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Financial Markets Commentary For the week of May 14, 2018

Key Market Data

05/04/2018 05/11/2018 One Week Change YTD One Year
S&P 500 Index 2,663.42 2,727.72 +2.41% +2.72% +16.15%
MSCI EAFE Index 2,031.20 2,059.94 +1.41% +2.07% +14.51%
Barclays Capital U.S. Aggregate Bond Index 1,999.85 1,999.69 -0.01% -2.28% -0.01%
10-year Treasury Note Rate 2.951% 2.971% +2.0 basis points +56.5 basis points +58.3 basis points

The end of the Iran deal, signs of moderating inflation and a federal plan for drug prices that brought a sigh of relief to drug and health care companies helped drive the Dow Jones Industrial Average and S&P 500 Index to their best week since March 2018. Up 2.4 percent and 2.3 percent, respectively, both are now back in the black for 2018. Additionally, for the first time in 2018, the Dow has risen for seven sessions straight. And though tech stocks dipped Friday, they were up for the week as the Nasdaq continued its recent rebound and added 2.7 percent. The yield on the 10-year Treasury Note Rate, meanwhile, briefly inched above 3 percent last week, before falling back after the government report on inflation.

Trump scuttles the Iran deal

Tuesday, President Donald Trump pulled out of the 2015 agreement with Iran to curb its nuclear weapons development program, a deal he had derided since early in his presidential campaign. As a result, what the president called “the highest level of economic sanctions” will be re-imposed on Iran, the world’s fifth largest oil producer, and will remove from the market anywhere from 300,000 to one million barrels of oil a day.

The Organization of the Petroleum Exporting Countries (OPEC) and Russia will meet next month. They will discuss continuing the production cuts that have helped push the price of Brent crude back over $70 a barrel (a three-year high even before Trump’s announcement), and Saudi Arabia is said to want to keep the cuts in place until oil hits $80 a barrel. All of this means the shares of energy companies are on the rise – and Americans can expect to pay more at the pump this summer as U.S. crude closed above the $70 a barrel mark last week.

Inflation moderates

Earlier this year, the stock market swooned when the fear of rising inflation led some investors to believe that the Federal Reserve Bank of New York would raise its benchmark rate four times this year (rather than three). Last week, however, weaker numbers for the Consumer Price Index (CPI) eased those fears, helping to spur the market’s rally. The government reported that consumer prices rose 0.2 percent in April from March and 2.5 percent over the past year. Core CPI, which excludes food and energy, increased 0.1 percent month over month and 2.1 percent over the past year, less than expected but still matching March’s 13-month high. More important, CPI is only up 1.8 percent over the past three months compared to the 3.1 percent increase from December through February. The Producer Price Index (PPI) was up 0.1 percent in April from March and 2.6 percent year over year (down from 3 percent in March). Core PPI climbed 0.2 percent reaching 2.3 percent (down from 2.7 percent in March).

Powell promises transparency

Speaking of rate cuts, Fed Chairman Jerome Powell appeared at a policy conference in Zurich. He said the Fed would work to communicate its interest rate strategy “as clearly and transparently as possible to help align expectations and avoid market disruptions.”

Drug pricing

As a candidate, Trump said he’d take action to lower prescription drug prices, but the plan he unveiled Friday was, as The Wall Street Journal described it, “a raft of modest moves” that are unlikely to have a major impact on the profits of drug and health care companies. While running for office, Trump had suggested many strategies that were not mentioned Friday, including having the federal government negotiate directly with drug companies to get lower prices for drugs purchased through Medicare.

Jobs openings hit a new high

The United States Department of Labor said there was a record 6.55 million job openings at the end of March, which means there were almost enough job openings for all of the 6.59 million Americans looking for work. Over the past year, the number of people looking for jobs fell by 600,000, and the number of jobs rose by 1 million. In addition, the number of quits – an indication of confidence in the economy as people are willing to leave one job for another – increased to 2.3 percent, the highest level since the recession began.

A record surplus

The government reported its largest monthly budget surplus on record in April due to stronger economic activity over the past year. Receipts in April totaled $510 billion – about 12 percent more than the same period last year – while outlays increased by 8.4 percent to $296 billion. This adds up to a surplus of $214 billion, the highest on record dating back to 1968.

A first for the eurozone, and the BOE stands pat for now

For the first time since the Economic and Monetary Union was created in 1999, all of the countries that use the euro are expected to meet the bloc’s annual deficit target of less than 3 percent of gross domestic product (GDP) this year. In fact, eight members are projected to have budget surpluses in 2018.

The Bank of England (BOE) left its interest rate unchanged last week but indicated that it expected to raise its rate later this year, seeing the recent economic slowdown as temporary. BOE Governor Mark Carney said, “We think momentum in the economy is going to reassert,” adding that, if he’s right, “some modest adjustment of interest rates will be justified.”

In other news, the National Federation of Independent Business (NFIB) Index of small business optimism hit a very solid 104.8 in April. The preliminary University of Michigan Consumer Sentiment Index reading for May was 98.8, unchanged from April and remaining near a multi-year high. And for the trading week ended May 4, first-time jobless claims were unchanged from the week before at 211,000 and the four-week moving average fell 5,500 to 221,500, the lowest level since 1969.

A look ahead

This week’s releases will include the latest on retail sales, business inventories, housing starts, industrial production, consumer confidence and leading economic indicators. In addition, China’s Vice Premier Liu He – Chinese President Xi Jinping’s top economic adviser – is coming to Washington this week to discuss trade.