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Weekly Review - April 16, 2018

Weekly Review - April 16, 2018

Guest Post - Monday, April 16, 2018

Summary

Economic data for the week included producer and consumer inflation reports that showed pricing ticking upward, as expected, while sentiment declined and labor data, while strong, came in below expectations

Global equities gained upon more tempered language between the U.S. and China over trade policy, while bonds succumbed to interest rates pushing higher. Commodity prices rose, led by oil’s jump as a result of expected military action in Syria.

Economic Notes

(0) The March producer price index rose more than expected, at +0.3% for both headline and core, versus a consensus guess of +0.1% and +0.2%, respectively. This was led by a -2% drop in energy prices and +2% gain in food prices. Other segments were mixed, with a half-percent rise in transportation/warehousing leading the way.

Import prices in March were unchanged, despite expectations for a slight +0.1% increase. However, a similar drop in petroleum helped, with core import prices ex-petroleum rising by a slightly higher +0.1%—this was led by gains in foods/feeds/beverages as well as capital goods, while industrial supplies prices fell, as did other consumer goods. Year-over-year, core import prices have increased +2.1%, in keeping with other inflation measures.

(-) The preliminary Univ. of Michigan consumer sentiment index for April fell by -3.6 points to 97.8, below the 100.4 level expected. Assessments of current conditions fell by over -6 points, while expectations for the future declined by just -2 points. On the inflation side, expectations for the coming year fell by a tenth of a percent to 2.7%, as did expectations for the coming 5-10 years to 2.4%. While below peak sentiment levels, this measure remains strong.

(+) The government’s JOLTs job openings data for February declined a bit (by -176k) to 6.052 mil., but still beat forecasts calling for 6.024 mil. The drop largely consisted of declines in food/accommodation employment, as well as construction and professional services. The job openings rate fell by -0.1% to 3.9%, as did the layoffs rate by the same magnitude to 1.1%, and the hiring rate to 3.7%. The quits rate was unchanged at 2.2%. This measure, like many others, continues to show labor market strength.

(0) Initial jobless claims for the Apr. 7 ending week fell by -9k to 233k, coming in a bit higher than the 230k level expected. Continuing claims for the Mar. 31 week rose by a fairly-high +53k to 1,871k, surpassing the 1,843k level expected; however, the Good Friday holiday and Easter may have played a role in adjustment challenges. Despite that quirk, overall claims levels continue to run at a very low level.

(-) The minutes from the March FOMC meeting showed a generally optimistic view of the overall economy. Overall growth was described as ‘moderate’, while acknowledgements were made in the areas of household and business spending; interestingly, the dispute over trade policy was seen as a significant risk, although this view was not publicized as much at the time. The committee expects that inflation will firm over ‘coming months’ towards their 2% target, with an overshoot possible in years following as the cycle matures—not viewed as a major concern at this time. However, all participants felt further policy was appropriate under such a scenario, even to the point of the terminal rate rising higher than the long-term neutral rate for a time, which was a bit of a surprise.


Market Notes

Period ending 4/13/2018

1 Week (%)

YTD (%)

DJIA

1.80

-0.87

S&P 500

2.04

-0.10

Russell 2000

2.41

1.26

MSCI-EAFE

1.48

0.40

MSCI-EM

0.70

1.00

BlmbgBarcl U.S. Aggregate

-0.18

-1.69


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

4/6/018

1.73

2.27

2.58

2.77

3.01

4/13/2018

1.76

2.37

2.67

2.82

3.03

U.S. stocks recovered last week, as trade tariff talk between the U.S. and China calmed down somewhat with more conciliatory language—boosting market sentiment that a full-out global trade war could be avoided. Additionally, Chinese officials vowed to improve market access for foreign firms, notably in the financial arena. However, threats of missile strikes on Syria (later realized) and a dramatic seizure of documents from the office of the President’s attorney added more drama and uncertainty to the political mix.

From a sector standpoint, energy led the way with gains over +6%, with continued higher prices for crude oil, followed by tech, as Congressional testimony of Facebook founder Mark Zuckerberg resulted in an alleviation of regulatory fears somewhat. Lagging were defensive sectors utilities and consumer staples. Upcoming earnings are the next round of news, with year-over-year earnings growth expected to fall in the high 15-20% range, which would be the strongest season in seven years.

Foreign stocks lagged U.S. issues a bit, developed Europe and the U.K. outperforming Japan and emerging markets, although all fared positively. In EM, Russian and Turkish stocks were hit hard, following an escalation of tensions over Syria. Conversely, China fared well with a toning down of tariff talk and other commodity-oriented nations, such as Mexico, shined with a trend of higher oil prices.

U.S. bonds lost ground during the week as rates ticked up across the yield curve, with investment-grade corporates faring a bit better than government bonds. Minor losses in developed market foreign bonds, due to higher yields, converted to gains with a weaker dollar of, albeit by only about a third of a percent. Emerging markets performed similarly in both local and USD terms, with flattish returns on net.

Real estate lagged in the U.S., upon higher rates, but fared well internationally, with returns rivaling those of broader equities in Europe and Asia. Domestically, dispersion was wide again, with cyclical segments such as lodging/resorts outperforming (except for retail) while more defensive segments, such as healthcare, lagged behind—not a surprise due to the easing of global trade concerns.

Commodity indexes rose significantly on the week, due to sharp gains in energy, although industrial metals prices and other segments also saw gains. Crude oil rose dramatically during the week, by over +8% to $67.39—to no surprise, this increase was due to comments by the U.S. administration alluding to military strikes, which came to fruition later in the week. Aside from the direct Middle East geographical connection, which has traditionally resulted in oil price volatility when tensions rise, the involvement of oil producers Russia and Iran add a secondary wrinkle, now that current supply conditions appear to have moderated somewhat, perhaps leaving less of a buffer than in prior months.

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 April 09, 2018.

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