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Weekly Review - April 9, 2018

Weekly Review - April 9, 2018

Guest Post - Monday, April 09, 2018


Economic data for the week was led by weaker-but-still-robust reports for manufacturing and non-manufacturing activity, yet mixed results for jobless claims and a weaker-than-expected employment situation report for March—likely weather-affected.

U.S. equity markets swung dramatically in both directions during the week, ending lower with ongoing market concerns over trade tariffs. European equities bucked the trend by gaining ground, while emerging markets declined. Bonds were flattish to slightly negative as interest rates ticked up again during the week. Commodities declined a few percent as positive results from non-energy groups were unable to offset declines in crude oil.

Economic Notes

(-/0) The March ISM manufacturing index fell by -1.5 points to 59.3, a bit more than the expected minimal drop to 59.7, but remaining solidly expansionary. Key underlying components all declined, including new orders, production, employment and inventories, but similarly remained near or above the 60 range, which is quite strong. While the pace didn’t match that of the prior month, manufacturing activity remains robust.

(-/0) The ISM non-manufacturing index for March declined by -0.7 points to 58.8, which was just a shade below the forecasted level of 59.0. New orders and business activity fell by several points, but remained near the 60 level, while employment gained over a point and supplier deliveries rose by several points to a new high for the cycle. Like in manufacturing, this services index continues to run at a high level, signifying expansion.

(-) Factory orders rose +1.2% for February, falling short of the expected +1.7% increase, and included downward revisions for two prior months. Durable goods orders were revised down a tenth to +3.0%, while manufacturing inventories rose a few tenths.

(-) Construction spending rose +0.1% in February, lagging forecasts calling for a +0.4% increase. At the same time, data for the two preceding months were each revised higher by just under a percent. By segment, private non-residential gained over a percent to lead, while public non-residential fell by over -2%.

(+)Motor vehicle sales for March increased, bucking the decline of the previous month, with auto/light truck sales rising to a seasonally-adjusted annualized rate of 17.4 mil. units, with inventories declining. However, concern remains about the impact of higher interest rates on auto financing as the year progresses, in addition to already-challenged conditions in the ‘sub-prime’ auto loan market, albeit small. Interestingly, GM reported that it will stop reporting monthly unit sales numbers, taking the frequency down to quarterly—it’s assumed other carmakers may follow suit.

(-) The trade deficit for February widened further by -$0.9 bil. to $57.6 bil., relative to expectations for a little-changed reading of -$56.8 bil. On a newsworthy note, it appears imports from China surpassing exports has represented the bulk of the deficit in recent months, which appears tied to a greater degree to timing of the Chinese New Year than it does the recent tariff talk, although the dated information of these results mean that time will tell in the coming months.

(+) The ADP employment report for March came in showing a +241k gain, beating expectations calling for +210k. Additionally, the February growth number was revised up by +11k. In March, service jobs increased by +176k, as professional/business services, trade/transports/utilities and education/health led. Goods-producing jobs rose +65k, which was almost entirely led by a nearly-even split between construction and manufacturing.

(0) Initial jobless claims for the Mar. 31 ending week rose by +24k to 242k, surpassing the 225k claims estimated. Continuing claims for the Mar. 24 week declined dramatically by -64k to 1,808k, lower than the 1,843k expected and representing a new low for the current economic cycle. The DOL didn’t report any anomalies in the data, which continues to point to low levels of layoff activity, and, hence, a very strong employment market.

(-) The government employment situation report for March came in as a bit of a disappointment. While early in the quarter/Fed cycle, continued strong results could have meant meaning a higher probability for another Fed hike in June, but there are several reports to come between now and then. Weather certainly could have played a role in these results, as weather-sensitive industries suffered the largest lags compared to the prior month, when weather was more benign.

Nonfarm payrolls rose by +103k, compared to +185k expected—representing the slowest pace since Sept. Professional/business services (+33k) was a primary segment of job creation, per usual, while other key areas of growth included manufacturing (+22k), health care (+22k) and mining (+9k), the latter of which includes oil industry jobs. Less positive areas included construction (-15k) and retail (-4k), each of which represented a reversal from large gains the prior month. Additionally, payrolls for January were revised down significantly from +239k to +176k, while February’s were revised higher slightly, from +313k to +326k. As we’ve often mentioned, initial releases have a high degree of standard error (+100k) so should be taken with a grain of salt, but tend to be taken quite seriously by markets.

The unemployment rate was unchanged at 4.1%—where it has been for six consecutive months—in contrast to expectations for a slight drop to 4.0%. The household survey came in showing a decline of -37k jobs, in sharp contrast to February’s gain of nearly +800k. Bucking the trend, the broader U-6 rate of unemployment fell by -0.2% to 8.0%. The labor force participation rate was little changed, at 62.9%, although those working part time for economic reasons (can’t find full-time work), those marginally attached to the labor force, and discouraged workers are generally down from a year ago. These stats all attest to the strength of the current labor market. However, job growth over the last two years lags that of the more robust 2014-15 period when we appeared to be further away from full employment than today.

Average weekly hours were steady for the month at 34.5. Average hourly earnings rose by +0.3% for the month, bringing the year-over-year rate of increase to +2.7%.

Read the "Question of the Week" for April 9, 2018

How meaningful are these ongoing tariff threats?

Market Notes

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U.S. stocks ended a roller-coaster week nearly flat, as losses early in the week in response to trade concerns abated by Thursday, with rhetoric from the administration meant to downplay impact of the tariffs, but appeared again Friday as markets fell sharply for the same reason.

Volatility has substantially increased in recent weeks, with the latest catalyst being the imposing of tariffs by the U.S. (and by China, in retaliation) on a variety of goods. The tempered jobs report on Friday was not taken as poorly as it could have been, perhaps in a realization it could keep the Fed’s pace of rate increases tempered if labor growth stabilizes. Next week begins the flurry of Q1 earnings reports, which could shift some focus away from the tariff talk.

Every sector lost ground during the week, with energy faring best with losses of just a few basis points, and defensive sectors consumer staples, utilities and telecom just behind. Technology and industrials fared worst, with larger anticipated impacts from tariffs, as tech hardware and industrial equipment are among the most significant U.S imports from China—so would be the most negatively affected by rising input costs.

Foreign stocks were mixed with a slightly stronger dollar weighing on results minimally. Stocks from Europe and the U.K. gained, as stronger economic results—and unemployment falling to its lowest levels in nearly a decade—outweighed broader trade concerns that appear to be driving equity results as a group globally in recent weeks. European PMI has been ticking downward a bit as of late, although it remains solidly in over-50 expansionary territory. Some fears have rising around a possible deceleration of European growth, which could ultimately trail into a slower pace of earnings growth recovery, but growth overall continues to remain solid. Emerging markets saw declines with China and Brazil suffering most from global trade fears.

U.S. bonds declined slightly, with government losses offset by minimal gains in investment-grade corporates. High yield bonds fared better, as spreads contracted a bit. A stronger dollar pushed minimal losses in foreign developed market debt from rising rates into deeper negative territory.

Another under-the-radar story is the resurgence of LIBOR rates. The 3-month version has risen almost a percent over the last six months to reach its highest levels since 2008. While rising short-term treasury rates appear to play an obvious role in higher yields for a variety of related indexes, there also appear to be technical factors at play as U.S. companies sell short-term commercial paper (driving prices down and rates up, like all bonds) to repatriate cash domestically in response to tax reform. LIBOR is going away anyway in three years, to be replace by another short-term bogey, but remains relevant for the time being as a primary base index for corporate loans of all types, and even residential and consumer revolving debt.

Real estate lost some ground, but to a far lesser degree than U.S. equities. Apartments experienced gains, while industrial REITs suffered on par with broader tariff-related concerns for industrial activity. Asian and European REITs fared better, with gains, in keeping with better results abroad, despite a stronger dollar.

Commodities declined due to a drop in the energy sector. West Texas intermediate crude oil fell by over -4% on the week to $62.06 to end the week, despite inventory declines and lower rig counts, as investors became increasingly concerned over possible effects of tariff talk on oil demand. Natural gas declined to a much lesser extent. Other segments, including metals and agriculture gained ground for the week partially offset energy’s weakness.

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,, 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 2, 2018.

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