RECAP: for the week ending March 3rd 2017

March 5, 2017

The Dow Jones Industrial Average performed best for the week and for the month ended Tuesday. The widely watched benchmark also just missed setting a record for consecutive all-time-high closes, notching 12 daily gains before falling back on the last day of February. The broader Standard & Poor’s 500 Index was not as strong but logged its fifth straight weekly gain, its best such run since late 2015. Conversely, the small-cap Russell 2000 Index recorded a modest loss and ended the week as the worst performer for the year-to-date. Political and economic environment appears to have dominated investor sentiment in recent months. Accordingly, the market’s biggest move came on Wednesday, following President Trump’s highly anticipated first address before both houses of Congress the previous evening. On Friday, Federal Reserve Chair Janet Yellen sent her clearest signal yet that the improvement in the economic outlook would likely lead the central bank to increase rates at its next meeting. “At our meeting later this month,” she said in a speech in Chicago, “the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

The major European indexes ended the week higher, with the pan-European index Euro Stoxx 600 touching a 15-month high midweek before settling lower amid news of lackluster corporate earnings. German government bonds came under pressure this week, as data showed that inflation in the eurozone’s largest economy had reached its highest level in more than four years. Annual inflation in Germany hit 2.2% in February, and eurozone headline inflation exceeded 2% in February for the first time since January 2013. The indications of rising German inflation, combined with growing expectations for a Fed rate hike in mid-March, pushed the yield on 10-year German bunds above 0.3% on Thursday

Japanese stocks posted gains for the week. The widely watched Nikkei 225 Stock Average advanced 0.96% (186 points) and closed at 19.469.17. For the year to date, the Nikkei is up 1.86%, the broad-based TOPIX Index has gained 2.6%, and the TOPIX Small Index is up 4.1%. The yen weakened and closed at ¥114.4 per U.S. dollar, about 2.3% stronger than ¥117 per U.S. dollar at the end of 2016. Bank of Japan (BoJ) Governor Haruhiko Kuroda told reporters that inflation is still a long way from the 2% target and that he intends to maintain the central bank’s current course of easy monetary policy. Most agree that it is unlikely that the BoJ governor will achieve his inflation goal before his current term ends in April 2018. This is because he has not been able to engineer wage gains, even given extremely tight labor market conditions. The Japanese economy appears to be on track to generate steady, albeit modest, growth.

On Friday, U.S. Commerce Secretary Wilbur Ross, expected to be the Trump administration’s leading voice on trade negotiations, gave an interview to CNBC that seemed supportive of a constructive modernization of the North American Free Trade Agreement (NAFTA). Ross said that the rules of origin under NAFTA were too lenient; that the minimum wage in Mexico has not increased much in peso terms, which undercuts NAFTA’s intent to lift up Mexican workers; and that the U.S. needs to find ways to stabilize the dollar-peso exchange rate.

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