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Oil rises, eurozone spending falls

Weekly Market Commentary
Courtesy of Ken Armstrong, Shane Fleury & Steve Shanley of the Northwestern Mutual Wealth Management Company — Vail Valley

The globe’s financial leaders gathered in Washington D.C. last week for the conclaves hosted by the World Bank and the International Monetary Fund (IMF). While they were meeting on Friday, stock markets at home and abroad were battered because of the continued economic malaise and rising anxiety, yet again, over the possibility that Greece might exit the eurozone.

It didn’t help when the Bloomberg network went offline Friday morning (before U.S. markets opened) and Chinese officials tightened trading regulations, precipitating fears of a slowdown in what has been one of the world’s hottest stock markets. Leading up to Friday, U.S. investors had been torn between the rebound in the price of oil, up 7.9 percent last week, which carried with it the stocks of energy companies, and the mixed early returns for first-quarter earnings, which are expected to fall because of the stronger dollar. In the end, thanks to Friday’s selloff, the three major indexes were down at least 1 percent for the week.

A fragile recovery

In its latest forecast, the IMF said that, despite an improved outlook for the U.S. and Europe, the slowdown in emerging nations and debt-laden banks would continue to hinder global growth. The IMF again lowered its estimate for growth in emerging countries for next year, this time down to 4.3 percent, which would make it the fifth straight decline. Overall, growth was estimated to be 3.5 percent this year and 3.8 percent in 2016. On Friday, the G-20 added to the gloom, issuing a report that warned of a rough recovery while endorsing quantitative easing, noting: “In many advanced economies, accommodative monetary policies are needed to anchor inflation expectations and support recovery.” In stark contrast, the average yield on German government debt fell below zero for the first time ever.

Once more, the “Grexit” looms

So far, Greece has been able to make the debt payments that are the result of its bailout, but it will soon be short of cash unless it meets the demands of its creditors to free the last bailout payment. Last week, Germany’s Finance Minister Wolfgang Schäuble said time was “running out for Greece,” and the IMF’s Poul Thomsen, who helped structure the bailout, said, “Let me emphasize, one should not underestimate the risk of a Greek exit.” Meanwhile, Standard & Poor’s cut that nation’s credit rating to CCC+, and the yield on Greece’s 10-year bonds moved close to a two-year high at 12.49 percent.

Oil rises again

A slowdown in production drove the price of oil up – domestic stockpiles rose by the smallest amount for any week in 2015 (though they still rose). Even so, because of the many variables, including production, the Organization of the Petroleum Exporting Countries (OPEC) and Iran, there’s an ongoing debate as to whether prices will continue to rise or fall. As last week’s report on production from the International Energy Agency report noted, “In some ways, the outlook is only getting murkier.”

Fast track? Not so much

Siding with GOP lawmakers, President Obama said he would “fast track” the proposed trade agreement known as the Trans-Pacific Partnership, but unions, environmentalists and most of his fellow Democrats are against it. Furthermore, China, the Pacific’s largest economy, is not part of the pact, just as the U.S. is not part of that nation’s new Asian Infrastructure Investment Bank.

Around the eurozone

Mario Draghi, the president of the European Central Bank (ECB), said the bank’s bond-buying program, along with lower oil prices and government policymaking, has begun to have a positive impact; the bank left its benchmark rate unchanged at 0.05 percent. Consumer prices fell yet again in March, but this time at a slower pace of -0.1 percent compared to -0.3 percent in February, indicating that the possibility of deflation may be receding – for now. And after a long investigation, the European Commission formally charged Google with an antitrust suit.

China’s slowdown

China’s economy expanded at 7 percent in the first quarter, its slowest pace since 2009. In addition, industrial production in March rose only 5.6 percent year over year, the weakest reading since November 2008, raising the prospect of further government stimulus.

Oil’s rebound boosts the CPI

Consumer prices were up in March for the second month straight, indicating that inflation may be normalizing. The consumer price index gained 0.2 percent following a long stretch in which prices were either stagnant or declined because of cheap oil. Though prices were down 0.1 percent from a year earlier, core prices, less food and energy, increased 0.2 percent in March and 1.8 percent over the last 12 months. The producer price index gained 0.2 percent but was off 0.8 percent on a yearly basis; core PPI rose 0.2 percent month to month and 0.9 percent year over year.

In other economic news, retail sales totaled $441.4 billion in March, up 0.9 percent from the month before and 1.3 percent higher than in March 2014. The Fed announced that industrial production fell 0.6 percent in March, the biggest drop since May 2009, and for the first quarter it decreased at an annual rate of 1 percent, also the worst run since 2009. Factory output was up 0.1 percent, the first increase since November, mainly because of auto production, which rose 3.2 percent. Capacity utilization dipped 0.6 percent to 78.4 percent. Housing starts for March came in below expectations, the Commerce Department reported, up just 2 percent from a year ago to 926,000 units. Building permits were down 5.7 percent to 1.04 million, but they remained above the one-million mark for the eighth straight month and were up 2.9 percent from last March. Finally, first-time jobless claims rose 12,000 to 294,000, while the four-week moving average inched up 250 to 282,750.

A look ahead

The coming week’s news will be focused on earnings news, but there will also be updates on new and existing home sales, durable and capital goods orders, and Markit’s manufacturing PMI.

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This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company®.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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