Weekly Economic Review Feb. 12, 2017
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“Significantly reducing capital requirements would reduce the safety of the system and we certainly hope it’s not going to happen.”
Stanley Fischer Federal Reserve Vice Chairman
US Treasury Yield Curve 3 2.5 2 1.5 1 0.5 0 1 mo
3 mo
6 mo
Yield
1 yr Yesterday
2 yr
3 yr Last Week
5 yr
10 yr
30 yr
Last Month
1m Oct-05 Oct-09
0 0.01
3m 6m 0.01 0.06 0.01 0.07
1y 0.26 0.28
2y 0.61 0.65
3y 0.89 0.96
5y 10y 30y 1.35 2.07 2.9 1.41 2.12 2.94
Market Overview
The three major indexes ended in record territory this week, largely due to the U.S. President Donald Trump stating on Thursday, in a meeting with airline executives, he would release a “phenomenal tax plan” in the upcoming weeks and the plan was moving “ahead of schedule”. Trump promised the executives he will stimulate economic growth through deregulation, infrastructure spending and tax cuts. Specifically, The Dow Jones Industrial Average closed at 20269.37, up 1.22% this week, a 243.76pts increase. The NASDAQ closed at 5,734.13, up 1.36% this week, a 77.18pts increase. The S&P 500 rose .95 percent to 2316.10, a 21.82pts increase. In particular the S&P 500 Financials sector rose 1 pt. to 394.13, with high growth Thursday due to President Trump’s announcement and Daniel Tarullo, a member of the Board of Governors on the Federal Reserve, writing to President Trump Friday of his plan to resign “on or about” April 5th. Tarullo was a strong advocate for imposing safeguards on big banks and nonbanks to protect against another financial crisis. His resignation gives the President more freedom to accelerate his deregulatory agenda. In other parts of the world, the global markets have been rising. Japan’s Nikkei Stock Average rose from 18976.71 Monday to 19483.38 to close out the week. Australia’s S&P/ASX 20 rose from 3276 Monday to 3348 on Friday. Also, Hong Kong’s Hang Seng Index rose by 1.5% during the week. These increases were seen partly due to President Trump stating that the “United States of America stands behind Japan, its great ally, 100%” as well as affirming he would abide by the “One China” Policy.
Macroeconomic Overview
This week saw strong performance from US indices and the markets as President Trump offers confidence in his economic plan in the face of uncertainty. Around the world, there are multiple elections that could play a big role in the volatility of world markets. In Germany, former Foreign Minister Frank-Walter Steinmeier was elected president this past Sunday. His election was expected but the re-election of German Chancellor Angela Merkel in September is much less certain. In France, the possibility of France to pull out of the euro with the possible election of Marine Le Pen has had a complex reaction by French markets. While yield on 10-year French government bonds rose to 1.04%, up from .835% on January 1st, 2017, the CAC-40 stock index is up 1.7% this month. This is better than the 1.2% gain in the Euro Stoxx 50 index. Also, the yield on 10-year Greek government dropped from 7.802% to 7.389% Friday, due to progress in bailout negotiations between Greece’s international creditors and the country’s finance minister. The Jobs Opening and Labor Turnover Survey (JOLTS) was released last week (1/7) for the month of December. The report tracks monthly changes in job openings and offer rates on hiring and quits. The month of December showed that the demand for labor remains strong, indicating a healthy labor market. Looking ahead to the domestic economic calendar this week, Federal Reserve Chair Janet Yellen will give her semiannual monetary policy testimony this Thursday at 10 am. She will shed light on Banking, Housing, and Urban Affairs. Regarding the federal funds rate, based on a survey conducted by the Wall Street Journal, nearly 60% of business and academic economists expect the Fed to raise the federal-funds rate at its June 13-14 policy meeting. The survey was of 62 economist. Also, this Wednesday, the Consumer Price Index for January, 2017 will be released, an indicator of the rate of inflation in the United States. Forecasters see the monthly rate rising by a tangible 0.3 percent.
Fixed Income Overview
The treasury bond yields did not follow the same pattern of growth as the high performance of the equities market. The United States 10 Year Treasury Note yields declined this past week, closing at 2.496% the previous Friday compared 2.409% at the end of this week. Before Trump’s remarks to airline executives on Thursday, the yield had hit its largest three-day decline since June due to the slow pace of policy-making in Washington as well as concerns of the political situation in France, as Marine Le Pen has a strong shot of making it to the second round of voting in the French presidential election. She threatens to pull out France from the Eurozone, potentially disrupting financial markets worldwide. The price of crude oil increased this week from $53.00 to $53.86 a barrel due to OPEC following through on promises to cut oil production. Also, according to the latest forecast by the U.S. Energy Information Administration (EIA), U.S. crude oil production will rise to 9 million barrels a day this year, with another 500,000 barrel-a-day increase in 2018. Gold prices remained relatively constant this week. Currently, the price is 1232 dollars per ounce, down 0.34% from the beginning of the week. The drop in prices was largely due to President Trumps comments Thursday to cut taxes for businesses, as investors are moving away from non yielding safe haven assets.
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Industry Focus: Luxury Goods Over the past few years, notable brands like Louis Vuitton and its rivals invested large amounts of capital on opening flashy stores in the world’s most expensive streets. However, the general consumer trend has been shifting to selling products directly to the customer from opulent city stores. This helps the companies maintain control over wholesale and licensing businesses. Demand from China and other emerging economies has been increasing ever since the 2008 financial crisis.
With retail centers already in place, industry executives are shying away from their usual extravagant store openings, increasing corporate cash stocks. Analysts predict that the three luxury brand giants LVMH (Louis Vuitton), Kering (which owns Gucci), and Swiss watch giant (Richemont) are planning on either an increase in mergers and acquisitions or paying off debt. If neither of the above occurs, an increase in dividends paid to shareholders is the most likely outcome.
Transaction Highlights
Ford Invests $1bln into Argo AI On Friday, Ford announced its plans to invest $1bln in the next five years into Argo AI, a startup that focuses on autonomous vehicle technology. Argo AI will make technology for Ford exclusively during the duration and then plans to license its technology to others in the future. Ford wants to not only position itself as an established automobile company but also a provider of “mobility services�. Traditional car-making requires billions of dollars in investments with 8% returns compared to 20% returns from mobility services. Several months before, Ford acquired another small companie that ferried passengers around San Francisco. Judge blocks Anthem-Cigna Merger On Wednesday, Judge Amy Berman Jackson blocked a $48bln merger between Anthem and Cigna claiming that it would harm consumers. The argument was that it would raise prices and enable anticompetitive effects. The proposed merger between the two companies have been contentious as both firms accused each of other breaching their agreement. The merger is the industry’s response to the ACA as insurance companies are evolving their negotiations strategies with hospital systems.
Data & Indicators
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Time (ET) Statistic 8:30 AM PPI 8:30 AM Core PPI 7:00 AM MBA Mortgage Applications Index 8:30 AM Core CPI 8:30 AM CPI 8:30 AM Empire Manufacturing 8:30 AM Retail Sales 8:30 AM Retail Sales ex-auto 9:15 AM Capacity Utilization 9:15 AM Industrial Production 10:00 AM Business Inventories 10:00 AM NAHB Housing Market Index 10:30 AM Crude Inventories 4:00 PM Net Long-Term TIC Flows 8:30 AM Housing Starts 8:30 AM Building Permits 8:30 AM Initial Claims 8:30 AM Continuing Claims 8:30 AM Philadelphia Fed 10:30 AM Natural Gas Inventories 10:00 AM Leading Indicators
For Jan Jan 11-Feb Jan Jan Feb Jan Jan Jan Jan Dec Feb 11-Feb Dec Jan Jan 11-Feb 11-Feb Feb 11-Feb Jan
Actual -
Briefing Forecast 0.30% 0.20% NA 0.20% 0.30% 800.00% 0.00% 0.30% 75.60% 0.20% 0.40% 67 NA NA 1235K 1220K 242K NA 1900.00% NA 0.50%
Market Expects 0.30% 0.20% NA 0.20% 0.30% 700.00% 0.10% 0.40% 75.50% 0.00% 0.40% 68 NA NA 1220K 1230K 245K NA 1750.00% NA 0.50%
Prior 0.30% 0.20% 2.30% 0.20% 0.30% 650.00% 0.60% 0.20% 75.50% 0.80% 0.70% 6700.00% +13.8M $30.8B 1226K 1210K 234K 2078K 2360.00% -152 bcf 0.50%
Revised From -