Market Commentary

Financial Markets Commentary For the week of February 19, 2018

Key Market Data

02/09/2018 02/16/2018 One Week Change YTD One Year
S&P 500 Index 2,619.55 2,732.22 +4.30% +2.45% +18.71%
MSCI EAFE Index 1,992.31 2,075.67 +4.18% +1.38% +21.78%
Barclays Capital U.S. Aggregate Bond Index 2,007.17 2,002.96 -0.21% -2.12% +1.04%
10-year Treasury Note Rate 2.852% 2.876% +2.4 basis points +47.0 basis points +42.8 basis points

Go figure.

Two weeks ago, stocks had their worst run in years after investors became concerned that rising inflation would lead to higher interest rates. Last week, stocks had their best run in years despite evidence that inflation is indeed on the rise, apparently concluding – as central bankers have said for years – that any such rate increases will be gradual. Despite a late-in-the-day reversal Friday after the government indicted 13 Russians for interfering in the 2016 election, the major indexes soared for the week, making up almost half of what they lost when they fell into correction territory Feb. 8, and moved back into black for 2018. By week’s end, the Dow Jones Industrial Average (the Dow), on a six-day winning streak, and the S&P 500 had both added 4.3 percent, their best showings since 2016 and 2013, respectively, while the Nasdaq surged 5.3 percent, its strongest week since 2011. Meanwhile, despite a slight decline at the end of the week, bond yields continued to climb, with the 10-year Treasury hitting a four-year peak and the two-year rising to its highest level since 2008.

Signs of rising inflation – and higher wages

Reports on inflation have seldom been headliners, but last week investors eagerly waited to see what the government would have to say about the consumer and producer price indexes. As it turned out, both indexes climbed faster than expected in January, but stocks nonetheless rose, perhaps because investors discounted the increases as largely attributable to last month’s higher oil prices, which have since declined. The Core Consumer Price Index (CPI) gained 0.5 percent in January from the month before and 2.1 percent from a year earlier. The CPI less food and energy, rose 0.3 percent, the biggest month-over-month jump since 2005, and increased 1.8 percent for the year. As for the producer price index, it was up 0.4 percent from December and 2.7 percent from January 2017; Producer Price Index (PPI) ex food, energy, and trade rose 0.4 percent for the month and 2.5 percent for the year. One question now is whether the Federal Reserve Bank of New York (the Fed) will raise its rate three times this year, as expected, or four, with the CME Group putting the odds of a rate hike at the Fed’s next meeting in March at 83 percent. At the same time, according to the Fed, in January Americans were more optimistic about wage growth than they had been in years, with consumers expecting earnings to rise 2.73 percent in 2018, slightly ahead of the expected rate of inflation and the highest such reading since data collection began in 2013.

Trade tactics

During his campaign, candidate Donald Trump said that once in office he would protect American-made goods from unfair foreign competition, and last week the Commerce Department, by linking imported steel and aluminum to national security, gave him an opening to do so. On Friday Wilbur Ross, the commerce secretary, said, “Imports threaten to impair our national security,” because of the use of steel and aluminum by the defense industry, and he presented the president with a range of recommendations for quotas or higher tariffs. The president has until April to decide to act, or not, but both China and the European Union have already said they will retaliate against higher tariffs.

Oil and OPEC

After a strong six-month run, the price of a barrel of oil has fallen recently, mainly because of record production from the United States. Last week, the Organization of the Petroleum Exporting Countries (OPEC) raised its 2018 forecast for output from non-member countries by 1.4 million barrels a day – with the United States accounting for 1.3 million barrels – but also maintained that higher demand would offset that increase. Later in the week, Khalid Al-Falih, Saudi Arabia’s energy minister, said that his country was going to maintain its production cuts through the end of the year, adding, “And if we have to overbalance the market a little bit, then so be it.”

Debt and net worth on the rise

U.S. household debt rose $193 billion to $13.15 trillion in the fourth quarter, closing the year up for the fifth year in a row, the Fed reported. Unadjusted for inflation, it was a new record. As a share of total economic output, debt was at 67 percent, well below the high of 87 percent hit in 2009. At the same time that debt rose, so did household net worth, with an earlier report by the Fed showing that it climbed $1.742 trillion to $96.939 trillion in the third quarter of 2017.

A slowdown in stimulus for the ECB?

Investors are waiting to see when the European Central Bank (ECB) will follow the Fed by paring its monthly stimulus spending and gradually raising its benchmark rate. Last week, Eurostat reported that for the fourth quarter the eurozone’s GDP was up 0.6 percent from the previous three months, perhaps setting the stage for the ECB to act later this year.

In other news, the index of small business optimism (National Federation of Independent Business Index), rose to 106.9 in January from 104.9 the month before, one of the highest readings in the index’s 45-year history, with the record of 108.0 having been reached in 1983. Builder confidence remained unchanged but high at 72 in January, as measured by the National Association of Home Builders/Wells Fargo Housing Market Index. The University of Michigan said its consumer sentiment index surged to 99.9 in February, its second highest level since 2004 and well up from January’s final reading of 95.7. After rising for four months in a row, industrial production slipped 0.1 percent in January from December, while manufacturing production was unchanged. Capacity utilization fell to 77.5 percent from 77.7 percent. The government said that new home construction jumped 9.7 percent in January from the month before to an annualized rate of 1.33 million and was up 9.4 percent year over year. Building permits rose 7.4 percent to 1.39 million. And first-time jobless claims for the week ending Feb. 10 increased 7,000 to 230,000, while the four-week moving average gained 3,500 to 228,500.

A look ahead

In a holiday shortened week, the short list of releases includes the latest on Markit Group Limited’s manufacturing index, existing home sales, consumer comfort, and the index of leading economic indicators (Conference Board Leading Economic Index). The Fed will also release the minutes of its meeting on Jan. 30 and 31, at which it left its benchmark rate unchanged.