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Financial Markets Commentary For the week of April 23, 2018

Key Market Data

04/13/2018 04/20/2018 One Week Change YTD One Year
S&P 500 Index 2,656.30 2,670.14 +0.52% +0.44% +15.58%
MSCI EAFE Index 2,042.41 2,050.72 +0.41% +1.09% +18.65%
Barclays Capital U.S. Aggregate Bond Index 2,011.83 1,999.33 -0.62% -2.30% -0.54%
10-year Treasury Note Rate 2.828% 2.961% +13.3 basis points +55.5 basis points +72.8 basis points

By recent standards, last week was relatively quiet for the stock market. With talk of a trade war largely muted, the indexes were mostly moved by first-quarter earnings reports. By week’s end, all three indexes were modestly up. However, as expectations of rising inflation increased, so did the yield on the two- and 10-year U.S. Treasury Note Rate – both of which hit multi-year highs, with the latter closing in on 3 percent.

Oil continues to climb

The price of oil continued its recent rebound after representatives from the Organization of the Petroleum Exporting Countries (OPEC) and Russia met in Saudi Arabia. Those representatives said they expected to maintain their production cuts through this year and possibly into 2019. Starting last year, OPEC and non-OPEC members reduced production by about 2 percent of global output, around 1.9 million barrels a day. Saudi Arabia Energy Minister Khalid al-Falih said the cuts would not last “indefinitely” but noted that “It’s not mission accomplished.” President Donald Trump responded by tweeting, “Looks like OPEC is at it again,” and “No good and will not be accepted."

Trade salvos and skirmishes

Although there was no major noise from the United States or China on the trade war front, there was some maneuvering. For instance, China continued to delay approval of Qualcomm’s $45 billion acquisition of the Dutch company NXP Semiconductors. China is the only country that hasn’t signed off on the acquisition and its regulators said the deal had issues that “were hard to resolve.”

The Commerce Department took action against China’s second largest manufacturer of telecommunications equipment, banning ZTE Corporation from selling parts to American companies for seven years because it violated sanctions to sell equipment to North Korea and Iran. ZTE, which says that the ban will hurt American companies, has been granted the right to provide additional information in its defense. On the plus side, China said that over the next five years it will loosen the rules governing foreign car and aerospace manufacturers, essentially allowing them to conduct business without having to partner with a Chinese firm.

No go for Abe

President Trump met with Japanese Prime Minister Shinzo Abe in Florida to discuss trade and other topics. Japan remained one of the United States’ few allies still subject to the recent tariffs on steel and aluminum. The European Union is also putting together a deal so it can be exempt from the tariffs. No progress was made on that front, and President Trump also backed away from his recent comments about the U.S. being part of the Trans-Pacific Partnership, noting that though Abe wanted the U.S. to join, “I don’t like the deal for the United States.”

The IMF: good news about growth, with a caveat

In its semiannual report, the International Monetary Fund (IMF) said business investment and trade were boosting global growth – which it forecast at 3.9 percent this year compared to 3.8 percent in 2017, the best showing since 2011. In addition, it raised its forecast for U.S. gross domestic product (GDP) to 2.9 percent this year and 2.7 percent in 2019. The IMF also warned of the possible negative impact of a trade war.

A vice chairman for the Fed

President Trump nominated Richard Clarida as the Federal Reserve Bank of New York vice chairman, a position that has been open since last October when Stanley Fischer stepped down before the end of his term. Clarida, an economist at Columbia University and the managing director at Pacific Investment Management, worked in the Treasury Department under former President George W. Bush.

Wells Fargo’s fine

Wells Fargo agreed to pay U.S. regulators $1 billion. This is because of Wells Fargo’s failure to avoid and address such issues as creating credit card accounts for consumers without their permission along with car insurance policies they didn’t need. In February, the Fed barred the bank from increasing its assets due to what it described as “widespread consumer abuses.”

Taxes and tax cuts

The Internal Revenue Service (IRS) had to extend the date for filing tax returns after a website glitch told electronic filers to try again in the year 9999.

As returns were being filed, the latest Wall Street Journal / NBC News poll showed that Americans were lukewarm about the tax cut bill: 27 percent of respondents said it was a “good idea,” while 36 percent thought it wasn’t. The poll also showed that Americans see the GOP as the better bet when handling taxes and trade, and the Democrats as better suited to handle social issues.

In other news, retail sales were up 0.6 percent in March from the month before after three straight months of decline, partly because of stronger auto sales. Industrial output rose 0.5 percent in March from February and advanced at an annual rate of 4.5 percent for the first quarter. Manufacturing production edged up 0.1 percent, while capacity utilization hit 78 percent, its highest level in three years. Housing starts increased 1.9 percent in March from February to an annualized rate of 1,319,000 – 10.9 percent higher than in March 2017. Building permits climbed 2.5 percent in March to an annualized 1,354,000 – a gain of 7.5 percent from a year earlier.

The Conference Board Leading Economic Index improved 0.3 percent in March to 109, and its six-month annualized rate is up a robust 8.8 percent. The Fed’s Beige Book report on its 12 districts indicated that businesses remained positive about economic growth, though there were concerns about labor shortages in skilled positions and the impact of tariffs. First-time jobless claims for the week ending April 14 fell 1,000 to 232,000; the four-week moving average rose 1,250 to 231,250.

A look ahead

In addition to more earnings news, this week will feature updates on new and existing home sales, the S&P CoreLogic Case-Shiller Home Price Index, the Conference Board Consumer Confidence Index, retail and wholesale inventories, and orders for durable and capital goods. The government will also release its advance estimate for first-quarter GDP, forecast to come in at 2 percent after a reading of 2.9 percent for the fourth quarter of last year.