REPORT
By Övünç Kutlu
U.S. letter, Feb. 27

- What happened last week?

The most important development in the American economy last week was the Dow Jones Industrial Index in the U.S. stock market shattering record high levels day after day.

With President Donald Trump’s economic promises, investors took a buying position in the market, and pushed indexes higher.

The Dow Jones ended higher Friday, gaining for the eleventh trading day in a row – its longest streak since 1992.

While the Dow gained 1 percent overall last week, and marked its third consecutive weekly gain, the S&P 500 and the Nasdaq rose 0.7 percent and 0.1 percent, respectively, last week. Both indexes marked gains for the fifth week in a row.

The U.S. Treasury Secretary Steven Mnuchin’s remarks also played a role in stock market gains.

Mnuchin said the administration hopes to pass tax reform legislation before the Congress’ recess in August. He also reiterated Trump’s target to see annual economic growth reaching 3 percent, but added that this may take one to two years.

A number of major American companies such as General Electric, Boeing, Caterpillar and Pfizer wrote an open letter to the majority and minority leaders of the U.S. Senate and House of Representatives last week, calling the American tax laws obsolete.

They argued in the letter that American companies are disadvantaged to compete with foreign companies because of the existing tax laws, and urged that a comprehensive tax reform be adopted, which would benefit economic growth, add jobs and attract foreign investment to the U.S.

During his campaign, Trump promised to lower the corporate tax rate in the country from 35 percent to a 15-20 percent range.

On the energy front, the U.S.’ Energy Information Administration (EIA) announced that the country’s oil production rose over two consecutive months, through September to November last year -- a first since early 2015. American oil producers seem to have shaken off the negative impact of oil prices, thanks to OPEC's decision to cut output, which pushed prices higher from their current range of $50-$55 a barrel.

The EIA also announced last week that U.S. crude oil production has reached its highest level since last April. Domestic crude production rose by 24,000 barrels per day (bpd) to 9 million bpd for the week ending Feb. 17. It is the first time crude output has reached that mark since the week ending April 1 last year. The 46-week recovery in crude production comes after OPEC and Russia began limiting their output levels at the beginning of the year.

Another important development last week was the release of the minutes from the Federal Reserve’s Jan.31-Feb.1 meeting. The minutes showed that the Fed’s next rate hike can happen "fairly soon" if economic indicators come in line with the bank's expectations.

Many Federal Open Market Committee (FOMC) members said "it might be appropriate to raise the federal funds rate again fairly soon” if the labor market and inflation figures are “in line with or stronger than their current expectations.”

This was the first Fed meeting since Trump took office. While the FOMC still awaits the impact of Trump's policies on the American economy, it also warned on risks that may change the Fed's path of raising interest rates. 

"... most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and about their net effects on the economy," the minutes read. 

The FOMC’s next meeting will be held on March 14-15 in Washington, D.C.

 

What to expect this week?

The market and investors focused on Trump’s first address to a joint session in the U.S. Congress late Tuesday.

Trump yet again failed to provide much detail about his economic policies, and investors were mostly disappointed by his speech.

The president reiterated his insistence on ridding the U.S. of trade deals he believes harm the economy. 

He noted the U.S. lost more than one-fourth of its manufacturing jobs since the approval of the North American Free Trade Agreement (NAFTA), 60,000 factories since China joined the World Trade Organization in 2001 and said the trade deficit reached almost $800 billion last year. 

"When we ship products out of America, many other countries make us pay very high tariffs and taxes -- but when foreign companies ship their products into America, we charge them almost nothing," he said. 

"I believe strongly in free trade but it also has to be fair trade."

Trump touted the U.S. withdrawal from the “job-killing" Trans-Pacific Partnership and said the construction of controversial pipelines in the U.S. would create "tens of thousands of jobs".

He also noted that the stock market gained almost $3 trillion in value since his election on Nov. 8, and that he would support deregulation to spur economic growth and create more jobs.

Although Trump reiterated the administration would reduce the corporate tax rate and provide tax relief for the middle class, he failed to provide a timeline for the new tax legislation, or details about deregulation.

Trump’s lack of furnishing information on his economic policies is expected to create a selling frenzy in the U.S. stock market on Wednesday morning, since investors expected the President to give some comprehensive explanations on economic plans he wants to undertake.

Some analysts, however, also believe that loyal investors will continue their buying position in the market based on their trust in Trump’s past experience as a business mogul, and await more details about his steps on economic affairs.

01 Mar,2017

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