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Financial Markets Commentary For the week of April 09, 2018

Key Market Data

03/30/2018 04/06/2018 One Week Change YTD One Year
S&P 500 Index 2,640.87 2,604.47 -1.38% -2.10% +12.62%
MSCI EAFE Index 2,005.67 2,013.31 +0.38% -0.92% +16.66%
Barclays Capital U.S. Aggregate Bond Index 2,016.48 2,015.39 -0.05% -1.51% +0.83%
10-year Treasury Note Rate 2.740% 2.774% +3.4 basis points +36.8 basis points +43.2 basis points

So far, the much-hyped trade war has been more about words than actions, with American and Chinese officials exchanging threat for threat. However, last week those words were enough to send stocks on a dizzying run of ups and downs.

The Dow Jones Industrial Average, for example – though only off 0.7 percent for the week – rose or fell at least 200 points every day, capped by a 572-point plummet Friday. The S&P 500 and the Nasdaq fell further: 1.4 percent and 2.1 percent, respectively. But the fact remains that, as of now, no one knows for sure whether any of the new and more consequential tariffs announced will be fully implemented, or whether they are simply negotiating ploys as the world’s two largest economies stand toe-to-toe.

Some tariffs are already in place, such as those on steel and aluminum, though most of America’s key allies have been exempted. Last week, the Chinese made their first counter-move, imposing tariffs on $3 billion in United States exports, including pork, fruit and recycled steel. Soon after, the Trump administration offered the details of its previously announced $50 billion in tariffs, enumerating 1,300 Chinese exports that would be targeted – including flat screen TVs, aircraft parts, medicines, clothes and dishwashers. China then retaliated with a $50 billion plan of its own, including charges on key U.S. exports such as soybeans and airplanes. None of these tariffs, however, will take effect until May at the earliest. As China’s Vice Finance Minister Zhu Guangyao noted, “Both sides have put their lists on the table. Now it’s time for negotiations.”

As the week came to a close, President Donald Trump ordered his trade representative to come up with another $100 billion worth of goods that could be taxed in response to what he called China’s “unfair retaliation,” and the Chinese made it clear that they were ready to respond, “forcefully and without hesitation,” as China’s Ministry of Commerce Spokesman Gao Feng put it. The heated game of chicken was further complicated by American officials including President Trump’s Chief Economic Advisor Larry Kudlow who tried to calm investors by saying, “There are all kinds of back-channel discussions going on,” though Feng said the two sides weren’t talking at all. President Trump responded to the stock market’s decline by saying, “I’m not saying there won’t be a little pain…But we’re going to have a much stronger country when we’re finished.” On Sunday, as administration officials moderated their tone, President Trump tweeted of the relationship between the U.S. and China saying, “Great future for both countries!”

The jobs report

Investors had another reason to be disappointed Friday after a so-so jobs report. Only 103,000 new jobs were added to the economy in March, well below the forecast of 173,000. However, the jobless rate remained at 4.1 percent, its lowest level since 2000. And the average number of jobs created over the first three months of 2018 is 202,000 – ahead of last year’s average pace of 182,000 – with March’s low number perhaps the result of the nor’easters that clobbered the east coast last month. The increase in average annual wages in March was also up from the month before, coming in at 2.7 percent compared to February’s 2.6 percent.

Powell and Williams

Federal Reserve Chairman Jerome Powell delivered his first speech as chairman last week, saying that the Federal Reserve Bank of New York (the Fed) would stay the course as it worked to keep the jobless rate low and ease inflation toward 2 percent. After his speech, Powell fielded questions about the trade war, saying it was “too early to say” what impact it might have on the economy. The Fed also made it official last week that John Williams, current president of the Federal Reserve Bank of San Francisco, would be named to replace current Fed President William Dudley. Williams, endorsed by former Chairwoman Janet Yellen, is expected to follow Powell’s lead on policy based on their almost identical voting records over the past few years on everything from rate hikes to bank regulation.

Tech’s week; Spotify’s IPO; Musk plays April Fool

It was another rough week for tech stocks. On Monday alone, for instance, the so-called “FAANG” stocks – Facebook, Apple, Amazon, Netflix and Google (as in its parent company Alphabet) – shed $78.7 billion in market value. And the president continued to target Amazon, leading U.S. Chamber of Commerce Executive Vice President Neil Bradley to say (without naming names), “It’s inappropriate for government officials to use their position to attack an American company.” Spotify’s initial public offering (IPO) generated $26.5 billion in market value, but it was unusual in that the company listed its stock directly, not raising capital but, instead, allowing investors to exchange already existing shares if they so choose, while saving millions in IPO fees. And Tesla’s founder Elon Musk made an April Fool’s Day joke about his company going bankrupt that did not sit well with stockholders – shares of Tesla fell 7.7 percent Monday.

In other news, the Institute for Supply Management (ISM) Manufacturing Index dipped to 59.3 percent in March from February’s 60.8 percent. The ISM’s Non-Manufacturing Index also fell to 58.8 percent from 59.5 percent; both indexes remained within range of recent multi-year highs. In the midst of last week’s trade talk, the trade gap for February came in at $57.6 billion, its highest level since October 2008, though the deficit with China was down to $29.3 billion from $36 billion.

Construction spending decreased 0.1 percent in March from the month before. Autodata’s preliminary estimate for vehicle sales in March was 17.48 million, up 3 percent from February and 4.5 percent from a year earlier. Factory orders rose 1.2 percent in February from the month before, while orders ex-transportation increased 0.1 percent. Durable goods orders climbed 3 percent, orders ex-transportation rose 1 percent, and orders for nondefense capital goods excluding aircraft added 1.4 percent.

First-time jobless claims for the week ending March 31 jumped 24,000 to 242,000; the four-week moving average was up 3,000 to 228,250. And consumer prices in the eurozone increased 1.4 percent in March from a year earlier after four months of declines, while the region’s jobless rate in February fell to 8.5 percent, its lowest level since December 2008.

A look ahead

This week’s releases will include the latest on small business optimism, the Producer Price Index, the Consumer Price Index, wholesale inventories and the Consumer Confidence Index. Additionally, we await the minutes of the Fed’s most recent meeting in mid-March, at which the Fed raised its benchmark rate for the first time since December of last year.