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Weekly Review - August 21, 2017

Weekly Review - August 21, 2017

Guest Post - Monday, August 21, 2017


Economic data for the week was highlighted by mixed housing results but gains in retail sales, several strong readings from regional manufacturing surveys, and strong results for the index of leading economic indicators and jobless claims.

Global equity markets were mixed last week with U.S. stocks losing ground, and foreign stocks gaining slightly on net. Bonds were little changed along with minimal movement in interest rates, while emerging market bonds fared well. Commodities lost ground slightly with losses more concentrated in agriculture than in energy.

Economic Notes

(+) Retail sales for July rose +0.6%, far better than the +0.3% expected. The core/control retail sales figure was identical to the headline, which also outperformed expectations. Sales were strong across a variety of groups, including department stores, food/beverage, health/personal care, miscellaneous, as well as non-store (‘online’) retail, which was up well over a percent. It appears Amazon Prime Day last month was a significant part of that component and a reminder of how pervasive this effect has become, although effects could only last for the single month. Weaker segments included clothing and electronics.

(+) The NY Empire manufacturing survey for August bucked the trend of the previous month by rising +15.4 points to 25.2, far ahead of expectations calling for a barely-changed +10.0 reading. Underlying components reflected the positive headline figure, with gains in new orders, shipments and employment.

(0) The August Philly Fed survey ticked down by -0.6 of a point to +18.9, but still surpassed the expected +18.5 reading. Underlying components remained generally positive, with large increases in new orders and shipments, while employment and inventories came in a bit weaker. Overall, manufacturing data remains positive in these regional surveys, with readings well over the neutral point of ‘zero’.

(0/-) Industrial production in July rose by +0.2%, which lagged forecasts by a tenth of a percent. The manufacturing component of this fell -0.1%, compared to a gain of +0.2% expected by consensus, caused by weaker production in autos and auto parts. Non-manufacturing utilities and mining experienced gains and accounted for the stronger headline figure. Capacity utilization was flat at 76.7%.

(0) Business inventories rose +0.5% for June, which was a tenth better than forecast. Manufacturing inventories only rose by a few tenths of a percent, while merchant and retail inventories rose over a half-percent.

(0) Import prices in July rose +0.1%, which was on par with forecast. The increase was taken positive by a +0.7% gain in petroleum prices for the month, as well as food, as ex-fuels prices actually declined -0.1%—led by weaker pricing for autos and industrial supplies/materials.

(-) Housing starts for July fell -4.8% to a 1.155 mil. annualized rate, contrary to an expected +0.4% increase. The multi-family group, which tends to be the most sporadic on a month-to-month basis, fell -15% to dominate the headline number, while single-family starts fell a half-percent. The prior-month single family starts were also revised higher slightly to offset some of this negativity, so this was close to a wash for the most part. Regionally, the South was the only area to see a slightly positive in starts, while the Northeast and Midwest experienced more significant declines. Building permits for July similarly fell -4.1%, compared to a forecasted -2.0% decline. Much like with starts, single-family permits were flat, while multi-family fell -11% to reverse a strong June. Northeast starts rose by +20%, while the Midwest and South saw the strongest declines. Starts and permits are a volatile series, mostly as a result of apartment building that tends to be ‘lumpy’; on the positive side, single-family data has been more consistent but not as strong as some economists have hoped for.

(+) The NAHB homebuilder survey defied expectations for an unchanged reading by rising +4 points to 68, back near a cycle high. The underlying data showed growth throughout, with gains in current sales, future sales and prospective buyer traffic. Regionally, all four areas gained, with the South showing the strongest results for the month. This is considered positive report, with loose correlation of builder sentiment to housing starts in months beyond the report, so this may offset the flattish result of single-family starts for the last month.

(+) The Conference Board’s Index of Leading Economic Indicators rose by +0.3% in July, following several straight months of increases. July’s gains were due to increases in almost all key components, such as manufacturing, credit and financial metrics, with the exception of building permits. The coincident indicator index similarly rose by +0.3%, while the index of lagging indicators gained +0.1%. For the past six months, the leading index rose at a rapid annualized clip of +4.7%, which surpassed the +3.1% growth rate of the prior six months; the coincident and lagging indexes also gained over the past year, albeit at a slower pace. The acceleration in growth is apparent in the graphic below, and if history serves as a guide, points to a continued positive economic trend.

Index of Leading Economic Indicators rose by July 2017

(+) The preliminary August Univ. of Michigan index of consumer sentiment rose by +4.2 points to 97.6, beating forecasts calling for 94.0. Assessments for current conditions fell a few points, but future expectations jumped by over +8 points—the strongest result for a single month in several years. Inflation expectations for the coming year were flat at 2.6%, while 5-10 year ahead expectations dropped a tenth of a percent to 2.5%.

(+) Initial jobless claims for the Aug. 12 ending week fell by -12k to 232k, which was below the expected 240k. Additionally, this is the lowest level since Feb. of this year. Continuing claims for the Aug. 5 week dropped by -3k to 1,953k, close to the 1,955k expected. No anomalies were reported, and these metrics continue to show labor market strength.

(0) The minutes from the July FOMC meeting showed little in terms of a change in view on the economic growth or inflation front. Growth was described as moderate, with gains in spending by households and businesses, while fiscal policy remained uncertain for future GDP growth—no doubt a nod to uncertainty surrounding future efforts at tax reform. However, while a decline in inflation was officially described as ‘transitory’, there appear to be some underlying concerns about the lack of inflation normalization upward to help justify the Fed’s tightening regime. Additionally, there seems to be ongoing discussion about the circumstances of the current Phillips curve (where inflation and unemployment tend to have a historical inverse relationship) flattening in recent years. Academics also are debating the issue. The mentioned balance sheet drawdown was generally agreed up on by most committee members, with the timing being the key difference of opinion.

Read the "Question of the Week" for August, 21, 2017

Is LIBOR going away? By the way, what is it, anyway?

Market Notes

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U.S. stocks lost ground on net for the week, with volatility picking up somewhat, but large-caps again holding up better than small-caps (which have deteriorated to nearly flat on a year-to-date basis). From a sector standpoint, utilities and materials experienced positive weeks, while energy and consumer cyclicals suffered the most.

Volatility was exemplified on Monday, with gains the highest in four months as tensions with North Korea waned. However, on Thursday, markets experienced their biggest drop in three months (-1.5%) for the S&P. To put this into perspective, this was an extremely long stretch of low volatility (defined as an under-1% move in either direction)—these types of moves are actually quite common. The VIX, which has been floating around the 10-12 level for months, spiked back up to 15 for a bit by the end of the week. Investors were unnerved mid-week by the terrorist attack in Spain and dismantling of several business councils in the aftermath of comments made (and not made) by the President following the Charlottesville, VA demonstrations. This weakening of corporate executive confidence caused investors to question the ability of Trump to push through agenda items later in the year and next year—notably tax reform being the one that matters. Tax reform matters far more for markets than most agenda items since any resulting tax relief or cuts would have a direct impact on corporate financials (e.g. a blue chip firm being subject to a 15% rate would create an immediate jump in profitability compared to paying a 30% rate). Profitability, in turn, effects multiples and valuations. This is why it matters.

Interestingly, despite knee-jerk market reactions, and based on opinions from political/financial market analysts, Republicans seem to be increasingly going their own way with legislation (particularly as Presidential opinion ratings continue to plummet). Success in tax reform and possibly infrastructure could be dependent more on their efforts in Congress than the input of the President. Time will tell, but this appears to be a more practical base case. The announced exit of Steve Bannon, who was seen as a wildcard, appears to be soothing to markets.

European stocks outperformed U.S. stocks, showing slight gains, despite the tempering influence of a stronger U.S. dollar, while Japanese and British stocks ended with net losses in line with those of domestic equities. Mostly, European growth in Q2 showing up stronger than first reported, particularly in smaller peripheral economies, continued to help sentiment. Japanese GDP for the 2nd quarter grew by 1%, which sharply beat consensus, but left economists wondering about revisions and sustainability. In emerging markets, Chinese stocks fared well as the government issued instructions to restrict domestic firm investments in overseas property and certain entertainment ventures, in favor of being pushed to invest in internal infrastructure road projects. Argentina was also a big winner as voters supported the reformist Macri administration even more than expected.

U.S. bonds were generally little changed, with minor movement across the yield curve on net. Credit, on both the investment-grade and high yield sides, outperformed governments and bank loans. Developed market government debt lost ground, hindered by a stronger dollar for the week, while emerging market bonds fared the best globally in both USD and local terms.

Real estate gained slightly in the U.S., which outperformed broader equities, but were outgained by Asian and European real estate. Domestically, retail malls again lost significant ground, bringing year-to-date losses to around the -15% range, among the worst of any asset class other than energy.

Commodities lost ground slightly, with a lack of energy volatility being outshined by weakness in agriculture (primarily in soft commodities coffee and cocoa) and strength in industrial metals. Crude oil declined by over a dollar a barrel mid-week before recovering to a few pennies from where it began at $48.66.

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 14, 2017.

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