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Weekly Review - August 15, 2016

Weekly Review - August 15, 2016

Guest Post - Monday, August 15, 2016


Economic data for the week included a flattish/disappointing retail sales report and continued weak productivity, but, on the positive side, ongoing strong labor market metrics.

U.S. equity markets reached new highs again for the week, before pulling back to flattish returns; foreign stocks outperformed, with generally positive gains globally. Bonds gained some ground with interest rates falling. Commodities with help from a weaker dollar and higher oil prices.

Economic Notes

(-) Retail sales for July came in flat on a headline level, which was a disappointment relative to the +0.4% gain expected by consensus; it also experienced the same result on a 'core' measure, removing the impact of food, energy and building materials. On the positive side, several prior months were revised upward a bit. Under the hood, several broad segments lost ground during July, including general merchandise and an impact from cheaper gasoline prices, which lowers nominal sales numbers. However, non-store retail (i.e. online) gained over 1% for the month, in a continued show of strength for a segment of the economy that has been stealing market share from brick-and-mortar retail to an increasing degree over time.

(-) Nonfarm productivity for Q2, which was expected to come in at +0.4%, instead fell to -0.5%. Unit labor costs rose for the quarter by +2.0%, which was a few tenths higher than expected; however, past labor costs were revised downward for Q1 by almost 5%, which was much more meaningful. It appears peripheral compensation, including stock options and bonuses, were a more significant driver of the figure than were wages/salaries, which continue to be on track for year-over-year growth in the mid-2% area. As we've discussed, low productivity continues to be a unique and negative attribute for this business cycle relative to most over time, with economists continuing to debate the potential causes and their possible solutions.

(+) Wholesale inventories rose +0.3% in June, on both an overall and ex-petroleum basis, which outperformed expectations of no change. This is typically a minor item from an economic reporting basis, but accumulation can underlie some fundamental economic strengthening and the timing of inventory build-up can affect GDP for a given quarter—this may help Q2 revisions in this case, as well as carry over to Q3, where expectations for overall growth (including inventory buildup) is higher.

(0) The JOLTs job openings data for June ticked up by +3.8% to 5,624k, but fell short of the forecast 5,675k. The hiring rate moved up a tenth of a percent to 3.6%, while the quits rate was flat at 2.0% and layoff/discharge rate ticked downward to 1.1% (its all-time lowest level, albeit the JOLTs dataset isn't terribly old).

(0) Import prices rose +0.1% for July, in contrast to the -0.4% decline expected by consensus; additionally, prices for the prior month were revised higher by almost a half-percent. Excluding fuels, July prices rose by +0.3%, reflecting higher pricing for industrial supplies and materials, as well as food/beverages/feed, while petroleum fell by almost -4%. A tempering in the dollar's rise as of late, while helping exports, would have an effect of potentially increasing imported inflation.

(0) The July producer price index declined -0.4% on a headline level (in contrast to an expected +0.1% gain) and -0.3% on a core level, not including food and energy. The bulk of the change was due to a drop in both energy and food prices, which each fell about -1%, as did 'trade services', although several key segments declined to a lesser degree, including consumer goods and capital equipment.

(-) The preliminary University of Michigan consumer sentiment index for August rose almost a half-point to 90.4, but fell short of the 91.5 level expected. Forward-looking consumer expectations gained several points, while assessments of current conditions fell by a similar amount. Inflation expectations for the next year fell by two-tenths of a percent to 2.5%, while those for the upcoming 5-10 years were unchanged at 2.6%—well within recent ranges. Lower gasoline prices may have played a role in near-term inflation views, as they often do in these types of surveys.

(0) Initial jobless claims for the Aug. 6 ending week ticked down to 266k, which was +1k higher than expectations. Continuing claims for the Jul. 30 week came in at 2,155k, which was +22k higher than expectations. The DOL reported no special factors, and claims continue to hover at very low levels, in line with other areas of labor market strength.

Read the "Question of the Week" for August 15, 2016:

What has caused LIBOR to move up so sharply?

Market Notes

Period ending 8/5/2016

1 Week (%)

YTD (%)





S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

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U.S. stocks ticked slightly higher on the week as a small boost from department store retail stocks led sentiment. These have been an area of investor concern, as the intense growth of online retail has pressured the group—as commented under the retail sales note above. Announced store closures by larger firms, such as Macy's, appears to have pleased investors looking for cost savings and further consolidation in the industry. Overall, the energy and consumer sectors led the way with the largest gains in the S&P, while financials, materials and healthcare lost just over a half-percent on the week.

For Q2 earnings season as a whole, it was the 7th consecutive quarter with negative year-over-year growth, with a net result of -1% (ex-energy, it was +1%). Sales improved, however, with a flattening of the negative effects of a strong dollar from the prior period. Health care, materials and consumer discretionary bucked the trend with year-over-year earnings growth of near or a bit over 10%, energy lost ground with write-downs of energy assets, and the bulk of other sectors ended up with growth in the low-to-mid single digits. Guidance for the second half of the year remained tempered, even if a bit better than the first half, as poor results from energy especially begin to trail off.

Foreign stocks dramatically outperformed U.S. equities, with gains in Europe, Japan and the U.K., in addition to strength in emerging markets. A decline in the dollar aided in this effort, as did reports showing German growth was better than expected (at +0.4% for Q2), while other regions and data was mixed. Debate continues in Japan regarding further stimulus measures, how extensive these might be, if they'll be large enough—and much of that is economic data-dependent. Although growth in China has continued to slow, hopes for additional stimulus before the end of the year has buoyed sentiment somewhat.

U.S. bonds generally experienced a decent week with rates ticking downward, notably at the longer end of the yield curve, with help from lower PPI inflation and retail sales readings that depress perceptions of economic growth. Investment-grade and high yield corporates generally outperformed government bond indexes, except for the longest bonds, as credit spreads shrunk.

Foreign bonds rose, mostly through the help of a weaker dollar, benefitting USD-denominated debt for the most part, although emerging market local bonds fared decently also as credit spreads contracted. Interestingly, the Bank of England's new scheme of bond-buying ran into some difficulties, due to a reluctance of owners to sell their bonds (considering that U.K. rates are higher than many in the rest of Europe, rendering British relatively more attractive). In another unique twist, Japan's largest bank discontinued their program as a primary dealer of Japanese government bonds as it was determined an increase in interest rates by several percent would wipe out significant bank capital. This is the basic problem with very low/negative interest rates—not much good can happen with owning such bonds unless rates fall further into the negative. At the current pace of their purchases, the Japanese government could eventually become virtually the sole owner of these bonds.

Commodities gained on the week broadly with an improvement in the price of crude oil, which ticked higher from $41.80 to $44.50—a 6.5% gain—based on rumors of OPEC/Saudi Arabian agreements to adjust production boosted prices later in the week. Gold, a darling of 2016 thus far, fell back as investors preferred risk assets for yet another week, as the broader metals groups both lagged.

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 8, 2016.

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