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The Weekly Review May 21, 2018

The Weekly Review May 21, 2018

Guest Post - Monday, May 21, 2018


Economic data for the week came in generally strong, with retail sales, industrial and manufacturing data, jobless claims and leading indicators all coming in solidly positive. Housing starts, however, declined more than expected.

U.S. equity markets were mixed on the week with large-caps underperforming small-caps, which gained. Emerging markets lost significant ground due to a variety of country-specific issues. Bond prices declined with rising rates, with the exception of bank loans. Commodities continued their push upward on the back of higher oil and agricultural prices.

Economic Notes

(0) Retail sales rose +0.3% in April, on par with expectations, bringing the year-over-year rate of increase to +4.7%. With higher gasoline prices during the month, a +0.8% increase in gas station sales was not surprising, and boosted the headline number, while auto sales only rose +0.1%. On a core/control level, excluding the more volatile components, this increased to +0.4%. Under the core group, clothing rose over +1%, as did ‘miscellaneous’ and furniture, while food services sales fell by over a percent, with weather being a possible cause. This wasn’t a bad result, especially, when several revisions higher for prior months were included, but does not include the acceleration seen in earlier cycle retail sales reports typically.

(+) Industrial production gained +0.7% in April, beating forecasts calling for +0.6%, in addition to the March numbers being revised higher by a few tenths. The manufacturing production component gained +0.5%, in line with expectations. Utilities and mining gained to a much larger degree, by +1.9% and +1.1%, respectively, while motor vehicle production declined by over a percent. The latter two were no doubt affected by the weather and energy extraction activity. Capacity utilization rose by almost a half-percent to a level of 78.0%, although that lagged the forecast 78.4%. Regardless, this is a high level.

(+) The New York Fed’s Empire manufacturing survey for May rose +4.3 points to 20.1, which outperformed expectations of a slight decline to +15.0. Underlying components showed strength, including new orders, shipments and employment, each of which gained several points, as did inventories and prices paid. All-in-all, the strength of report countered a span of weaker manufacturing reports over the past several months.

(+)The Philly Fed manufacturing index for May rose by +11.2 points to a strong +34.4, reaching a high for the past year and bucking expectations for a drop to +21.0. Underlying components also showed strength, with substantial gains in new orders, shipments and employment. Employment also gained strongly, as did workweek length. In contrast to concerns over a slow patch in manufacturing as of late, this index continues to run at a very high level.

(+) The NAHB homebuilder index for May bucked the trend of the previous two months by rising +2 points to 70, beating expectations by a point. Current sales rose by +2 points as well, while future sales expectations and prospective buyer traffic were both flat. Regionally, the Midwest gained five points, while the West and South each fell by a point. Overall, this index continues to run at decent levels, pointing to potentially good housing starts in months ahead, notably as new home building continues to run at only two-thirds of historical normal (seen in years prior to the Great Recession).

(-) Housing starts fell -3.7% in April to a rate of 1,287k, in disappointing contrast to the -0.7% decline expected; however, prior month growth was revised by almost +2% to partially offset this weakness. For April, the spotty multi-family category fell by -11%, while single family starts ticked up by just above flat. Regionally, three key regions experienced near- to over-double-digit declines, perhaps due to more difficult late winter weather, while the South gained. Building permits fell -1.8% for the month to an annualized 1,352k, which was slightly better than the -2.1% forecast, in addition to a prior month revision here as well. Multi-family was also the culprit, falling -6%, while single-family permits rose +1%. Regionally, the Northeast and West experienced the strongest declines, while permits in the South rose over +10%. Single-family starts and permits are each up nearly +10% on a year-over-year basis, which is promising for housing supply.

(+) The Conference Board’s Index of Leading Economic Indicators for April gained +0.4%, continuing a strong trend of recent monthly results. The largest contributors were the yield spread, manufacturing hours, ISM new orders, jobless claims and consumer sentiment. For the past six months, the annualized rate of growth came in at about +6.7%, which surpassed the 6.1% annualized rate of the prior six months; however, the Conference Board noted that the pace of growth has moderated somewhat in some areas. The coincident and lagging indicators each rose +0.3%, which was a bit stronger than the pace of recent months. As seen in the chart below, the trajectory of the LEI remains strongly positive, which can’t last forever or in a straight up fashion, but momentum can persist longer than sometimes expected.

The Conference Board Leading Economic Index for the United States

(0) Initial jobless claims for the May 12 ending week rose a bit by +11k to 222k, above the 215k level expected by consensus. Continuing claims for the May 5 week fell by -81k to 1,707k, far below the 1,780k expected, and representing a 45-year low for that series. No anomalies were reported, and levels continue to run a multi-decade lows.

Market Notes

Period ending 5/18/2018

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks were mixed on the week with large caps losing some ground, while small caps gained over a percent to continue their strong run—the week featured decent economic data but fears this strengths could continue to translate to higher interest rates. From a sector standpoint, strong oil prices continued to buoy energy and materials names, while utilities and technology brought up the rear, with defensive sectors continuing to be hampered by fears of higher rates more than other areas.

The dollar rose over a percent for the week, which dampened the returns for foreign equities, turning minor returns into minor losses. U.K. and the pound fared among the best, with reports of the U.K. government desiring to preserve certain key trade relationships with the EU post-Brexit, while Italian stocks languished in the negative as political alliances between different factions (far right versus populist) pointed to plans for potentially requesting a debt forgiveness program. While Japanese stocks have been on a winning streak in recent weeks, first quarter GDP shrunk by -0.6%, which was a bit worse than expected. Emerging markets fared the worst of the group, with a larger loss of over two percent, led by weakness in Brazil, where stocks fell -10% during the week at one point, resulting in a temporary trading halt, as new bribery allegations surfaced against the president. Mexican stocks declined in reaction to a delay in the renegotiation of NAFTA, which looks to be pushed into next year.

U.S. bonds lost ground again as interest rates continued to tick upward for longer maturities—the 10-year treasury reaching a seven-year high of 3.12% on Thursday—while the short end of the curve was little changed. Credit spreads widened, which resulted in government bonds outperforming corporates, although floating rate bank loans led the various groups with flattish results. Foreign bonds, as expected, lost significant ground on the week due to the stronger dollar, with emerging market local bonds taking the brunt of losses. Several emerging market debt issuers, notably Argentina and Turkey, have been struggling as of late as recently re-strengthened U.S. dollar, internal politics and questions about central bank effectiveness have resulted in increased volatility. This has a tendency of happening when investors become too complacent in emerging markets and certain spreads fail to adequately compensate for these behind-the-scenes issues that can crop up from time to time.

Real estate suffered for the week, losing over -3% as interest rates continued to act as a strong headwind to prices. Residential fared worse, with recent metrics showing a degree of overbuilding and perhaps overpriced conditions for apartments, while foreign real estate suffered less, despite the strength of the dollar. Naturally, as REIT returns have been challenged this year, due to the expectations for, and realization of, rising interest rates, shares for a variety of groups are substantially discounted to underlying net asset value. This can imply that underlying NAV’s may decline, as well as the impact of simply poor sentiment, which is no doubt the case.

Commodities generally gained on the week, despite the usual headwind of a strong dollar. Agricultural prices and energy both gained, with the latter boosted by weather- and production-related effects in wheat especially. The latter was driven by oil prices rising almost another percent to end the week at $71.37/barrel for West Texas crude, while Brent crude continued to be priced at just under $80, with European supplies much more tightly tied to the Middle East. Precious metals prices continued to decline as higher real rates for bonds proved more attractive for risk-avoidant investors than did gold.

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 May 14, 2018.

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