Week in Review September 8, 2017
Stock prices and bond yields fell last week as nervous investors braced for another major American hurricane and the next round of threats from North Korea.
U.S. equities had their worst week in a month, with NASDAQ falling 1.2%, the Dow down 0.8%, and the S&P 500 off 0.6%. Investors instead sought the safety of Treasury bonds, driving down the yield at the long end by about 10 basis points. The benchmark 10-year government note ended the week at 2.05% after falling as low as 2.02% on Friday morning, its lowest level since before last November’s presidential election. Gold closed at $1347 an ounce, its highest level since last September and up 1.5% for the week; the price of the metal has risen 11% over the past two months. About the only positive financial news of the week was President Trump’s agreement with Congressional Democrat leaders – circumventing the Republican majority – to reach a budget deal that averts a government shutdown and extends the government’s debt limit to avert a default, although that extension is only for three months.
European stock prices were mostly lower, except in Germany, while sovereign bond yields fell sharply and the euro remained strong, ending the week above $1.20, its highest level since the end of 2014. The European Central Bank announced no policy changes following its meeting last week but ECB President Mario Draghi said the board will “probably” address any changes to its mammoth asset-purchase program in October. Those changes may include keeping the program going “beyond [December] if necessary,” rather than starting to end it, as many have been expecting. Draghi said the euro zone’s recent economic growth is heavily dependent on continued stimulus and that there is a need for “a continued very substantial degree of monetary accommodation.” The bank raised its forecast for economic growth this year to 2.2% from 1.9%, the third straight upward revision, but the recent gains in the euro led the bank to scale back its inflation forecasts for 2018 and 2019 to well below its 2% target rate. The yield on the benchmark 10-year German bund fell eight basis points to 0.31%, its lowest level since late June.
The battle lines are being drawn for the next Federal Reserve monetary policy meeting on September 19-20. On one side is Fed governor Lael Brainard, who doesn’t seem ready to raise interest rates yet until justified by higher inflation. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” she told the Economic Club of New York. On the other is William Dudley, the president of the New York Fed, who seems ready to raise rates regardless of the current low inflation environment. “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate” to raise interest rates gradually, he said. “I expect that we will continue to gradually remove monetary policy accommodation.” The meeting is likely to be the last for Fed Vice Chair Stanley Fischer, who announced his intention to resign next month for personal reasons, well short of the June 2018 expiration of his term. President Trump now has four seats to fill on the seven-member Fed board of governors, while Janet Yellen’s term as Fed chair expires in February.
Reports/dates/facts/links worth paying attention to over the next week:
1. September 13: Producer price index for August; U.S. Treasury budget report for August.
2. September 14: Weekly unemployment claims; consumer price index for August
3. September 15: Retail sales for August; industrial production for August; Empire State manufacturing survey for September; University of Michigan consumer sentiment index for September, first reading.