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Financial Markets Commentary For the week of November 19, 2018

Key Market Data

11/09/2018 11/16/2018 One Week Change YTD One Year
S&P 500 Index 2,781.01 2,736.27 -1.61% +4.10% +7.87%
MSCI EAFE Index 1,840.67 1,812.84 -1.51% -8.81% -5.67%
Barclays Capital U.S. Aggregate Bond Index 1,997.14 2,006.44 +0.47% -1.95% -1.59%
10-year Treasury Note Rate 3.183% 3.064% -11.9 basis points +65.8 basis points +68.8 basis points

In a volatile week, the major indexes were down as investors had to make sense of the latest news concerning three ongoing issues: the price of oil, the fate of the Brexit, and the progress – or not – on averting a trade war with China. Not surprisingly, given the uncertainty, the yield on the ten-year Treasury fell every day last week as investors sought the safety of bonds.

The price of oil continues to tumble

The price of oil dropped again last week, and Brent crude joined U.S. crude in bear territory – a decline of 20 percent or more from a recent high. Rising inventories and output along with estimates for reduced demand in 2019 have all contributed to the fall, but so has the fact that the United States agreed to allow eight countries to keep buying oil from Iran despite sanctions, without announcing exactly how much oil is involved. On Monday, as the price of U.S. crude fell for the eleventh day in a row – the longest streak since 1983 – President Trump tweeted, “Hopefully, Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC) will not be cutting oil production. Oil prices should be much lower based on supply!” But by the end of the week, Saudi Arabia was signaling that, partly because of the confusion over how much oil Iran will be allowed to sell, it intended to push for production cuts at OPEC’s next meeting in Vienna on Dec. 6, with the intention of driving Brent back to $80 a barrel.

The latest on the Brexit

With the late March deadline for the Brexit looming, it seemed that progress had been made last week when Prime Minister Theresa May’s cabinet signed off on a 565-page plan that had been endorsed by the European Union (EU); and then the roof fell in. Not only did two of May’s cabinet ministers resign over the plan, but it is not expected to get passed by Parliament, which greeted it with derision despite May’s warning that, “Voting against a deal will take us back to square one.” The main complaint was that there would be a “standstill period” (that could be extended) during which Great Britain would still be closely tied to the EU. As a result, the issue of a second national referendum was again being discussed. Meanwhile, the pound fell against the dollar, shares in British banks were sold off, and investors looked to U.S. Treasurys.

The trade war with China

There were signs of progress in the trade talks with China after it was reported that Treasury Secretary Steven Mnuchin had been speaking with his counterpart Vice Premier Liu He to set the stage for a summit between President Trump and China’s President Xi Jinping at the upcoming Group of 20 meeting in Buenos Aires. At week’s end, however, Trump dismissed the latest list of concessions offered by China as “not acceptable to me, yet,” because some of his key demands were not met. Nonetheless, he did say he was optimistic that an agreement would be worked out, noting, “China wants to make a deal.”

The Fed

Jerome Powell, the Chairman of the Federal Reserve, spoke positively about the state of the economy more than once last week, but also noted headwinds such as the slowdown abroad; and the takeaway was that the Fed was likely to remain on course for one more hike this year, but could slow to two hikes rather than three in 2019. Powell didn’t mention the president’s name when pressed about Trump’s recent criticism of him, but did say, “Our policy is part of the reason the economy is in such a good place now,” adding, “Our accountability is really to Congress.” In addition, two senators, Jeff Coons (D-DE) and Jeff Flake (R-AZ), wrote a letter to the president asking him to stop criticizing the Fed and Powell. They argued that such criticism would hurt the economy and the Fed’s credibility, stating that his “ill-advised commentary” was “unproductive and dangerous.”

Trouble for the “new” Nafta?; the budget deficit

The fate of the recently negotiated United States-Mexico-Canada Trade Agreement (USMCA) is now less certain after the Democrats regained control of the House, and last week Representative Bill Pascrell (D-NJ), who is expected to become the Chairman of the House Ways and Means Committee, said, “Trump made it seem like a done deal, but there is a long, long way to go.” And, as expected, the budget deficit for the first month of the new fiscal year was $100 billion compared to $63 billion in 2017, mainly because of increased spending on Medicare, defense and debt servicing.

Amazon makes its moves

Amazon made it official that it has chosen Long Island City in New York and Crystal City in Virginia for its two new headquarters, but there was an immediate outcry over the billions in incentives granted to the company, despite the fact that it will create 25,000 jobs with an average salary of $150,000 at both locales. In other news, retail sales improved a solid 0.8 percent in October from September (which was revised down) and 4.6 percent from a year earlier. Investors will get an even better read on retail sales after the upcoming “Black Friday” and “Cyber Monday,” traditionally seen as the kickoff of the holiday spending season. The consumer price index was up 0.3 percent in October from September and 2.5 percent for the year. Core Consumer Price Index (Core CPI), excluding food and energy, rose 0.2 percent month over month and 2.1 percent year over year. The Fed said that household debt climbed to $13.51 trillion in the third quarter, up for the seventeenth quarter in a row. Industrial production rose 0.1 percent in October from September and 4.1 percent from a year earlier. Manufacturing advanced for the fifth month in a row, rising 0.3 percent. Business inventories were up 0.3 percent in September from August. And first-time jobless claims for the week ending Nov. 10 rose 2,000 to 216,000; the four-week moving average increased 1,500 to 215,250.

A look ahead

This week there will be updates on housing starts, building permits, existing home sales, the Conference Board’s leading index, and the University of Michigan’s Consumer Sentiment Index.

Happy Thanksgiving from Northwestern Mutual.