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The Weekly Review April 23, 2018

Weekly Review - April 23, 2018

Guest Post - Monday, April 23, 2018


Economic data for the week was highlighted by stronger retail sales, industrial production and leading economic indicator reports, mixed manufacturing results, and lackluster housing data.

U.S. equity markets rose for the week, beating foreign stocks, with help from a stronger dollar. Bonds lost significant ground as interest rates ticked higher. Commodities were led by gains in industrial metals and crude oil.

Economic Notes

(+) Retail sales for March came in with a gain of +0.6%, surpassing forecasts of +0.4%. On a core/control level, sales grew by +0.4%, which was on par with consensus expectations. However, February’s growth was revised down by two tenths. The month was highlighted by a +2% in auto sales, while gasoline and building materials sales declined, seemingly due to some weather effects around the nation as winter persisted for longer than normal. This likely resulted in the negative results for other areas, such as sporting goods and clothing, while non-store retail and health/personal care sales rose.

(-/0) The New York Fed Empire manufacturing index for April fell by -6.7 from the prior month to +15.8, compared to +18.4 expected. The sub-components of new orders, shipments and employment all declined as well, while inventories and prices paid improved for the month. While not a great month on its own, the overall level remains solidly in expansion.

(+) The Philly Fed manufacturing index ticked higher by +1 point to +23.2, despite expectations for a decline to +21.0. Details included a substantial drop in new orders by -17 points, as well as shipments. On the other hand, employment ticked higher, as did the average workweek to a business cycle high. Price paid and prices received also rose to cycle highs. This report offset the more negative NY report.

(0) The March industrial production report for March showed a gain of +0.5%, beating the median forecast calling for +0.3%, and also featured a minor revision upward for February. Production growth was led by a +3% increase in utilities output, mostly in natural gas, as a result of weather effects, while mining gained a percent, on the back of higher oil prices. Manufacturing production, as a sub-component, rose +0.1%, matching expectations, as auto production gained several percent for the month, followed by business equipment. Capacity utilization ticked up by +0.3% to 78.0%—also reflecting gains in the utilities and mining areas.

(0) Housing starts & Building Permits for March rose +1.9% to an annualized level of 1,319k, but fell short of the +2.5% increase expected; however, prior month data was revised up by nearly +5%, negating some of that weakness. However, the multi-family category accounted for much of the strength, up +14% on the month, while single-family starts fell by nearly -4%. Regionally, the Midwest saw the most dramatic results, gaining +22%, while the West and South experienced minor declines of up to and just over a percent. Starts overall were up +11% on a year-over-year basis. Building permits rose +2.5% for the month to 1,354k on an annualized basis, outpacing expectations for no change; February results were also revised up a bit. For permits, also, multi-family permits led the way, rising +19%, while permits for single-family declined -6%. Regionally, the Midwest also gained most strongly, up +9%, followed by the West and South with low single-digit increases, while the Northeast saw a decline of over -5%. It seems weather played a role in these figures, especially the more volatile components, like multi-family, where supply is far less of an issue than in single-family where supply remains contained. Interestingly, housing under construction reached an 11-year high. The most recently MBA Purchase Mortgage Index also points to improvement, up +10% year-over-year to an 8-year high.

(-) The NAHB homebuilders index for April edged down -1 point to 69, representing the fourth straight negative month, in contrast to median expectations for no change. By component, current sales fell by -2 points, future sales expectations by -1 point, while prospective buyer data was unchanged. Regionally, the Northeast gained a point, while the South and West fell for April. Despite the recent trend of falling reports, the overall level remains high, pointing to cycle strength.

(+) The Conference Board’s index of Leading Economic Indicators for March experienced a rise of +0.3%, bringing the rate of growth of the last six months to an annualized +8.8% growth rate—surpassing the +3.7% growth rate of the prior 6-month period. Positive contributions for the monthly indicator remain widespread, while the average workweek and jobless claims detracted from the result. The coincident index and lagging index rose by a lesser +0.2% and +0.1%, respectively, for the month, while the coincident indicator’s six-month trajectory rose by an annualized +2.8%, also higher than the previous semi-annual period. As seen visually in the chart below, indicators continue to grind higher.

Weekly review The H Group

(0) Initial jobless claims for the Apr. 14 ending week fell by -1k to 232k, just slightly above the 230k level expected. Continuing claims for the Apr. 7 week ticked down by -15k to 1,863k, but still above expectations calling for 1,845k. Seems the largest changes occurred in the most populated states, as expected, and no anomalies were reported. Claims and implied layoff levels remain quite low.

(0/+) The Fed Beige Book, which cataloged qualitative economic conditions for March through early April, was little changed from the prior book—depicting growth continuing at a modest-to-moderate pace nationwide. However, there were some understandable concerns raised over the possibility of tariffs and general uncertainty over future prospects for global trade, but manufacturing activity grew regardless. Consumer spending showed strength, despite some weather effects. Real estate was characterized by an expansion of construction activity and rise in loan demand, while an ongoing thin inventory may be holding back transactions. Employment continued to grow and labor markets remained tight, with wages needing to rise in certain segments where skilled labor shortages appeared (in keeping with reports over the past several months). Prices rose in a variety of areas, such as manufacturing, technology and construction, but inflation was seen to be rising at a ‘modest’ rate overall.

Market Notes

Period ending 4/20/2018

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U.S. stocks rose during the week, with tensions over recent Syrian air strikes dissipating, decent economic data, such as retail sales and housing, as well as earnings. Small caps outperformed large caps. From a sector standpoint, energy and industrials gained, with the former benefitting from higher crude prices; consumer staples lost significant ground as the only negative-performing industry for the week, with weakness in tobacco sales.

Earnings reports for Q1 are beginning to roll in, with results the best in about seven years on a year-over-year basis. Just under 20% of firms in the S&P 500 have reported, with 80% of those beating consensus estimates. Positive factors include a weaker dollar, which has boosted earnings from global operations, noted by more than half of calls so far. Much more to come, with only a fraction of firms in the S&P reporting thus far, but including estimates for upcoming quarters, 2018 consensus features earnings growth of over 18% and revenue growth of just under 7%. A bulk of earnings gains are originating from energy/materials, financials and tech. Forward P/E stands at 16.6, which is a bit higher than that of the last decade on average, but well within the tighter range of historical averages.

Foreign stocks performed positively, due to strength in Japan and Europe, as opposed to flattish returns in the U.K., due to weaker economic data in the latter. Emerging markets lost ground last week, with U.S. trade partner Mexico lagging along with China, despite continued strength in commodities, that buoyed Russia and Brazil. Chinese GDP for Q1 came in at +6.8%, which largely matched expectations. While formal Chinese growth numbers are considered less reliable in some circles, these appear to be coming in closer to estimates, due to economic forces tempering somewhat and growth evolving to secondary value-add industries.

U.S. bonds lost significantly as interest rates across the yield curve steepened further, with the 10-year treasury nearly closing at the 3% level. Government and investment-grade corporate indexes both ended in the negative, as did high yield to a more limited degree, while floating rate bank loans were flattish. Foreign bonds lost significant ground as well, due to a dollar strengthening by three-quarters of a percent, effecting both developed market and emerging market debt.

Real estate lost ground as rates continued to tick higher, resulting in negative returns in the U.S., but far less so in Asia, while Europe earned positive returns. Cyclical lodging/resorts fared best, while retail/malls lost several percent to continue their weak returns year-to-date.

Commodity indexes fared positively on the week, with gains in energy and, more dramatically, a +5% rise in industrial metals prices, offsetting the decline in agriculture. Notably, the metals prices were due to a spike in the prices of aluminum and nickel, the former being affected by U.S. sanctions on a particular Russian producer. Crude oil prices gained again, by +1.5%, to finish the week at $68.40/barrel, the highest levels in about three years and enough to spur tweets from the administration. A variety of factors appear to be a play, including continued commitment by OPEC to production cuts, ongoing trouble in Venezuela, a refinery explosion in Texas, and possible new sanctions against oil producers Russia and Iran. Interestingly, rig counts in the U.S. have grown by 150% over the past two years, but inventories of WTI crude fell in Q1 for the first time in over 20 years.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s,, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for April 16, 2018.

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