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Weekly Review - April 2, 2018

Weekly Review - April 2, 2018

Guest Post - Monday, April 02, 2018

Summary

On a holiday-shortened week, home sales and price data came in solidly, as did jobless claims; manufacturing data came in expansionary but at a slower pace, while consumer sentiment declined a bit.

Equity markets recovered globally last week, as rhetoric over a trade war with China dissipated a bit. U.S. bonds fared well, with interest rates falling back from recent high levels. Commodities fell a bit on the week, led by declines in the prices of crude oil and gold.

Economic Notes

(+) The final edit of the 4th quarter GDP number came in at +2.9%, which was two tenths above expectations. Personal consumption was revised higher by two tenths as well, to a +4.0% growth rate for the quarter, which helped boost the overall GDP figure. Inventory accumulation was also revised upward by twice that reported in the previous edition, in addition to higher figures for business fixed investment and government spending. Inflation readings were little changed. Thus far, as we move on to the new quarter, estimates for Q1 are falling in the relatively optimistic 2.0-2.5% range, with the Atlanta Fed’s ‘GDPNow’ measure rising to 2.4% from 1.8% for the prior week.

(-/0) The Chicago PMI result for March was a drop of -4.5 points to 57.4. This was the lowest level in a year, but continues to be solidly expansionary (noting that any reading over 50 represents growth). The underlying data was mixed, with production and new orders falling to the lowest levels in over a year, while order backlogs also declined. Supplier delivery times remained high, perhaps due to some bottlenecks in supplies, which also continued to tick up in price, according to the prices paid metric. On the other hand, employment continued to pick up. In the special monthly question about expectations for orders over Q2, half of firms anticipated a pick up, based on recent trends.

(0) Personal income in February rose +0.4%, while personal spending rose +0.2%, each meeting consensus expectations. The personal savings rate rose by +0.2% to 3.4%, a far higher pace than late 2017. The headline and core PCE price indexes each rose +0.2%, also on par with expectations. This brought the year-over-year inflation change to +1.8% for headline and +1.6% for core—this is the highest level of yearly core PCE in a year, but still well under the Fed’s target.

(+) The S&P/Case Shiller home price index for January rose +0.8%, beating the median forecast calling for +0.6%. For the month, all 20 cities experienced an increase, led by Seattle, San Francisco and Atlanta, which gained about a percent and a half each. Year-over-year, the rate of change on a national level ticked up a tenth to +6.4%, which remains extremely strong on a historical basis, especially relative to tempered levels of underlying inflation.

(+) Pending home sales for February rose +3.1% over the prior month, beating forecasts calling for a +2.0% increase; however, January results were revised downward a bit. Regionally, the Northeast and South experienced the sharpest gains, although all four areas turned in positive results. Interestingly, the year-over-year pending home sales figure is down -4% from a year ago, although this recent figure bodes well for existing home sales in a few months, as it usually serves as a predictor.

(-) The advance edition of the February trade balance report came in worse than the prior month, widening by $1 bil. to -$75.4 bil.—the widest level seen in this cycle and wider than the -$74.4 bil. level expected. Goods imports rose by over +1%, with increases in foods/feeds/beverages and capital goods, although some of this may have to do with the later Chinese New Year. Exports of goods rose +2%, with strong gains in the categories of industrial supplies/petroleum and autos. Activity generally has increased on both sides of the trade ledger over the last several months.

(-) The Conference Board index of consumer confidence fell by -2.3 points to 127.7 for March, as opposed to gaining a point to 131, as expected. The headline drop included slightly lower scores for present economic conditions and a bit more so for future expectations. The labor market indicator rose a bit—measuring how plentiful vs. hard to get jobs currently are—to its widest differential since 2001.

(-) The final March Univ. of Michigan consumer sentiment report ticked down by -0.6 of a point to 101.4, versus expectations for an unchanged reading of 102. The index remains near a high point for the cycle, regardless. The current conditions component fell by almost -2 points, which was partially offset by a slight rise in future expectations. The median inflation expectation for the coming year fell a bit to 2.8%, while inflation expectations for the coming 5-10 years were unchanged at 2.5%.

(+/0) Initial jobless claims for the Mar. 24 ending week fell by -12k to 215k, below the 230k expected and reaching nearly a 50-year low. Continuing claims for the Mar. 17 week rose by +35k to 1,871k, just a tick above the expected 1,870k level. There were no surprises in the DOL release, with the largest movements taking place in the largest states, as would be expected under normal conditions. Overall, the data continues to show a strong underlying labor market with minimal layoff activity.

Market Notes

Period ending 3/29/2018

1 Week (%)

YTD (%)

DJIA

2.42

-1.96

S&P 500

2.05

-0.76

Russell 2000

-1.35

-0.08

MSCI-EAFE

0.86

-1.70

MSCI-EM

-0.24

0.93

BlmbgBarcl U.S. Aggregate

0.52

-1.46


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

3/23/2018

1.74

2.28

2.61

2.82

3.06

3/29/2018

1.73

2.27

2.56

2.74

2.97

U.S. stocks gained ground on a week shortened by the Good Friday holiday. Volatility was present again early in the week as a relief rally on Monday due to a tempering in tariff language that shook markets sharply last week, while mid-week sentiment was challenged again as Facebook struggled to explain its data lapses—bringing down the high-flying tech sector. Overall, a tempering of fears surrounding a trade war with China appeared to boost sentiment for risk assets overall, although trade war talk and actions on both sides continue to be a theme of potential uncertainty over coming weeks. It’s not the dollar amounts of various targeted items that is making investor jittery—it’s the fears of possible escalation to more substantive trade policy matters that could dampen the global economic recovery or grind it to a halt. The latter result does not appear to be the base case, in the current view of many economists, due to the basic fact that no one really wins under such an outcome.

Defensive consumer staples led the way with the strongest gains of over 3%, followed by telecom and utilities, while energy and consumer discretionary stocks gained just over a percent. Large index component Amazon was also hit with tough talk from the administration, hinting at anti-trust concerns.

Foreign stocks in Europe, U.K. and Japan all gained, albeit to a lesser degree than domestic stocks, brought down further to minimal levels by a stronger dollar. With a lack of major news releases, it appears sentiment abroad was also driven by lessened concerns over a broader global trade war, as it was in the U.S. Emerging market stocks lost ground slightly during the week, although results by region were mixed.

U.S. bonds benefitted from the shift in cash flows back to equities, with most segments showing gains along with interest rates falling to their lowest levels in a nearly two months. Investment-grade corporates outperformed governments, although high yield bonds ended up with minimal gains for the week and bank loans ended flat. The dollar rose by nearly 1%, turning minor gains in developed market foreign bonds into losses when translated into USD terms, with the key 10-year rate in Germany falling below 0.50% again. Emerging market bonds generally retained decent gains, with less of a currency effect, in keeping with positive sentiment for risk assets generally.

Real estate recovered well with a drop in interest rates, which had been weighing on sentiment, with U.S. REITs sharply outperforming foreign issues that were weighed down by a stronger dollar. All segments gained, but were led by +5% increases in residential and cyclically-sensitive lodging/resorts.

Commodity indexes declined slightly, led by weaker returns for energy and precious metals, while industrial metals and agriculture were mixed for the week. Natural gas prices rose several percent for the week, while crude oil declined slightly by just over a percent to $64.94—led by reports of rising inventories and analyst reports calling for cheaper oil in coming 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 March 27, 2018.

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