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Weekly Review - April 18, 2016

Weekly Review - April 18, 2016

Guest Post - Monday, April 18, 2016

Summary

  • Economic data for the week was plentiful but mixed, with neutral results from retail sales and inflation, weaker industrial production and consumer sentiment but strength in some manufacturing results.
  • Equity markets gained ground with higher oil prices and positive earnings results. Government bonds lost some ground on higher interest rates, but tighter spreads benefitted corporate bonds. Commodities also rallied, led by oil and agriculture.

Economic Notes

(0) Retail sales for March fell by -0.3%, which fell short of the expected +0.1% gain; however, some revisions for two prior months were taken +0.3% higher—causing the overall report to a be somewhat of a wash. Core sales, removing the more volatile components, showed a +0.1% gain, compared to the +0.4% expected. Motor vehicle sales fell by -2%, contributing to the decrease, in addition to clothing purchases; at the same time, gas station sales rose with gasoline prices ticking up during the month.

(+) The NY Empire State manufacturing index rose sharply again, from +0.6 the prior month to +9.6 in April, far ahead of expectations calling for +2.0. New orders and employment rose in line with headline gains, inventories improved while still remaining contractionary, and shipments ticked downward a bit. This result wasn’t overly surprising, but reiterates a bounceback from a manufacturing slow patch seen in other data.

(0) The Producer Price Index (PPI) fell -0.1% on both a headline and core level, which came in below expectations of a +0.2% increase for headline and +0.1% for core PPI. The tempered change came as a result of higher energy prices being offset by weaker food prices; trade services also fell a half-percent on the month to weigh down the overall result. Year-over year, headline PPI has declined -0.9%, which is certainly related to lower petroleum input costs, as removing foods, energy and trade results in a 12-month gain of a still-tempered +0.7%.

(-) Industrial production fell -0.6% in March, further than the expected decline of -0.1%. Manufacturing production as a component of this fell -0.3%, due to weaker production in machinery and motor vehicles/parts; the difference between manufacturing and the total industrial number resulted from weakness in utilities/mining, which includes the energy space. Capacity utilization came in at 74.8%, which was a half-percent below expectations of 75.3%, with weakness also originating from manufacturing, mining and utilities.

(-) The preliminary April Univ. of Michigan consumer sentiment index fell by over a point to 89.7, despite consensus expectations calling for an increase to 92.0. Both current conditions and expectations for the future fell, and inflation expectations for the coming 5-10 years ticked down to 2.5%—a low point for the past few years compared to averages of higher 2’s to 3%.

(-) The NFIB Small Business Optimism index for March, in contrast to manufacturing improvement, fell to a multi-year low to 92.6, despite expectations of a gain to 93.5. Interestingly, the underlying responses also showed weakness, with declines in sentiment for environment for business expansion as well as hiring plans.

(+) Initial jobless claims for the Apr. 9 week fell to 253k, versus 270k expected, and again touching multi-decade trough levels. Continuing claims for the Apr. 2 week also fell more strongly than consensus, to 2,171k, versus 2,183k expected. The DOL reported no special factors that would have corrupted the results. All-in-all, this is a positive report, as jobless claims are about as close of a ‘real time’ indicator of labor conditions as one can get. Other labor indicators, such as the unemployment rate and nonfarm payrolls have a tendency of lagging indicators, so reflect changes that have already taken place as opposed to being of as much help on the forward-looking side.

(+) The periodically released Fed beige book, which provides qualitative color on economic activity throughout the various Fed districts nationwide, showed that overall activity continue to expand across most regions for later February and March. Consumer spending increased (with implied help from low gas prices), including auto sales. Manufacturing activity showed improvement over the prior report (in keeping with other data/surveys), in addition to stronger real estate and construction activity. Labor markets continued to show strength, with some wage growth pressures beginning to appear in selected areas, particularly in the Northeast, West and selected Midwest districts, but nothing too dramatic—these generally occurred in occupations suffering from labor shortages and higher turnover, as technology services and skilled construction/manufacturing. Retail prices increased a bit, but overall inflation continued to look tempered, especially with oil prices at low levels.

Market Notes

Period ending 4/15/2016

1 Week (%)

YTD (%)

DJIA

1.85

3.52

S&P 500

1.65

2.47

Russell 2000

3.08

0.01

MSCI-EAFE

3.58

-1.05

MSCI-EM

3.66

6.62

BarCap U.S. Aggregate

0.08

3.46

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

4/8/2016

0.23

0.70

1.16

1.72

2.55

4/15/2016

0.22

0.74

1.22

1.76

2.56

U.S. equities generally gained ground on the week as earnings reports came in a bit better than expected and a production cut in oil helped general sentiment in the commodity space. Financials, industrials and materials led the way with returns in the low single-digits, while defensive consumer staples and utilities came in flat to slightly negative for the week. Financials gained ground largely due to better-than-expected earnings reports from megabanks Citi, Wells Fargo and JPMorgan. With a ‘risk on’ environment, small cap stocks rallied to outperform mid- and larger-cap indexes domestically. This coming week will be another high-volume one for earnings reports, which could drive a degree of market sentiment.

Foreign stocks outperformed the U.S., with gains in Japan and Europe, despite a slightly stronger dollar. Emerging markets also fared well, with gains similar to those in developed regions, but led by further gains in Brazil as hopes for political change remained intact ahead of a key vote on the issue of presidential impeachment. Some stabilization in commodity markets has also been a boost to Brazilian sentiment, witnessed in year-to-date strength from commodity exporters Canada, Australia, Chile, South Africa, Russia and a few others. Key developments for the week included the U.K. keeping interest rates unchanged, largely a result of the uncertainty surrounding the upcoming ‘Brexit’ vote in June. In EM, the release of Chinese GDP, which fell precisely yet unsurprisingly within the intended range of 6.5-7.0%. The trend continues downward, led by industrial performance, which is back at 2009 growth levels (although still just below 6%!).

U.S. bond prices were mixed with risk-taking being in vogue for the week, as interest rates ticked upward across the bulk of the curve. Government bonds came in negative, while credit—especially high yield and floating rate bank loan—gained upwards of a percent for the week. European and Japanese debt was generally currency-driven, while emerging market bonds gained in keeping with stronger risk assets and commodity sentiment.

Real estate earned flattish to minimal gains in the U.S., led by positivity in more cyclically-sensitive lodging/resorts, while the popular apartments/residential group pulled back a bit. Asian REITs performed strongly, on par with equities, led by gains in Australia and Japan, while Europe lost some ground.

Commodity indexes gained over a percent, led by sharp gains in industrial metals copper, zinc and nickel. Energy gained on net with crude oil rising from $39.70 to $41.70, with investors anticipating the weekend’s meeting of the world’s major oil producers in Qatar (however, the weekend came and went with no agreement, fueling fears of a longer-lasting supply glut by Monday morning). Natural gas continued its decline due to the usual variables of high inventories and lessened weather-related demand. Agriculture was another positively-performing group on the week, led by corn and soybeans, while gold lost ground on risk-taking sentiment elsewhere.

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, 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 11, 2016.

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