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Financial Markets Commentary For the week of April 30, 2018

Key Market Data

04/20/2018 04/27/2018 One Week Change YTD One Year
S&P 500 Index 2,670.14 2,669.91 -0.01% +0.44% +13.97%
MSCI EAFE Index 2,050.72 2,042.83 -0.38% +0.88% +14.90%
Barclays Capital U.S. Aggregate Bond Index 1,999.33 1,999.46 +0.01% -2.29% -0.33%
10-year Treasury Note Rate 2.961% 2.958% -0.3 basis points +55.2 basis points +66.3 basis points

The major indexes, driven by first-quarter earnings reports, zigged and zagged last week before ending up almost right where they started – the S&P 500 fell less than one point for the week. Investors were more focused on the fact that the yield on the 10-year Treasury Note Rate closed above 3 percent Wednesday for the first time since Dec. 31, 2013, though there was little agreement as to what that meant for stocks in the long and short term.

Some investors and analysts see the rise in the yield on the 10-year as a welcome sign of economic strength, while others see it as an early warning that higher inflation and interest rates will take a bite out of growth. In either case, the yield retreated Thursday and Friday – and the debate will go on.

Q1 GDP

Released Friday, the government’s advance estimate for first-quarter gross domestic product (GDP) came in at 2.3 percent, down from 2.9 percent in the fourth quarter. As was the case with the yield on the 10-year, no one seemed to agree on what it meant. Some pointed out that first quarters have been weak for years and 2.3 percent was the best such reading since 2015.

In addition, nonresidential business investment, perhaps propelled by the recent tax cuts, was up a healthy 6.1 percent. And though consumer spending tumbled from 4 percent in the fourth quarter to 1.1 percent in the first – the slowest pace in almost five years – that was hardly a shock, as there’s almost always a falloff after the holiday season. The second estimate will be released May 30.

The latest on the trade wars

A team of United States negotiators will be heading to China in May to discuss trade and tariffs. The contingent will include Treasury Secretary Steven Mnuchin and Director of the National Economic Council Larry Kudlow as well as U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro. The first two are seen as likely to be conciliatory, while the latter pair of delegates are the hardliners who are the architects of the recently announced trade policies. President Donald Trump said, “I think we’ve got a very good chance of making a deal,” and also described Chinese President Xi Jinping as “a friend of mine.”

Earnings news

With just more than half of the S&P 500 companies having reported first-quarter earnings, they’ve risen 24.93 percent from a year earlier. If this continues, it would be the best finish since the third quarter of 2010. Last week, Amazon, Facebook, Boeing, Microsoft, Alphabet and Caterpillar all reported strong quarters – though the shares of the last two fell because Alphabet posted higher operating expenses and Caterpillar said its earnings had hit the “high-water mark” for 2018.

The ECB and the BOJ stand pat

The European Central Bank (ECB) left its policies unchanged last week. ECB President Mario Draghi indicated that the board was waiting to get a clear read on the region’s economy before taking any action, saying the recent slowdown could be “the beginning of a decline or simply a normalization following a period of very strong growth.”

The Bank of Japan (BOJ) also left its policies unchanged, including its negative short-term deposit rate, but it dropped any mention of reaching 2 percent inflation. The target date for 2 percent inflation had changed six times over the past five years, most recently having been pushed to 2020.

Macron and Merkel

President Trump received French President Emmanuel Macron and German Chancellor Angela Merkel last week. Both came to persuade him to stay in the nuclear arms deal with Iran and to lobby for exemption from the recent tariffs on steel and aluminum. Both seemed to have gone home empty-handed.

Third time’s the charm for T-Mobile and Sprint?

After failed attempts in 2014 and 2017, T-Mobile and Sprint – the nation’s third- and fourth-largest wireless providers – will try again. Sunday, the two companies announced a merger so they can better compete with AT&T and Verizon. The deal is likely to draw federal scrutiny, which is what undid the proposed merger back in 2014.

In other news, sales of previously owned homes rose 1.1 percent in March to an annualized rate of 5.6 million, but were down 1.2 percent from a year earlier. New home sales were up 4 percent in March to 694,000. The S&P CoreLogic Case-Shiller Home Price Index climbed 6.3 percent in February year over year. The preliminary report for durable goods orders for March increased 2.6 percent from the month before, while orders for nondefense capital goods excluding aircraft fell 0.1 percent. The advance trade balance for March was -$68 billion compared to -$75.9 billion in February. Retail inventories were off 0.4 percent in March from the month before, while the preliminary reading for wholesale inventories rose 0.5 percent.

The Conference Board Consumer Confidence Index added 1.7 points to 128.7 in April, while the University of Michigan Consumer Sentiment Index declined 2.6 points to 98.8 but remained near its multi-year high. First-time jobless claims for the week ending April 20 fell 24,000 to 209,000 – the lowest level since 1969 – and the four-week moving average dropped 2,250 to 229,250.

A look ahead

In addition to more earnings news, this week will feature a long list of economic updates, including the latest on the Personal Consumption Expenditures Price Index, pending home sales, construction spending, vehicle sales, the Institute for Supply Management Manufacturing Index and Non-Manufacturing Index, nonfarm productivity, the trade balance, the Consumer Comfort Index and the final figures for orders for durable, factory and capital goods.

In addition, the Federal Reserve Bank of New York will meet Tuesday and Wednesday, though it’s not expected to raise its benchmark rate as it did in March. And Friday, the U.S. Department of Labor will release the jobs report for April, with the unemployment rate forecast to dip by 0.1 percent to 4 percent.