The major U.S. stock market averages ended the week at all-time closing highs as Congress moved to put the finishing touches on the tax reform package to get it to President Trump before Christmas.
With some last-minute wrangling, there appeared to be enough votes on the Republican side to get the measure approved. The Dow and NASDAQ were both up more than 1.3% for the week while the S&P 500 rose 0.9%. NASDAQ is up 29% so far this year before dividends while the Dow is up 25%; the S&P has gained nearly 20%. In the bond market, the yield curve continued to flatten out, with short-term yields rising to their highest levels since before the global financial crisis while rates at the other end of the spectrum fell. For example, the yield on the two-year Treasury note rose five basis points to end the week at 1.84% while the yield on the 30-year bond, the longest maturity, dropped eight basis points to 2.69%, its lowest level in three months and close to its 2017 low. The yield on the two-year note has jumped nearly 60 bps since early September while the yield on the long bond has dropped almost 30 bps since late October. A flattening yield curve worries some analysts who believe it signals a coming recession, although that seems unlikely given the recent surge in economic growth.
As expected, the Federal Reserve raised interest rates a quarter of a percentage point to a range of 1.25% to 1.5% at its final meeting of the year while indicating three more rate increases next year. “At the moment, the U.S. economy is performing well,” Fed Chair Janet Yellen said at what is likely to be her last post-meeting press conference before she steps down in favor of Jerome Powell in February. “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years we’ve seen this. I feel good about the economic outlook.” The Fed raised its projection for U.S. GDP growth this year to 2.5%, up from 2.4% in September, and to 2.5% for 2018, up from the previous estimate of 2.1%. It expects the unemployment rate to fall to 3.9% for each of the next two years from a current 4.1%. It also expects inflation to remain slightly below its 2.0% target rate.
Indeed, the consumer price index remained stubbornly below that threshold last month. The core CPI – excluding food and energy – rose just 0.1% for the month, down from 0.2% the previous month, and 1.7% compared to a year earlier. Producer prices showed bigger price gains, with the core rate rising 0.3% for the month and 2.4% on a year-on-year basis. Elsewhere, retail sales jumped an unexpectedly sharp 0.8% in November, well above expectations of a 0.3% rise, while October’s increase was revised upward to 0.5%. The increase came despite a 0.2% decline in auto sales; excluding that, retail sales would have shown a 1.0% increase. On the downside, industrial production rose a weak 0.2% last month following an upwardly revised 1.2% jump in October.
European stocks fell back into negative territory last week after notching their best gains in several months the prior week. The broad-based Stoxx Europe 600 fell 0.3% after rising 1.4% the previous week. But stocks in peripheral Europe did much worse, with Italian stocks down 3% and Spanish stocks off by nearly 2%. Sovereign bonds in those countries also lost ground, with yields on 10-year Italian government bonds climbing 16 basis points and Spanish bonds rising about half that. By contrast, comparable German bund yields were unchanged. The European Central Bank left interest rates unchanged last week while raising its economic growth forecast for the euro zone next year to 2.3%, up a half-percent from its September forecast. “The incoming information indicates a strong pace of economic expansion and a significant improvement in the growth outlook,” ECB President Mario Draghi said. In Asia, Japanese stocks were down about 1% for the week while Hong Kong stocks rebounded 0.7% after falling a combined 4% the prior two weeks.
Reports/dates/facts/links worth paying attention to over the next week:
1. December 18: National Association of Home Builders housing market index for December.
2. December 19: Housing starts for November.
3. December 20: Existing home sales for November.
4. December 21: Weekly unemployment claims; third quarter GDP, second and final revision; Chicago Fed national activity index for November; leading economic indicators for November; Philadelphia Fed business outlook survey for December.
5. December 22: Durable goods orders for November; personal income and outlays for November; new home sales for November; University of Michigan consumer sentiment index for December, second reading.