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The Weekly Review May 14, 2018

The Weekly Review May 14, 2018

Guest Post - Monday, May 14, 2018

Summary

Economic data for the week was highlighted by lower-than expected inflation as measured by PPI and CPI, decent consumer sentiment, as well as continued strong labor numbers.

U.S. markets gained sharply last week, with foreign equities also performing positively, although to a lesser degree. Bonds were little changed, with corporates outperforming governments; foreign bonds lost a bit of ground overall. Commodity prices gained generally, due to an uptick in the price of crude oil sparked by the U.S.’s exit from the Iran nuclear deal.

Economic Notes

(0) The April Producer Price Index came in +0.1% higher, coming in at half that of the forecast +0.2% increase; on a core level ex-food and energy, prices gained +0.2%. Energy prices ticked just slightly higher, interestingly, while food prices fell -1%. In core segments, tobacco prices rose as did other upstream input costs, with crude materials prices outside of food and energy rising +0.7% for the month overall, while medical care costs fell sharply. Year-over-year, intermediate producer prices showed a firm gain of +3.4%. While not the same direct comparison to CPI, price inflation has been picking here somewhat, but is dependent on the good involved.

(0) The Consumer Price Index rose +0.2% in April on a headline basis, and +0.1% for core, excluding food and energy, each of which was about a tenth below expectations. For the month, gains were most dramatic in energy commodities, which rose +3.0% on the back of higher crude oil and gasoline prices, and shelter, which gained +0.3%, along with gains in apparel and medical care services. Interestingly, several other categories lost ground, including new and used vehicles, transportation, airfares, recreation and energy services. On a trailing 12-month basis, this brought headline and core CPI gains to +2.5% and +2.1%, which are just over the Federal Reserve’s target level. This is no doubt led by energy commodities, up +14%, with home prices helping the shelter component, which gained just over +3% for the year.

(0) Import prices for April rose +0.3%, falling below forecasts calling for +0.5%; additionally, the March number was revised down by a few tenths of a percent. Much of this was due to petroleum, with the ex-petroleum price index rising a mere +0.1%, which no change for the price of capital goods and included a -0.4% drop in the prices for food/beverages.

(+) The preliminary May Univ. of Michigan Consumer Sentiment index was unchanged at 98.8, despite calls for a mild drop to 98.3. Consumer assessments of current conditions fell by -2 points, while expectations for the future rose by just over a point. In regards to inflation, expectations for the coming year ticked up a tenth to 2.8%, while those for the next 5-10 years were flat at 2.5%. Per usual, a spike in oil (or specifically, unleaded gasoline) prices can tend to push inflation expectations higher.

(+) The government JOLTs job openings report for March showed an increase to 6.55 mil., beating forecasts calling for 6.100 mil. and representing a new economic cycle high. The job openings rate ticked +0.3% higher to a level of 4.2%, with gains across a variety of industries, the quits rate rose a tenth to 2.3%, while the layoffs and hires rates were unchanged at 1.1% and 3.7%, respectively. To no surprise, these metrics continue to point to strong labor market activity.

(+) Initial jobless claims for the May 5 ending week were unchanged at 211k, which again fell below expectations calling for an increase to 219k. Continuing claims for the Apr. 28 week ticked up by +30k from the prior week to 1,790k, but still below the 1,800k level expected. Per the DOL, no anomalies were reported, and claims levels continue to hover near multi-decade lows.

(0) The Federal Reserve’s Senior Loan Officer Opinion Survey covering the first quarter of 2018 showed a modest easing in lending standards overall. For commercial/industrial loans, standards eased a bit, particularly for larger companies, while demand for loans was mixed to a bit lower. Commercial real estate lending standards were little changed, with a tinge of easing for some larger properties, and demand for such loans remained mixed. On the commercial side overall, narrowed spreads and larger loan sizes were apparent due to increased competition from other banks. Residential mortgage lending standards were little changed, while demand weakened a bit. Banks did seem more willing to make consumer installment loans, although auto loan demand has fallen. Very little seemed to surprise here, as eased lending standards are typical of later cycle behavior.


Read the "Question of the Week" for May 14, 2018

Are we in for another round of high oil prices?


Market Notes

Period ending 5/11/2018

1 Week (%)

YTD (%)

DJIA

2.51

1.26

S&P 500

2.49

2.72

Russell 2000

2.65

5.06

MSCI-EAFE

1.60

1.80

MSCI-EM

2.49

0.52

BlmbgBarcl U.S. Aggregate

-0.01

-2.28


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2017

1.39

1.89

2.20

2.40

2.74

5/4/2018

1.84

2.51

2.78

2.95

3.12

5/11/2018

1.92

2.54

2.84

2.97

3.10

U.S. stocks experienced a sharply positive week, with small caps again outshining large caps. While there did not appear to be one specific catalyst, tempered inflation results likely helped, sentiment has improved surrounding the potential ability of the U.S. and China to resolve trade differences, and earnings continue to register strong results for the quarter, with gains on the order of around +25%. From a sector standpoint, energy led the way with higher oil prices, followed by technology, financials and industrials with roughly equal returns. Defensive sectors utilities and consumer staples lagged, with the only negative returns for any sector for the week.

Foreign stocks also fared well, with the U.K. leading the way with the strongest returns, while the Bank of England elected to stand pat on interest rate policy, which was somewhat of a surprise. Europe and Japan posted more tempered results—all of which were below those of the U.S. Emerging markets fared better, on par with domestic equities. China, Brazil and Russia all gained several percent on the week, with the latter due to continued strength in commodity prices, including crude oil.

U.S. bonds on net were flattish again on the week, with interest rates ticking slightly higher across most of the yield curve. Investment-grade credit fared better, with positive returns, as spreads tightened, as did high yield, in keeping with strong equity performance, while government bonds lost a bit. The dollar was little changed on the week, but foreign bonds lost a bit of ground in both USD and local terms in both developed and emerging markets.

Real estate gained sharply, in keeping with the broader U.S. stock market, led by gains in more cyclically-sensitive lodging and industrial/office, with European and Asian REITs coming in just behind, followed by domestic retail and apartments registering minor gains.

Commodities generally gained on the week, led by a sharp rise in the energy sector, followed by precious metals, while agriculture sharply declined due to larger-than-expected crop yields for wheat and other grains. The President’s scrapping of the Iran Nuclear deal and promise to revert back to sanctions caused oil prices to shoot up nearly +3% immediately, to over $70/barrel, with lower production assumed, coupled with already-low inventories.

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, StockCharts.com, 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 The Weekly Review for May 7, 2018.

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