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Financial Markets Commentary For the week of March 19, 2018

Key Market Data

03/09/2018 03/16/2018 One Week Change YTD One Year
S&P 500 Index 2,786.57 2,752.01 -1.24% +3.37% +17.85%
MSCI EAFE Index 2,040.90 2,043.58 +0.13% +0.15% +17.37%
Barclays Capital U.S. Aggregate Bond Index 2,000.94 2,005.40 +0.22% -2.00% +1.43%
10-year Treasury Note Rate 2.895% 2.845% -5.0 basis points +43.9 basis points +30.4 basis points

Despite rallying on Friday, the major indexes were down last week. And last week politics almost – almost – knocked the economy and the recent debate on tariffs from the front pages.

During the week, President Donald Trump asked Secretary of State Rex Tillerson to step down and nominated CIA Director Mike Pompeo to replace him.

In addition, both the United States and Britain took steps against Russia. The U.S. took action for the “malicious cyberattacks” during the 2016 election and Russian acts against our power and electrical grid. Britain took action for the use of a toxic gas against an ex-Russian spy living in Salisbury. Those actions only seemed to improve President Vladimir Putin’s standing among Russians, as he was re-elected Sunday by an overwhelming margin. President Trump also announced that he chose CNBC’s Larry Kudlow to replace Gary Cohn at the helm of the National Economic Council. Kudlow – a budget aide in the Reagan White House and former chief economist at Bear Stearns – is seen as a conservative, pro-Trump pundit, though he criticized the recently announced tariffs on steel and aluminum.

The tariffs – and more tariffs

On the subject of tariffs, both America’s allies, and U.S. companies, were trying to find ways to be exempt. The government announced that few such exemptions would be parceled out to American businesses, and they would only be issued for reasons of national security. Trump responded to the prospect that European auto manufacturers might retaliate to the tariffs by tweeting, “If they drop the horrific barriers and tariffs on U.S. products going in, we will likewise drop ours,” adding, “If not, we Tax Cars etc. FAIR!” The president is also reportedly preparing a new round of tariffs against China for intellectual property theft, covering at least $30 billion of, as yet unspecified, Chinese exports.

The Fed is set to pull the trigger

The Federal Reserve Bank of New York (the Fed) meets this week and – given the strength of the economy, the low unemployment rate, and what looks like a gradual increase in inflation – is widely expected to raise its benchmark rate for the first time in 2018 (it last did so in December). The CME Group puts the odds of a hike at 94.4 percent. Last week’s report on consumer prices most likely clinched the Fed’s case, as prices, despite lower oil and gas costs, were up 0.2 percent in February after a gain of 0.5 percent in January, and rose 2.2 percent for the year. The Core Producer Price Index (PPI) came in at the same 0.2 percent, and was up 1.8 percent year over year for the third month in a row.

Rolling back Dodd-Frank

A bill easing the Dodd-Frank Wall Street Reform and Consumer Protection Act rules imposed in the wake of the Great Recession was passed by the Senate with bipartisan support. Among other steps, the bill would raise the threshold for financial institutions subject to stress tests from $50 billion to $250 billion, exempting many small- and mid-sized banks. However, the House is expected to push for further rollback, and Representative Jeb Hensarling (R - Texas), chairman of the House Financial Services Committee, said that no one should expect the House to “rubber stamp” the Senate’s proposal.

Oil’s up-and-down week

The price of oil fell early last week as a result of disagreements among Organization of the Petroleum Exporting Countries (OPEC) members – Saudi Arabia wants to get oil to $70 a barrel, while Iran is aiming for $60 to better compete with U.S. drillers. But at week’s end, the price rebounded, partly because it’s believed that Mike Pompeo, Secretary of State nominee, will look to renegotiate or undo America’s deal with Iran regarding that nation’s development of nuclear weapons, possibly leading to the return of sanctions and thus reduced Iranian oil exports.

The tech stock surge

The Nasdaq set a new high last week, and investors have been shifting their money into tech-oriented funds at a near-record clip. According to Thomson Reuters Lipper, $5 billion has been shifted into such funds this year, including $3.9 billion in January, the most in one month since March 2000, at the height of the dot-com bubble.

Broadcom blocked; Toys R Us closing shop

Last Monday, President Trump halted the hostile bid by the Singapore-based Broadcom to acquire chip-maker Qualcomm for $117 billion, citing national security concerns. And Toys R Us, which filed for bankruptcy protection last September, announced that it will be closing its remaining U.S. stores, resulting in the loss of as many as 33,000 jobs. The news took a toll on the share price of toymakers such as Mattel and Hasbro.

In other news, retail sales fell a modest 0.1 percent in February from January, largely because of weak car sales, and were down for the third month in a row for the first time since 2012. Still, sales were up 4 percent over the last year. Industrial production rose 1.1 percent in February from the month before, the biggest gain in four months. Manufacturing was up 1.2 percent, and overall production was up 4.4 percent from a year earlier, the best year-over-year gain since 2011. Housing starts fell 7 percent in February from January to an annualized rate of 1.236 million, while building permits dropped 5.7 percent to an annual rate of 1.298 million.

The University of Michigan’s preliminary Consumer Sentiment Index for March hit a 14-year high of 102.0, up from February’s 99.7. And the National Federation of Independent Business said the optimism of small business owners continues to flirt with record highs, rising to 107.6 in February from January’s reading of 106.9. Lastly, first-time jobless claims for the week ending March 10 fell 4,000 from the week before to 226,000; the four-week moving average decreased 750 to 221,500.

A look ahead

This week’s releases will include updates on existing and new home sales, consumer comfort, and the Conference Board Leading Economic Index, as well as the preliminary readings for orders on durable and capital goods. And, as noted, the Fed meets this week, after which Jerome Powell will hold his first press conference since becoming the Fed’s chairman in February.