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Weekly Review - August 17, 2015

Weekly Review - August 17, 2015

Guest Post - Monday, August 17, 2015


  • Economic data on the week generally turned out mixed to better than expected, with positive results in retail sales and industrial production, while several employment metrics were a bit weaker.
  • Despite weakness early due to concerns about the Chinese currency devaluation, markets rebounded to result in a positive week in the U.S., while foreign stocks generally lost ground. Bonds were little changed as yields across the curve barely budged. Crude oil prices fell in the U.S. by a few percent, while Brent crude and gold rose—resulting in just a slight decline in commodity indexes overall.

Economic Notes

(0/+) Retail sales for July were mixed, with the headline figure showing a +0.6% gain, on par with expectations, while the less volatile ‘core/control’ gaining +0.3%, about two-tenths below expectations. Additionally two prior months were revised upward by a few tenths of a percent, which was a positive to the report overall, especially considering the relatively small numbers. The headline inclusive areas of autos, building materials, gasoline and food services displayed a substantial portion of growth. In the core segments, online sales (the bulk of ‘non-store retail’) gained +1.5% perhaps aided by some Amazon promotional activity, while electronics fell by just over -1%.

(0) The producer price index for July on both a core and headline level rose +0.2% on a seasonally-adjusted basis, which was a tick higher than forecast. Goods prices fell by -0.1%, while services gained +0.4%, accounting for the difference. A small portion of this was actually the result of a correction in egg prices back downward after a spike in June (avian flu). Year over year, the headline PPI rate fell -0.8%. This represents a continued pattern of very subdued inflationary pressures, due to tempered influences of energy and related segments.

(+) On a similar note, import prices fell -0.9% for July, which was not quite as dramatic as the forecasted -1.2% decline. As expected, petroleum pricing led the way, down -6%. Interestingly, capital goods prices have fallen in every month over the past year. Year-over-year, headline and core import prices fell -10.4% and -2.9%, respectively. This is how a strong dollar can affect ‘imported’ inflation, so one benefit to offset the headwind of weaker exports.

(+) Industrial production in July rose +0.6%, which was double the forecasted increase. However, some earlier months were revised downward, which tempered the effect. In July, the bulk of production gains originated from the motor vehicle segment, which increased by +11%; non-auto manufacturing was barely above flat. ‘Mining support’ production, which includes the oil/gas complex gained almost a half-percent on a seasonally-adjusted basis, which was a small positive. Capacity utilization came in at 78.0% for the month, which was as expected.

(-) Productivity for the 2nd quarter came in weaker than expected, only rising +1.3% versus a +1.6% increase expected, taking the year-over-year increase to a barely-positive +0.3%. Unit labor costs rose +0.5% for the quarter, relative to a forecast of no change. Additionally, productivity stats for 2013 were revised downward, which doesn’t have much impact on current figures but affects longer-term trends that economists tend to use for these things (productivity is one of those areas generally looked from a longer-timeframe perspective).

Productivity is a unique concept, essentially defined as the output earned per unit of input, often measured as GDP-to-hours worked. Lately, productivity has been slowing (even before the financial crisis) and many economists are trying to figure out why—whether it be fewer blockbuster innovative ideas, or the spread of these ideas has changed or slowed somehow.

There have been a few theories about productivity put out there by economists in recent years, concerning its stubbornly low level. Of the more prominent theorists, professor Robert Gordon of Northwestern University, has implied that the scale of technological changes over the past 100 or so years cannot be replicated—an example being the transition from horse-and-buggy to supersonic jet in the matter of a few decades’ time, yet a much less dramatic pace of innovation since. Will a faster or thinner transistor that saves perhaps a fraction of a second in computer processing time provide the same bang for the buck as the invention of the smartphone in the first place? Or, more workplace appropriate, sending a few e-mails in a single minute relative, with almost immediate response, relative to the hand-typing and mailing of paper documents? These theoretical points continue to baffle economists using old-school paradigms to evaluate modern work. Robotics have taken over many manufacturing industries, adding to faster production as well as better, more consistent product quality, but a translation of this to service work has been more difficult to determine, and there may be no easy answer to this anytime soon.

(+) The NFIB business optimism survey for July rose +1.3 from the prior month to 95.4, better than the 94.3 expected. One the labor market side, the majority of those surveyed were interested in hiring, but just under half weren’t able to find qualified workers. From a credit standpoint, a third of firms felt their loan needs were being satisfied and another half weren’t in need of additional credit. The survey has lagged a bit recently in choppy month-to-month reports (common) but continues to show broader trends of improvement since extreme lows in 2009.

(-) The preliminary Univ. of Michigan consumer sentiment survey for August fell a few tenths to 92.9. Expectations for the future declined, while household assessments for current conditions were generally unchanged, which accounted for the result. Inflation expectations fell a bit to 2.7%, but this remains well within recent ranges.

(-/0) The government JOLTs report for June showed a monthly decline of -108k jobs to 5,249k, which disappointed relative to an expected 5,350k showing, although the full trailing 12 months shows a gain of +539 jobs, which is considered substantial. During June, lower openings were seen across a variety of areas, including leisure/hospitality, construction and manufacturing. The hiring rate moved up a tenth to 3.7%, while the quit rate stayed at 1.9%.

(-/0) Initial jobless claims for the Aug. 8 ending week rose by about +5k to 274k, just slightly higher than the 270k expected. Continuing claims for the Aug. 1 week also rose slightly by +15k to 2,273k, higher than the 2,245k forecast. No special factors were reported.

Market Notes

Period ending 7/10/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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U.S. stocks experienced weakness early in the week, courtesy of the Chinese government’s decision to float the yuan lower by several percent (that we outlined the background of in the separate special ‘Question of the Week’ installment). Additionally, the FOMC Vice Chair mentioned in a speech that he didn’t expect rate hikes until inflation returned closer to 2%, although this was outshined by the Chinese news. This search for meaning in comments from FOMC members continues to act as a driver of near-term sentiment if anything remotely unexpected comes out in sound bites.

By the end of the week, returns for equities had recovered, with all sectors ending up positive. Energy recovered to be the biggest gainer on the week, up +4%, followed by utilities; on the negative side, consumer staples and health care barely budged. In blue chip news, Google announced that it’ll be restructuring itself as a company known as ‘Alphabet,’ which appears to be a play on the term ‘bet on alpha,’ more than the reference to letters. In this form, it’ll provide better transparency from underlying business lines, including the classic search ad revenue, but also the Android platform, as well as the wackier ventures in biotech and driverless cars. Markets appeared to like this additional layer of transparency.

Foreign stocks, on the contrary, lost ground, although they performed better in USD terms than not, as the dollar weakened on the week. The much-maligned China A share market was the best-performing index, gaining several percent, while Greece and other European peripheries also gained ground to lead the pack. While European GDP for the second quarter grew at +0.3%, a bit of a deceleration from the first quarter and slightly below expectations, Spain grew at a faster rate than France, leading the way. Also, some of these positive sentiment no doubt resulted from approval of the 86 bil. euro Greek bailout package through a 3-year financing arrangement, in return for further reforms and cuts. Losers, unsurprisingly, were Asian region nations with the most to lose from China’s currency devaluation and stronger export position, including Malaysia, Indonesia, and Taiwan.

U.S. bond indexes lost just a bit with interest rates virtually unchanged across the yield curve during the week. Investment-grade bonds generally outperformed high yield, with oil prices weighing on sentiment for the energy sector. Foreign bonds performed similarly in local currency terms, but more favorable when translated back to dollar terms.

On par with equities, developed Europe represented the strongest real estate returns, while U.S. returns were positive in several areas, including mortgage, lodging and residential/apartments. (The U.S. apartment market continues to be one of the better performing assets of the year—up nearly +20% year-to-date on continued strong demand.) Asian REITs brought up the rear with negative returns, hurt by the general concerns surrounding China.

Commodities again were mixed, with slight declines overall. Crude oil prices fell -2% to about $42.75/barrel after pushing 6-year lows—driving overall index returns as usual. By contrast, Brent crude gained, as did precious metals. Corn and soybean prices fell by several percent on the week on anticipation of a bumper crop in the two harvests.

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 10, 2015.

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