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Weekly Review - August 4, 2014

Weekly Review - August 4, 2014

Guest Post - Monday, August 04, 2014

Summary

  • A jam-packed week of economic data releases boosted by a faster Q2 real GDP growth rate, a stronger ISM manufacturing reading in July and upbeat consumer confidence levels.
  • Weaker housing sales data in June, and in-line results for July's payroll numbers and June's personal income and consumption data.
  • No major surprises from last week's FOMC meeting with another asset purchase reduction of $10 billion each month; Philadelphia Fed President Charles Plosser voted against the guidance language about rates being on hold for “a considerable time after the asset purchase program ends.”
  • Initial jobless claims came in softer than the consensus expectation with a small improvement for the 4-week moving average and slightly higher continuing claims.
  • U.S. equity markets pulled back at the end of the week in reaction to the ongoing geo-political tension in Eastern Europe and the Middle East plus fears of uncertainty after the expected end of the Fed's QE3 in October.

Economic Notes

(-) The Pending Home Sales (PHS) Index published by the National Association of Realtors slipped by 1.1% to 102.7 in June, below the consensus expectation of a 0.5% increase. The index is 7.3% lower compared to the level in June 2013. Despite the recent month's weaker reading, the index is considered to be at an average activity level. By region, pending sales declined in the Northeast and South, rose in the Midwest and was roughly flat in the West.

(+) The first of three estimates for Q2 Real GDP came out with an annual growth rate of 4%, significantly higher than the consensus forecast of a 3.2% rate. Major components of the GDP all showed notable upticks in activity, including private inventory investment, export, state and local government spending, and nonresidential and residential fixed investments. Meanwhile, the Q1 real GDP's earlier estimate of -2.9% was revised up to -2.1% due to the revision from inventories, nonresidential structures and personal consumption expenditure (PCE).

(0/-) Initial jobless claims for the week ending July 26 came in at 302,000 after seasonal adjustment, which was roughly in line with the 310,000 expected by consensus. The 4-week moving average was 297,250, trending down from the previous week's revised average by 3,500.

Continuing claims for the week of July 19 increased 31,000 to 2,539k, a slight negative surprise from the consensus view of 2,525k. The 4-week moving average of continuing claims continued edging lower to 2,535,250, the lowest level since Oct. 13, 2007.

(-/0) Total nonfarm payroll employment grew by 209k in July, lagging the consensus expectation of 220k. However, both May and June numbers were revised up by 5k and 10k to 229k and 298k. Jobs increased across professional and business services, manufacturing, retail trade and construction. The labor force participation rate was ticked up by one- tenth of a percent to 62.9% in July. As a result, the unemployment rate edged up to 6.2% from June's 6.1%, below the consensus expectation of 6.1% in July. The broader measure of labor underutilization, the underemployment rate (U-6 Total unemployed), was also creeping up from 12.1% in June to 12.2% in July.

(0) Personal income for June was up 0.4% month-over-month. Meanwhile, personal consumption expenditures (PCE) grew 0.4% as well. Both measurements were in line with the consensus expectation. The personal saving rate stayed at 5.3% in June, the same as in May. The Fed's preferred inflation measurement, PCE price index, increased 0.2% in June as expected by the consensus view. The core PCE price index, excluding food and energy, was up only by 0.1%. On a year-over-year basis, the PCE price index and the core index grew 1.6% and 1.5% respectively, still below the FOMC's target of 2%.

(+) The ISM Manufacturing (PMI) index registered 57.1 in July, stronger than the consensus expectation of 55.9. With the reading above 50, the PMI indicates that the U.S. manufacturing economy is continuing to expand for the 14th consecutive month. Compared to the month of June, sub-components of the index - such as new orders (added +4.5 points to 63.4), employment (+5.4 pts to 58.2) and production (+1.2 pts to 61.2) - saw accelerated growth while inventories contracted and supplier deliveries slowed.

(-) Chicago Business Barometer (Chicago PMI) index fell 10 points to 52.6 in July, missing the consensus forecast of 61.8. As the largest weighted component of the index, new orders saw the largest monthly decline since late 2013. The magnitude of a sudden decline led the index back to the lowest level since June 2013. Despite of the steep monthly decline, surveyed purchasing managers expressed the decline as a temporary setback versus a beginning of a downward trend.

(+) The Conference Board Consumer Confidence Index was up for the third consecutive month to 90.9 in July from an upwardly-revised 86.4 in June. The reading exceeded the consensus expected 85.6. The improvement benefited the most from a 6.3-point jump in consumer confidence for future condition, standing at 92.7 in July from 86.4 in June. For example, 19.1% of the surveyed consumers anticipated to see more jobs in the months ahead, a 2.8% increase from 16.3% previously. Overall, the index in July marked the highest level since October 2007 at 95.2.

(0/+) The final University of Michigan's consumer sentiment index came in at 81.8 for July, roughly in line with the consensus expectation of 82. Consumers expressed further confidence in current economic condition as the sub-index rose to 97.4 in July from 96.6 in June. However, the survey's gauge on future expectations weakened to 71.8 in July from 73.5 in June but was slightly above an expected 71.5.


Read the "Question for the Week" for July 28, 2014:

What's Going On With Argentinian Bonds? How will the recently released changes for money market funds affect clients?


Market Notes

Period ending 7/25/2014

1 Week (%)

YTD (%)

DJIA

-2.74

0.77

S&P 500

-2.66

5.36

Russell 2000

-2.59

-3.50

MSCI-EAFE

-2.13

1.95

MSCI-EM

-1.72

5.73

BarCap U.S. Aggregate

-0.12

3.91

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2013

0.07

0.38

1.75

3.04

3.96

7/25/2014

0.03

0.53

1.69

2.48

3.24

8/01/2014

0.03

0.47

1.67

2.52

3.29

Despite a strong U.S. Q2 GDP report and several improving economic data, financial markets took a downturn at the end of the week after no major surprises from last week's FOMC meeting. As expected, the Fed kept the short-term rate at 0.25% while reducing its asset purchases by another $10 billion to a total of $25 billion starting in August. U.S. equity markets sold off across the board. Small cap stocks were deeper into the red zone for the year-to-date performance. Defensive sectors fared better. Telecom, healthcare, consumer discretionary and utilities sectors outperformed energy, industrials and financials in the S&P 500 index.

Outside the U.S., international developed stocks outperformed U.S. stocks. The MSCI Pacific index declined -0.58%, much less than the MSCI Europe index's -2.91% for the week. For the year-to-date, Pacific outperformed Europe by 3.72%. Emerging markets stocks held up surprisingly better than both U.S. and EAFE markets. Within the emerging markets, the MSCI BRIC index lost 2.08%, 36 bps behind the MSCI EM index. The EM Asia region as a whole outperformed emerging countries in Europe and Latin America. Argentina officially defaulted from its coupon payments as the negotiations between the country and a handful number of holdout creditors failed. Rating agencies downgraded Argentina's rating to Selected Default at S&P and Restricted Default at Fitch.

BarCap U.S. Aggregate Bond index was slightly down by -12 bps last week. Bonds outperformed stocks in a down week. With no major surprises from the Fed's meeting, the U.S. 10-year Treasury yield edged up 4 bps to 2.52% from a week ago. Short-term bonds beat long-term bonds. Government bonds outperformed credit.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were off by -37 bps, but ahead of emerging market bonds by 85 bps. The U.S. dollar strengthened on the back of robust Q2 GDP numbers.

U.S. REITs declined 2.28%, underperforming foreign REITs by 152 bps in the week. Commodity returns were down 1.71% as measured by the Bloomberg Commodity Index (former DJ-UBS index), beating a total return of -2.63% from the energy-heavy S&P GSCI Commodity index as energy lost ground.

Have a good week.

Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Conference Board, Goldman Sachs, ISM, JPMorgan Asset Management, Marketfield Asset Management, MFS, MNI Indicators, MSCI, Morningstar, National Association of Realtors, Oppenheimer Funds, Payden & Rygel, Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Department of Labor, U.S. Department of the Treasury, U.S. Federal Reserve, Vanguard, Yahoo!. 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.

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