are too restrictive, will be the vice chairman of supervision, in charge of the nation’s banks, a position created by former President Barack Obama that had remained unfilled. There will be three other vacancies on the seven-person Board of Governors after Vice Chairman Stanley Fischer steps down later this month, giving the president further opportunities to shape its agenda. Then, the Treasury Department issued a report saying that the Dodd Frank regulations for banks regarding the reporting of executive salaries, the use of derivatives and access to capital, among others, should be revised. “The U.S. has experienced slow economic growth for far too long,” said Treasury Secretary Steven Mnuchin. By scaling back the rules, he added, “We can make the U.S. capital markets a true source of economic growth.”

Around the eurozone

Catalans voted to secede from Spain on Oct. 1, but what happens next remains anyone’s guess. Spain’s King Felipe VI accused the region of “inadmissible disloyalty,” and there was also a general strike in Catalonia to protest the actions of government troops during the referendum when they violently disrupted the voting. Catalonia’s leader, Carles Puigdemont, said he wanted to talk, but did not back off seceding. Later in the week, businesses were given permission to move from Catalonia to other parts of Spain. In Great Britain, with Brexit negotiations impending, there was some unwanted drama after Prime Minister Theresa May had to ward off a coup from her own Conservative Party. The challenge to her leadership came after a disastrous speech during which she was handed a letter of resignation by a prankster and battled a cold that made her remarks all but inaudible. In other news, the trade balance came in at -$42.4 billion in August compared to -$43.6 billion in July. Wholesale inventories rose 0.9% in August from September. Consumer credit slowed to an increase of $13.1 billion in August after a gain of $17.7 billion in July. And first-time jobless claims for the week ending Sept. 30 fell 12,000 to 260,000, while the four-week moving average dipped 9,500 to 268,250.

A look ahead

This week’s releases will include the latest on small business optimism, the Producer and Consumer Price Indexes, consumer sentiment, retail sales and business inventories. In addition, the Fed will release the minutes of its September meeting.