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Financial Markets Commentary For the week of September 17, 2018

Key Market Data

09/07/2018 09/14/2018 One Week Change YTD One Year
S&P 500 Index 2,871.68 2,904.98 +1.16% +10.17% +18.67%
MSCI EAFE Index 1,905.44 1,939.01 +1.76% -2.95% +2.22%
Barclays Capital U.S. Aggregate Bond Index 2,017.69 2,015.54 -0.01% -1.51% -1.37%
10-year Treasury Note Rate 2.941% 2.997% +5.8 basis points +59.1 basis points +81.1 basis points

In a week during which the South girded for Hurricane Florence, the three major indexes rose as trade-war talk mostly receded and economic reports were generally upbeat. The positive economic news also helped to push the yield on the ten-year Treasury above 3 percent in intraday trading for the first time since early August, though it finished the week at 2.997 percent.

Last week, investors were heartened when it was announced that American and Chinese negotiators would meet later this month in Washington to discuss trade. However, on Sunday The Wall Street Journal reported that the White House is planning to announce that it’s moving forward with sanctions on another $200 billion of Chinese products either today or tomorrow, putting pressure on the Chinese ahead of the meeting. Based on recent public hearings, the tariffs will reportedly be 10 percent (not 25 percent) but could be upped to 25 percent if the Chinese don’t give ground. And, as the Journal noted, the new tariffs would likely “be met immediately by Chinese retaliation.” Earlier last week, representatives from the United States and the European Union met in Brussels to discuss trade, and while no agreement was reached, Larry Kudlow, the head of the National Economic Council, said, “There’s a lot of things on the board,” adding, “I really like the goodwill.” The two sides will meet again later this month. Discussions between Canada and the United States about the North American Free Trade Agreement continued, and while no announcements were made, President Trump weighed in. Speaking to a group of donors, he said the new name for NAFTA would be USMC, as in the United States, Mexico and Canada, and that he would drop the “C” if Canada doesn’t make concessions soon.

Central banks stand pat – and are worried about the trade war

The Bank of England (BoE) and the European Central Bank (ECB) left their benchmark rates unchanged last week, but they both warned of the impact of trade wars on growth. For instance, the ECB’s President Mario Draghi said, “Besides the effects on prices, tariffs, quotas, volumes traded and so on, what is going to be the effect on confidence of an extended trade war?” The ECB also said it would end its quantitative easing program by the end of this year.

The budget deficit, tax cuts and a problem postponed

The government announced that the August federal deficit almost doubled to $214 billion from a year earlier because of an increase in government spending and a decline in revenue. For the first eleven months of the fiscal year, the deficit was $898 billion, up 33 percent from a year earlier. Further, according to calculations by the Congressional Budget Office, the deficit will reach $1 trillion in 2019, a year earlier than previously estimated. While Democrats are claiming that President Trump’s tax cuts are leading to the higher deficit, the GOP says they’re stimulating growth, and last week the House moved ahead with its plan to make last year’s tax cuts for individuals permanent; unlike the corporate tax cuts, the individual tax cuts are due to expire in 2025. The House will vote on the bill later this month. And members of Congress reached a bipartisan agreement to fund the government until after the midterm elections; funding would have run out at the beginning of the new fiscal year on October 1.

Incomes on the rise once again

The Census Bureau said that median family income, adjusted for inflation, rose 1.8 percent in 2017 to $61,372. It was the third year in a row that income has increased, and poverty has declined to its lowest level since 2006.

Oil in flux

It was a volatile week for oil prices and the shares of energy companies, but prices rose at week’s end – and Brent crude hit $80 in intraday trading for the first time since May. The higher price was driven by reports that U.S. stockpiles were down, global consumption remained robust, and that sanctions on Iran are already taking a toll on that country’s oil exports. However, prices fell back midweek after the International Energy Agency said global output was increasing and that the increase “far outweighed” the losses from sanctions on Iran.

A new face at the Fed

Mary Daly, in charge of research at the Federal Reserve Bank of San Francisco, has been named as the bank’s new president, succeeding John Williams who left to become the head of the New York Federal Reserve Bank earlier this year.

In other news, the government said the number of job openings exceeded the number of job seekers by 650,000 in July with the number of available jobs rising to a record 6.94 million. In addition, a record 3.58 million people voluntarily quit in July. In an indication of how hard it is to find workers, the National Federation of Independent Business (NFIB) said the number of small business owners who had trouble filling positions with qualified workers hit a new high of 38 percent. Even so, the NFIB’s optimism index climbed to 108.8 in August, the highest reading in the index’s forty-five-year history. Retail sales, which jumped a revised 0.7 percent in July, increased only 0.1 percent in August, the weakest showing since January. Industrial production climbed 0.4 percent in August from July, while manufacturing output improved 0.2 percent. Capacity utilization increased to 78.1 percent in August from July’s 77.9 percent. The Producer Price Index (PPI) fell for the first time since February of 2017, down 0.1 percent in August from July; for the year, the PPI was up 2.8 percent. Core PPI, less food and energy, dropped 0.1 percent for the month and rose 2.3 percent for the year. The consumer price index was up 0.2 percent in August and 2.7 percent for the year, while the Core Consumer Price Index (CPI) advanced 0.1 percent and 2.2 percent, respectively. And first-time jobless claims fell 1,000 to 204,000 as the four-week moving average dipped 2,000 to 208,000; both totals were again at their lowest level since 1969.

A look ahead

In a quiet week for economic reports, the updates will include the latest on housing starts, existing home sales and leading indicators.