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Weekly Review - August 14, 2017

Weekly Review - August 14, 2017

Guest Post - Monday, August 14, 2017

Summary

Economic data was highlighted by weakness in inflation, with the PPI and CPI both coming in lower than expected. On the labor side, the government JOLTs job openings index and claims continued to show strength, while labor cost and productivity growth remained sub-par.

Global equity markets fell last week, in line with most risk assets, due to escalating geopolitical tensions with North Korea. Government bonds, by contrast, in both the U.S. and developed foreign markets fared well that that safe haven-seeking environment, and outperformed corporates and emerging markets. Commodities lost a bit of ground on net as oil prices fell.

Economic Notes

(0) The producer price index fell -0.1% in July, compared to expectations calling for a slight +0.1% gain—the headline figure and core, ex-food and energy ended with the same result. Interestingly, this is the first negative month in a year. When the more recent category of trade services are included, the result was flat for the month. It appeared crude materials less food rose over a percent, which indicates some commodity pricing recovery, while intermediate prices declined to a greater degree than the index. Year-over-year, the PPI rate of change declined to +1.9%, with core PPI coming in at +1.8%, so largely in line with other inflation metrics as of late.

(0) The consumer price index rose a similar +0.1% in July, on both a headline and core, ex-energy and food basis. Prices for energy commodities declined a bit for the month, holding down prices, vehicle prices declined -0.5%, while shelter rose slightly and medical care commodities gained a full percent. Overall, very little to report for the month in terms of extremes. Year-over-year, headline and core CPI each rose +1.7%, continuing a trend of sub-2% readings. For the trailing twelve months, owners’ equivalent rent, which includes impacts from house prices and rentals, rose over +3% and continued to be a source of stronger inflationary pressures, while education costs actually declined by over -2%, as well as commodity prices generally. What this means for the Fed in changing probabilities of action this year remains debatable.

(+) The government JOLTs job openings report for June showed a gain of +461k job openings, rising to 6,163k for June, stronger than the 5,750k level expected, and representing a 11% year-over-year increase. Services jobs, as usual, were the strongest gainers, in professional/business services long with education/health. The job openings rate rose by a few tenths to 4.0%, hiring rate was unchanged at 3.7%, while the quits rate ticked down by -0.1% to 2.1%. This level is a new cycle high point, so continues to demonstrate strong underlying labor market dynamics.

(-) Unit labor costs rose +0.6% in Q2, which was roughly half the growth level expected. Year-over-year, however, costs fell -0.2%, short of the over-1% growth pace a quarter ago. Compensation per hour rose a mere +1% over the past year, also reflecting weakness. Nonfarm productivity rose +0.9% for the quarter, which outperformed forecasts by two-tenths of a percent, but continued to fall well short of longer-term averages of around 2%. The pace of both wage growth and productivity continue to show lack of meaningful increase on a macro basis; the lagging productivity as well as slow labor force growth have been two key determinants of tempered GDP growth in recent years. Economists continue to debate the causes of the lack of productivity issue, and conclusions have been hard to come by due to the difficulty in separating out this component from other data. These could be any or a combination of several, such as measurement difficulties related to technology, lessened incremental benefits from technology and/or tied to lower corporate capex spending during the last decade of recovery, although productivity had already begun to decline prior to the financial crisis.

(0) Initial jobless claims for the Aug. 5 ending week rose +3k to 244k, just above expectations calling for 240k. Continuing claims for the Jul. 29 week fell -16k to 1,951k, which was below median forecast calling for 1,960k. No special factors appeared to be behind the results, aside from the likely impact from summer factory retooling, particularly in the auto industry.

Market Notes

Period ending 8/11/2017

1 Week (%)

YTD (%)

DJIA

-0.91

12.30

S&P 500

-1.37

10.40

Russell 2000

-2.67

2.04

MSCI-EAFE

-1.48

16.05

MSCI-EM

-2.29

20.94

BlmbgBarcl U.S. Aggregate

0.24

3.14


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

8/4/2017

1.08

0.36

1.82

2.27

2.84

8/11/2017

1.03

1.30

1.74

2.19

2.79

U.S. stocks declined over a percent on the week for the first time in a while, ruining an otherwise benign summer week, as concerns over North Korea, notably the comment about ‘fire and fury,' outshined a lack of significant other economic or financial news, other than a few disappointing earnings reports in the consumer sector. Small caps were punished far worse than large-caps, in a continuing pattern of under performance from that group.

Insofar as sectors were concerned, energy suffered the most extensive losses, down over -2.5% on the week, followed by materials, with the former being additionally affected by a drop in oil prices. Consumer staples bucked the trend with a minor gain for the week, while utilities were almost flat.

Foreign stocks fared a bit worse than U.S. equities in local terms, but a weaker dollar helped offset some of the effect. Japan fared better than both Europe and the emerging markets; Korean stocks lost about -5% percent to no surprise. Interestingly, several former Japanese central bankers opined that the BOJ may need to alter or slow down the pace of bond and other security purchases (like ETFs) due to a possible shortage of assets to buy—and inflation levels of 1-2% still look to be a challenge.

U.S. bonds experienced a strong week, with a pullback in risk asset prices due to the geopolitical North Korean conflict. Weaker inflation to end the week certainly didn’t help interest rates stay afloat, which led to lessened probabilities of FOMC interest rate action later in the year. Treasuries earned most of the benefits for the week, while investment-grade corporates came in flat and high yield lost ground. Foreign bonds in developed markets gained due to the same tendencies, with a weaker dollar on the order of about a half-percent acted as a tailwind to boost returns higher than U.S. treasuries. Emerging market bonds all generally lost ground.

Real estate lost ground globally, in keeping with broader equity markets, with Asia and Europe outperforming the U.S. Domestically, both lodging/resorts and retail suffered sharp losses, with the latter continuing to be affected by weakness in the equity consumer retail sector.

Commodity indexes also fell, but to a lesser degree than equities. Crude oil fell -1.5% to $48.82/barrel due to reports of higher global oil production for several months in a row, which brought down the energy segment. On the other hand, industrial metals and precious metals both gained sharply (gold due to the geopolitical Korea risks, as would be expected).

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 August 7, 2017.

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