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Weekly Review - August 22, 2016

Weekly Review - August 22, 2016

Guest Post - Monday, August 22, 2016


Economic data for the week showed a combination of strength in housing and jobless claims, continued mixed results in manufacturing, and tempered consumer inflation. The FOMC minutes showed conflicting opinions, which has carried over into recent Fed member communications.

In continued low-volatility summer equity market activity, stocks were slightly higher in the U.S. and emerging markets, and lower in the developed markets generally, even with help from a weaker dollar.

Economic Notes

(-) NY Fed Empire manufacturing index declined from a moderately positive +0.6 to a contractionary -4.2 in August, disappointing consensus expectations of a +2.0 reading. Interestingly (as sometimes happens with these surveys), the individual components fared better than the headline reading, as new orders, shipments and employment all rose several points.

(+) The Philly Fed manufacturing index rose about +5 points to +2 for August, which was on target with expectations. However, in contrast to the NY survey, the underlying components appeared a bit weaker, with employment and new orders falling off sharply and ending up at contractionary levels; shipments, however, strengthened. These results continued to show a mixed bag in the manufacturing space, where conditions have vacillated between hot and cold over the past year.

(0) The consumer price index was unchanged in July on a headline basis, and only gained +0.1% on a core level, sans food and energy. A pareback in energy prices over the last several months was a contributor to headline price stagnation, while other contributors included declines in airfares, hotel lodging, rents and car prices. Year-over-year, the headline index gained +0.8% while core rose +2.2%. The full year continued to be dominated by the -20% drop in energy prices, which has not only affected headline inflation but also has bled into core prices through lower transportation costs, etc. Other segments demonstrated more substantial inflation, including shelter and medical care, which gained upwards of 3-4% for the trailing year.

(+) Housing starts for July rose +2.1% to a seasonally-adjusted 1,211k units, surprising on the upside compared to an expected -0.8% decline. The more volatile multi-family starts series led the way with a +5% gain, while single-family rose a half-percent. The Northeast and South were the largest regional contributors, as the West experienced a decline in starts for the month. Building permits, by contrast, fell -0.1%, compared to an expected gain of +0.6%. Multi-family permits were +6% higher, while those for single-family dwellings declined by -4%.

(0) The NAHB homebuilder index for August ticked up +2 points to 60, which was on target with expectations. Current sales and expectations for future sales both increased; however, prospective buyer traffic ticked downward by a point. Regionally, the South and Northeast rose several points, pointing to improved sentiment, while the Midwest and West fell back by several points.

(+) Industrial production rose +0.7% for July, which surpassed expectations of a +0.3% gain. The manufacturing component of this rose +0.5%, which also surprised to the positive by a few tenths of a percent—led by a strong month for motor vehicle production and somewhat for business equipment. Capacity utilization came in at 75.9% for the month, +0.3% above expectations, to the highest level since last fall, as levels appear to be back on the upswing from several disappointing months.

(+) The Conference Board's index of leading economic indicators for July rose +0.4%, which is the largest increase in several months. This was due to eight of the ten underlying indicators improving, led by manufacturing hours, interest rate spread, stock prices and jobless claims. For the trailing 6 months, the index was +1.1% higher, which shows acceleration over the prior half-year period's +0.2% growth. Other indicators for July also improved, with the coincident indicator rising +0.4% and lagging indicator up +0.1%.

conference board graph

(+) Initial jobless claims for the Aug. 13 ending week fell by -4k to 262k, which was lower than the expected 265k. Continuing claims for the Aug. 6 week rose a bit to 2,175k, higher than the 2,142k assumed by consensus. Michigan was the source of the largest decline in claims, which could well have been affected by auto industry seasonal factors. Both measures continue to hover near low cyclical levels and remain quite positive.

(0) The FOMC minutes from the July meeting, as usual, didn't contain any huge surprises, but did offer a dovish tone. The market reacts to the Fed meeting minutes, although the data and discussion is stale by the time it's released. The saving grace of such information is that it might provide a 'hint' of some sort as to sentiment, whether that be a hawkish/tightening or dovish/easing bias by the chair and various members. Primarily, the focus for future rate movement continues to be on inflation, as in the members needing to see more sustained upward movement before action, with not much downside in continuing to wait—in their view. Some of this conversation appeared to surround several influences pushing inflation to the downside, while a 'wait and see' attitude appeared to surround the wage influences in the labor market. Interestingly, a point was mentioned regarding an extended period of low interest rates causing a broad 'reach for yield' and potential imbalances in capital market and risk allocations, although this isn't discussed by the committee as much in public (it certainly is by the broader economic and investment community). Recent comments from certain Fed officials have been mixed, with some alluding to September being a 'live meeting' from a potential rate increase standpoint, but this has been downplayed in other comments.

Market Notes

Period ending 8/19/2016

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BarCap U.S. Aggregate



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U.S. stocks were generally flattish on the week, with small caps performing a bit better and beating large caps. Energy and materials led the way with strong gains, while defensive utilities and telecom lagged with losses on the week. While the S&P has been in a typical low volatility summer pattern as of late, interestingly, it hasn't moved more than 1% on any given day for the past month, which is a bit unusual.

Foreign stocks out gained domestic, led by the U.K., with a strong retail sales showing, and emerging markets, while Japan and Europe under performed the U.S. during the week. A falling dollar generally helped the cause, while Japan experienced a disappointing GDP result of +0.2%, compared to an expected +0.7% for Q2. Peripheral Europe was an area of particular weakness, while Chinese stocks were among leaders, reaching 7-month highs upon the Shenzhen-Hong Kong Stock Connect being formally announced, for launch likely later in the year. These types of market efficiencies are seen as improving liquidity and access to formerly hard-to-access Chinese domestic stock market shares.

U.S. bonds lagged with interest rates rising; in some part due to differing commentary from a few Fed officials pointing again to September as a meeting 'in play' as noted above. Treasuries and investment-grade corporates both lost some ground, while high-yield bonds provided gains. Foreign bonds fared well in both developed and emerging markets with the dollar's decline.

Real estate in the U.S. fell back by over a percent, with losses in Europe and Asia less dramatic. Recently REITs have taken a bit of a pause following strong gains so far in 2016, with U.S. indexes up in the 10-15% range, led by healthcare, industrial and mortgage REITs, while residential/apartments has cooled off with supply beginning to catch up with demand and rent increases tapering off in some key areas, like San Francisco and other hot rental markets.

Commodities experienced a positive week, with a tailwind of dollar weakness and strength in crude oil. The West Texas per barrel price rose from $44.50 to $49.10—a 10% gain and 8-week high—with continued speculation about a possible OPEC member deal to reduce production in order to prop up prices. Such rumors change week-to-week, however, and thus account for the volatility in futures markets. Nonetheless, oil has found a somewhat comfortable trading range between $40-50 as of late. Metals also fared well on the week, as did agriculture, with the dollar being a likely tailwind.

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 15, 2016.

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