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Weekly Review - April 11, 2016

Weekly Review - April 11, 2016

Guest Post - Monday, April 11, 2016

Summary

  • In a relatively quiet week for economic data, ISM services showed further improvement into expansionary territory, and some jobs data offered a decent showing, with lower claims and stronger hiring and quits activity in the governments JOLTs report.
  • Equity prices generally fell globally with sentiment for economic growth declining a bit. Bonds rallied upon lower interest rates. Commodities gained, with oil leading the charge as a result of lower inventories.

Economic Notes

(+) The March ISM non-manufacturing index rose over a point to 54.5, surpassing expectations calling for 54.2—and improving into further expansionary territory. Underlying components showed general improvement across the board, including business activity, new orders and employment—all of which gained a few points further into expansion.

(0) Factory orders in February fell by -1.7%, which was on target with forecast; however, several items were revised down for prior months. Nondurable inventories also fell by a half-percent on a headline level, which included petroleum and coal, while they moved slightly higher with these items excluded.

(-) The trade balance widened from -$45.9 bil. in January to -$47.1 bil. in February, which was larger than expected by almost 1 bil. Trade activity overall increased during the month, seen in volumes for both imports and exports, while the widening effect was largely due to segments outside of petroleum.

(0) The DOL’s JOLTs report showed a decrease in job openings from 5.60 mil. in January to 5.45 for February. However, hires rose by +300k to a new recovery high, with the hiring rate moving up +0.2% to 3.8%. The quit rate also rose a tenth to 2.1%.

(-) Wholesale inventories fell in February by -0.5%, which was a deeper drop than the -0.2% expected. January levels were also revised downward by almost as much, intensifying the move. The inventory-to-sales ratio fell a bit to 1.36, but remains well within the recent range.

(+) Initial jobless claims for the Apr. 2 ending week fell to 267k, below the 270k expected. Continuing claims for the Mar. 26 week, on the other hand, rose a bit to 2,191k, which was above the 2,170k expected by consensus. No special factors were reported by the DOL, although it’s speculated the prior week’s mini-spike could have been due to the long Easter holiday.

(0) The minutes from the March FOMC meeting showed continuity with recent comments from Chair Janet Yellen in regard to policy and interest rate guidance (it would be unusual for them not to). While a few members were in favor of another interest rate increase, others acknowledged downside risks in foreign economic developments, notably slow growth and deflationary impulses that have kept stimulus intact in several key nations. This has resulted in a continued hesitation to raise rates too early, in that recent slow patches could be difficult to combat with ‘limited’ ammunition with rates being as low as they are already—and wanting to prevent the need for a reversal of policy, moving rates back downward in response to any weakness.

The reality is that the U.S. economy will experience another recession at some point—that is inevitable. All economists and policymakers also realize it’s inevitable, but the dilemma continues: how to ‘normalize’ (i.e., raise) rates to the point where sufficient ammunition is stockpiled for that eventual downturn where an easing policy is required, but also at a speed that will not cause a stall in the current slow, sporadic and seemingly fragile recovery. This has been the key question the Fed has been faced with, and it looks to continue to be a key question for 2016.

There have also been questions—mainly on the think-tank and academic side—about the ability and desirability of central banks to take responsibility for stemming financial crises and boosting economies in their recovery from crises. This is almost an unfair burden to place on such institutions, which are generally tasked with the mandate of long-term monetary and financial stability (in the form of inflation management and ‘smoothing’ the ups-and-downs of economic growth), and, in the U.S., employment. Considering the world’s occasionally tumultuous financial history, a single mandate has seemed like more than enough of a responsibility. Removing the dips of economic cycles and providing unending monetary support (such as today’s quantitative easing by many larger players) could be beyond of the limit of realistic expectations. Instead, it’s been argued that central banks should only be heavily involved in economic growth issues during major financial crises (where growth is falling dangerously enough to affect fundamental monetary stability), but less involved at other times. A decade after the financial crisis, this debate continues.

The U.S. Treasury Department put out new regulations in an attempt to stem the tide of ‘corporate inversions’, or U.S. firms merging with foreign ones and re-locating off-shore. This practice has been a hot button issue during the Presidential campaign. The proposed regulations represent the third in a series of increasingly-restrictive measures over the past three years, and would effectively raise the tax rate of foreign firms operating in the U.S. This iteration attempts to limit tools such as ‘earnings stripping’, where firms can essentially lend money to U.S. subsidiaries, which can claim tax deductibility for interest on the borrowings—this lowering U.S. earnings and raising it for the foreign portion (thus decreasing U.S. taxes due). No congressional approval is needed for such changes, as they’re considered a change in interpretation of existing laws. In response, Pfizer and Allergan decided to kill their proposed $160 bil. deal (it’s speculated that this pending merger was the impetus for this latest Treasury Dept. action).

Market Notes

Period ending 4/8/2016

1 Week (%)

YTD (%)

DJIA

-1.15

1.64

S&P 500

-1.15

0.81

Russell 2000

-1.81

-2.98

MSCI-EAFE

0.65

-4.46

MSCI-EM

-1.13

2.86

BarCap U.S. Aggregate

0.48

3.52

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

4/1/2016

0.23

0.76

1.24

1.79

2.62

4/8/2016

0.23

0.70

1.16

1.72

2.55

U.S. stocks were down—in fact, experiencing their worst week in two months. Some early declines coincided with a Fed official noting that markets were too slow in pricing in interest rate increases; however, this affected equities more than it did fixed income. Energy and health care posted positive returns; financials and cyclicals lost the most ground with continued concerns over global growth and yields remaining low. Earnings season is now beginning, and results here may well dominate sentiment over the next few weeks. Expectations are tempered, with S&P earnings slated to be flat to single-digit negative on a year-over-year basis, while hopes for improvement later in 2016 remain intact. Again, much of the index’s earnings number will depend on how energy (and financials) snaps back, as other sectors offer a mixed bag for the quarter.

Foreign stocks as a whole lost a bit of ground as well, similar to U.S. equities. Europe overall was just slightly positive on the week. European financials specifically have been weighed down as of late by concerns in the financial sectors and a glut of bad loans (particularly with Italian banks), but a European Commission plan to help compensate savers for losses boosted sentiment. Japan lost ground in local terms as business sentiment fell and PMI dropped below the 50 neutral reading, but actually gained several percent in USD terms as the yen continued to appreciate (it’s up dramatically versus the dollar so far this year, which has tempered poor local currency stock performance). As we know with the U.S. experience, however, a strong currency is not good news for exporters, so this adds another challenge for Japanese policymakers attempting to stimulate.

Emerging market stocks lost a few percent on the week. Brazilian stocks fell off dramatically early in the week, before rebounding somewhat in a macro response to impeachment possibilities and hopes for a ‘better’ regime, although it continues to be unclear as to what a new regime would look like and how much change is possible in the near term.

U.S. bonds saw strong gains as yields fell across the curve. Due to the typical duration effect, long investment-grade bonds outperformed, but high yield and bank loans also experienced gains, even as spreads ticked slightly wider.

The U.S. dollar weakened by a half-percent to over a percent, depending on the index being measured. Normally, this would buoy foreign bonds, but key developed markets in Europe, U.K. and Japan came in with similar results to U.S. indexes. Emerging market bonds generally sold off a bit along with wider spreads and move away from risk-taking on the week.

Real estate in the U.S. fell about a half-percent, which was a decent showing compared to broader equities—as is the +5% return year-to-date. European and Asian REITs gained several percent, leading the global group.

Commodities performed positively, largely the result of oil prices moving from $36.60 to $39.70 by week’s end—causing the energy group to gain +7% on the week as a whole. The gain was supported by American Petroleum Institute and U.S. Department of Energy inventory numbers mid-week which showed less supply than feared, as well as rig counts that show a continued reduction in drilling activity. At the same time, traders appear skeptical as to whether not production cuts are still in the works for OPEC nations. Precious metals also gained, with yields falling, while industrial metals declined several percent due to global growth concerns.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Seeking Alpha, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. 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 4, 2016.

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