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Weekly Review - April 4, 2016

Weekly Review - April 4, 2016

Guest Post - Monday, April 04, 2016

Summary

  • Economic data for the week was highlighted by a turnaround in manufacturing, decent housing reports and a generally positive but uneventful employment situation report.
  • Equity markets gained on the week with decent economic data, while bonds also performed well along with a drop in interest rates. Commodities fell on the week as oil supply concerns again rose to the forefront.

Economic Notes

(+) The ISM manufacturing index for March rose more than expected, to 51.8, beating expectations of a 51.0 reading. Interestingly, this was the month of expansion in this measure since Aug. 2015, which is obviously a promising development. The gain was led by stronger production and new orders, which were both above the 55 level, signifying a substantial increase for the month. Employment, on the other hand, ticked down a fraction to remain below 50 in contraction. Prices paid also rose substantially, back into over-50 territory with commodity rebounds in recent weeks.

(+) Similarly, the Chicago PMI rose 6.0 points for March, ending up at an expansionary 53.6—the highest level in a year. Analyst estimates appeared to be in the just-over-50 range. The bulk of the underlying measured components gained ground for the month, including production, employment, new orders and order backlogs; inventories remained flattish. Anecdotally, respondents appeared more optimistic about the coming year than in recent previous reports.

(-) Construction spending for February fell -0.5%, which disappointed relative to a forecasted gain of +0.1%. At the same time, January spending was revised upward by a half-percent, tempering the impact. Nonresidential construction was the primary contributor, falling approximately -1.5%, while private residential building rose almost +1%.

(0) Personal income for February rose +0.2%, which beat expectations of +0.1%, as non-wage income gains outshined declines in employee compensation. Personal spending gained +0.1%, which was generally on par with expectations; however, the prior month was revised downward by several tenths, dampening the positive result. On the inflation front, headline and core PCE were on par with expectations, falling -0.1% and rising +0.2%, respectively, bringing the year-over-year gains for headline to +1.0% and core to +1.7%. A more obscure inflation measure, personal consumption expenditures matter most as they're the preferred measure used by the FOMC in their official analysis. Interestingly, PCE and CPI are a bit more divergent than normal (with core CPI 0.65% higher than core PCE), which is a bit abnormal. Either CPI is too strong, or PCE too weak.

(+) The S&P/Case-Shiller home price index for January rose +0.8% on a seasonally-adjusted basis, beating forecast by a tenth of a percent. Every city in the index experienced increases, led by Portland, Seattle and Detroit, each up over a percent. Year-over-year, the index is up +5.8%, which continues to be a solid rate of home price appreciation from a historical standpoint.

(+) Pending home sales for February rose +3.5%, beating the forecasted increase of +1.2%, on a seasonally-adjusted basis (the measure was up +30% on a non-adjusted basis, explaining the need for seasonal adjustments). In fact, on that measure it was the strongest February in a decade. Sales were strongest in the Midwest, where they were up over +11%, while the South and West experienced marginal gains and Northeast fell a bit. Year-over-year, the level of pending sales rose by +5.1%.

(0/+) Total vehicle sales for March came in at 16.57 mil. on an annualized basis, gaining +3% over the year prior, and the best March in a decade, but a bit lower than the 17.5 mil. expected. Domestic sales were similarly lower at 5.12 mil. vs. 5.5 mil. expected. Trucks and SUVs continue to be the preferred sub-group, representing 57% of total sales—as consumers continue to take advantage of low gasoline price conditions and attractive low financing rates.

(+) The final Univ. of Michigan index of consumer sentiment for March was revised up a half-point to 91.0, exceeding expectations of no change. Consumer expectations improved several points, while long-term inflation expectations were unchanged at 2.7%—well within historical ranges.

(+) The Conference Board's consumer confidence index rose +2.2 points to 96.2 from February to March, stronger than the flat 94 reading expected. Consumers' assessment of present conditions ticked downward by over a point, while forward-looking expectations rose by almost +5 points. The labor differential, which measures the ease of finding jobs, ticked down a half point as well. Net-net, this measure has bounced around month-to-month but hasn't changed dramatically over the past year and remains near a recovery high point.

(+) The ADP employment report for March showed job gains of +200k, which was just above the expected +195k, so very little surprise. Service employment was responsible for +191k of the jobs, with +42k from trade/transports/utilities and +17k from construction (which is considered a 'service' since nothing is being manufactured). Goods-producing jobs rose by only +9k.

(0) Initial jobless claims for the Mar. 26 ending week rose to 276k, which was +11k above consensus estimates. Continuing claims for the Mar. 19 week edged lower to 2,173k, below the 2,200k expected. The Dept. of Labor noted no special factors for the week, but the Good Friday holiday may have had some impact in certain industries.

(0/+) The Bureau of Labor Statistics employment situation report for March was decent, with results largely matching hopes and expectations. Nonfarm payrolls rose +215k, which outperformed expectations calling for +205k, but at a slower pace than last month. While job gains appeared broad, services gained +199k, led by retail trade (+48k), general merchandise (+12k), construction (+37k) and health care (+37k). On the negative side, manufacturing jobs fell by -29k, in addition to further losses in mining (-12k), which includes activities in the energy area. It's always worth a reminder about this report concerning its construction, and that quite a few adjustments/assumptions are made in its construction; additionally, the room for error is quite high (as in +/- 100k jobs per report). Nevertheless, markets watch the report closely for trends, and that's probably the most useful takeaway from this type of data.

The unemployment rate ticked up a tenth to 5.0%, versus expectations for a flat 4.9% reading; however, as the bump up was due to an improvement in the workforce participation rate by a tenth of a percent, this was not all bad—actually, a positive. The employment-to-population, which is related, also grew—both measures are up just over a half-percent over the last six months. The U-6 underemployment rate also rose a tenth to 9.8% due to similar factors.

Average hourly earnings for March rose +0.3%, a tenth higher than expected, bringing the year-over-year increase to +2.3%. This is generally in line with broader inflation, while mixed in demonstrating the stronger wage growth desired by economists. The average workweek was unchanged at 34.4 hours.

(0) There was a big to-do about Janet Yellen's speech last week at the Economic Club of New York, in which she discussed the U.S. economic outlook—the most common topic. While the talk tended to be relatively optimistic in regard to the domestic outlook, the path of improvement was milder than previously expected, which is why the 'dot plot' rate estimates have fallen. She acknowledged the recent rise in core inflation being greater than some expected, as the longer-standing concerns over global influences, such as slowing economic growth in China and sporadic exchange rate policies. So, really, nothing too new here. But the dovish tone (hinting at no rate increase for the minor April FOMC meeting and casting doubt on June) was taken positively by risk markets.

Market Notes

Period ending 4/1/2016

1 Week (%)

YTD (%)

DJIA

1.58

2.82

S&P 500

1.84

1.99

Russell 2000

3.63

-1.19

MSCI-EAFE

-0.21

-5.08

MSCI-EM

1.71

4.04

BarCap U.S. Aggregate

0.58

2.99

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

3/24/2016

0.30

0.84

1.34

1.88

2.68

4/1/2016

0.23

0.76

1.24

1.79

2.62

U.S. stocks experienced some positivity on the week with the biggest gains coming from consumer staples and technology, up nearly +2.5%, while energy fell over a percent coinciding with cheaper oil prices. It certainly may not feel like it, but the S&P reached a high for 2016 so far, and is just a few percent below it's all-time peak last May. For the week, small-caps outperformed large-caps dramatically, as investors re-embraced risk—perhaps helped by better domestic manufacturing numbers, a decent jobs report and dovish Fed sentiment.

Overseas, developed markets in Europe and the U.K. lagged U.S. equities slightly, with a weaker dollar/stronger euro. Japan performed exceptionally poorly—losing several percent—as retail sales reports came in much weaker than expected, as did inflation. Emerging markets again showed strength, led by Brazil, which appeared ever closer to the regime change that has excited markets all year. China's PMI also rose into expansionary territory to its highest level in a year and a half, which improved general EM sentiment.

With dovish Fed talk, interest rates declined across the yield curve, resulting in a positive week for domestic bonds. Results were little differentiated across segments, but longer-duration investment grade debt outperformed high yield and bank loans by a few dozen basis points.

Foreign bonds in developed markets continued to plod along making gains, as interest rates abroad declined—partially in response to a deflationary report in Europe for the past month and weak year-over-year inflation figures. A weaker dollar by a percent and a half also helped as a tailwind to foreign returns. European debt generally outperformed Japanese for the week. It's important to be reminded of the difficult headwind that negative yields create over time—instead of earning a small, consistent coupon over time that provides an amount of positive return, this situation creates the opposite scenario and gives up small amounts of return over time, all else equal. Emerging market bonds were among the strongest performers of any asset on the week, led by the same factors that boosted EM equities.

Real estate continued its strong run in 2016, as lower interest rates and dovish Fed communications have pushed away potential shorter-term rate fears, which can add to REIT volatility. To a lesser degree, European real estate also gained, while Japan declined, in tune with their broader equity markets.

Commodity indexes fell several percent on the week, led by a decline in the energy group of over -5%. While natural gas bounced back somewhat, crude oil prices moved down from just under $40 to sub-$37 by Friday. Despite smaller-than-expected inventory builds in the U.S., in another chapter of the oil drama, the Saudis cast doubt on their willingness to cap production unless broader cross-nation agreement could be met; therefore, a lack of cap keeps supply at a high level. Other commodity groups, such as industrial metals and agriculture, have offered a mixed bag so far in 2016, which is certainly an improvement on the 'falling knife' performance of the past several years. Areas of positive performance include soybeans in the ag group, due to planting expectations, and copper and zinc, where it appears some Chinese supply excesses in metals may be finally declining somewhat.

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, Wall Street Journal, 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 March 28, 2016.

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