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The Weekly Review May 29, 2018

The Weekly Review May 29, 2018

Guest Post - Tuesday, May 29, 2018

Summary

Economic data for the week was highlighted by a mixed durable goods report, slightly higher jobless claims, and weak housing results for new and existing home sales, as well as weaker consumer sentiment.

Equity markets the U.S. performed positively last week, while foreign equities lost ground. Bonds fared well with rates dropping across various maturities. Commodities also declined with a pareback in the price of crude oil.

Economic Notes

(0) Durable goods orders for April fell by -1.7%, underwhelming compared to a -1.3% drop expected. The change was due to a drop in commercial aircraft orders, falling -27%, but a group that tends to be lumpy, shown by core orders faring better—gaining +1.0% compared to an expected +0.7%. Core shipments rose +0.8%, beating the median forecast of +0.4%. This data is in keeping with other manufacturing numbers that show a rebound following a soft patch lasting a few months.

(-) The FHFA house price index rose +0.1% in March, underperforming estimates calling for a +0.6% gain, although the Feb. figure was revised up by two-tenths of a percent. Regionally, prices rose in just over half of the nation, led by the Mid-Atlantic, which rose over a percent, while New England declined by a percent. The most recent month brought the year-over-over gain ‘down’ to +6.7%, which is still quite strong from a historical standpoint.

(-) Existing home sales in April fell -2.5% to a seasonally-adjusted annualized rate of 5.46 mil. units, which was a bit below the forecast decline of -0.9%. Single-family units fell by -3%, while condos/co-ops rose by nearly +2%. Sales fell in all regions but the Midwest, with the Northeast and West suffering the most, with total declines over -3%. The April figure is -1.4% below that of a year ago, and, interestingly, the average of total sales over the past year is about on par with levels in 2002, several years pre-crisis. This dearth of sales activity coupled with a continued lack of building activity continues to depress housing supply, which has made homebuying more difficult and sustained high prices.

(-) New home sales for April fell -1.5% to a seasonally-adjusted annualized rate of 662k, below the 680k expected by consensus—along with negative revisions that pull down sales for the prior several months by over -40k. Regionally, the Northeast experienced a gain of +11% for April, the South and Midwest were flat, while the West saw a decline of -8%. Inventory rose to 5.4 months supply, while remaining at the low side of the past year and reiterating low supply conditions in the broader housing market

(-) The final Univ. of Michigan consumer sentiment index for May ticked down -0.8 of a point to 98.0, compared to expectations calling for no change. Assessments of current conditions fell by -1.5 points, while future expectations only declined by -0.4 of a point. Median inflation expectations for the coming year were flat at 2.8%, as were those for the coming 5-10 years at 2.5%.

(-) Initial jobless claims for the May 19 ending week rose by +11k to 234k, surpassing the 220k level expected, and representing the second straight week of gains. Continuing claims for the May 12 week rose by +29k to 1,741k, which was still below the 1,746k level expected. No anomalies were reported, with the most activity taking place in the most populated states, per usual. Even though these have ticked higher off of extreme (as in all-time low) levels, the pace of claims remains in line with a strong labor market.

(0) The minutes from the early May FOMC meeting were light on surprises, with underlying commentary pointing to a balance in policy goals in the areas of economic growth, inflation and unemployment. This was certainly an acknowledgement of improving economic conditions in these categories over the past several years, from underachieving and worries of slow growth morphing into secular stagnation or deflation evolving into a more ‘normal’ environment, although it does raise questions about what’s next. Inflation had been the laggard, and members appear more confident in levels coming in more consistently around 2% based on recent data and even described slightly higher inflation levels as potentially ‘helpful’. ‘Normal’ policy is a spot in which we rarely seem to reside for long, but represents the theoretical ideal where risks are balanced on the upside and downside in terms of economic growth, inflation running near policy target (or at least within a ‘symmetrical’ range) and labor markets are healthy—essentially this is the place where policy warrants being neither accommodative nor restrictive. (Finally, the FOMC’s use of term ‘accommodation’ is starting to fade, although it’s been noted that rates may stay lower than historical norms.) By the nature of economic cycles, such conditions rarely last forever, with end of business cycles looming—creating a need to step on the brakes on credit creation by tightening or reacting to a recession by needing looser policy yet again. For now, a hike in June is seen as highly probable by markets, which would leave the latter part of the year the deciding factor as to how many rate hikes occur this year.

Market Notes

Period ending 5/25/2018

1 Week (%)

YTD (%)

DJIA

.18

1.07

S&P 500

0.33

2.58

Russell 2000

0.03

6.43

MSCI-EAFE

-1.53

-0.23

MSCI-EM

-0.10

-1.88

BlmbgBarcl U.S. Aggregate

0.74

-2.01


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

5/18/2018

1.91

2.55

2.90

3.06

3.20

5/25/2018

1.90

2.48

2.76

2.93

3.09

U.S. stocks gained on a lower-volume week, with few macro catalysts to move the needle, other than trade concerns following the President’s cancellation of the June North Korean summit and volatility in oil prices—with the a sharp decline to finish the week. From a sector standpoint, defensive utilities gained over 3% to lead the pack, while energy fell nearly -5% as oil prices corrected.

Foreign stocks generally lost ground, with developed Europe, U.K. and Japan pulling back by over a percent—this appeared to be a combination of weaker economic data (specifically PMI weakening, although still in expansionary territory), uncertainty about the chances and potential content of a U.S.-North Korean summit, tariff worries (this time over autos), as well as the aftermath of the recent Italian election in regard to it resulting in pro- or anti-Euro sentiment. Emerging markets fared far better, with minimal losses, although China and Brazil suffered substantial declines. A stronger dollar on the order of +3% this year has certainly weighed on foreign equities, although cheaper local currencies can boost export activity and act as a self-correcting mechanism to some degree.

U.S. bonds gained sharply on the week, as interest rates declined by over 0.10% along most of the yield curve, as the minutes from the May FOMC meeting were taken as a dovish sign that the Fed was not overly eager to hike rates at a quick pace, by letting inflation run a bit higher than target. Government and investment-grade corporates performed similarly; however, high yield and bank loans were flat on the week. Foreign bonds ended the weekly slightly higher, despite a stronger dollar, with emerging market debt outperforming developed.

Real estate gained sharply in the U.S., benefitting from declines in interest rates, while foreign real estate results were positive, but tempered. Healthcare and lodging fared best, continuing year-to-date strength in the latter.

Commodities declined on the week by over a percent, upon weakness in energy, while metals and agriculture all gained ground. Crude oil prices initially gained, reaching over $72/barrel on fears of the U.S. imposing new sanctions on Venezuela after a questionable election, correcting sharply to end the week down -5% to a level of $67.88, as rumors surfaced about OPEC plans to increase production. OPEC continues to ride the line between producing little enough to keep prices elevated, but if prices stay too high for too long, and translates into a burden on consumers, demand could suffer (and perhaps even exacerbate a recession in the worst case) and sabotage the entire effort.

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 Weekly Review for May 21, 2018.

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