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Weekly Review - December 1, 2014

Weekly Review - December 1, 2014

Guest Post - Monday, December 01, 2014


  • Despite a holiday-shortened week, there were several major releases—the more important of which surprised a bit on the upside.  U.S. GDP was revised substantially higher from the first estimate while other releases, such as durable goods, PMI and claims were mixed.
  • Equity markets ticked higher with lower volatility than we’ve been used to in recent months.  Interest rates fell, pushing domestic bonds higher as well.  The biggest news was the almost -15% drop in crude oil prices, which affected energy stocks, commodities and oil export-heavy nations.

Economic Notes

(+) The 2nd estimate/1st revision of U.S. GDP was revised upward, and fairly dramatically, from +3.5% to +3.9% for the 3rd quarter (despite consensus estimates for a slight decline to +3.3%). Interestingly (and optimistically), the revision was due to better nominal growth as opposed to other inflation adjustment factors. In fact, Q2 and Q3 were the best back-to-back GDP quarters in over a decade. Consumer spending in both durable and non-durable goods rose over +2%, beating expectations by a bit, and was responsible for three-quarters of the revision. In other segments, a two-tenths increase in business investment was partially offset by a tick lower for government expenditures. Strength was seen in other embedded segments also—including increases of +4.5% in real gross domestic income and +10.4% for nominal domestic corporate profits.

(-) Personal income and personal spending each rose +0.2% in October, which was about half the gain(s) expected.  Interestingly, a negative contributor to income last month was from ‘net transfer receipts,’ which includes Medicare and Medicaid, contrary to the contributory effect it had in much of the early part of the year.  This effect brought the savings rate down over a half-percent to 5.0%.  The headline and core PCE price index rose +0.1% and +0.2%, respectively for the month, bringing the year-over-year gain to 1.4% for the headline and +1.6% for the core—both showing tempered rates of change.

(+) Durable goods orders for October rose +0.4%, which was quite the opposite of the expected decline of -0.6%, although the underlying details weren’t as dramatically positive as one might think.  Removing transports from the headline number resulted in a core durable goods order decline for the month of -0.9%, which ran counter to an expected +0.5% increase—so a gain in cyclical transports was the difference.  Core orders and shipments both fell, as opposed to gained, as was hoped, while manufacturing inventories rose a half-percent.

(-) The Chicago PMI for November fell 5.4 points to a still-very strong 60.8, which came in below an expected 63 reading.  A drop in new orders was the primary culprit, while overall orders were decent and production expanded, albeit at a slower rate than the prior month.

(-) The FHFA house price index for September came in unchanged, relative to expectations of a +0.4% gain—so a disappointment.  The West South Central/Texas region gained almost a half-percent, while New England fell by roughly the same amount.  Year-over-year, the index gained +4.3%, which is a lessened pace from prior quarters but in par with or slightly above longer-term averages.

(0) The S&P/Case-Shiller 20-city home price index rose in keeping with expectations, at +0.3% for September.  Almost all cities posted gains, with the Southern group of Charlotte/Atlanta/Miami up over a percent to lead the way.  The year-over-year increase came in at just under +5%, so similar to other indexes.

(0) New home sales for October rose +0.7% to 458k, which was just a tick below expected (a difference of 13k homes).  However, sales were revised down for the prior three months.  The year-over-rate remains tempered during the recovery at a +2% increase over a year ago.  The annual data is likely more meaningful than the month-over-month data, which can be noisy due to its construction and adjustments.  Nevertheless, we’re not quite double the trough of 270k homes from Feb. 2011, but the slow slog upward has continued with a few interruptions—slow slog as compared to the dramatic growth of the 1990’s and early 2000’s, which surpassed historical tendencies from prior decades.


(-) Pending home sales fell -1.1% in October, disappointing relative to an expected +0.5% gain.  Three of the four primary regions declined; the West fared weakest with a -3% drop, while the Northeast eked out a +0.5% gain in sales.  Despite stronger growth earlier in the year, the last few months have been fairly lackluster for general home sales and pending activity.

(-) The Conference Board’s consumer confidence index fell over -5 points in November from the prior month, to 88.7—far below the forecasted 96.0 reading.  All three key indicators were down, from current and forward-looking expectations, as well as jobs looking a bit ‘harder to get’ than they were plentiful.

(-) University of Michigan consumer sentiment for November declined a bit to 88.8, below the expected 90.0.  Consumer assessments of present conditions and expectations for the future both declined by less than a point, so the weakness was quite tempered.  The 1- and 5-year look-ahead inflation expectation figures remained at 2.6%, which is the lowest they’ve been in 5 years (relative to the standard and oft-referenced long-term average of 3% or so).  This may not seem important on the surface, but one of the less-tangible components of inflation are expectations for near-term future inflation.  This is due to the self-fulfilling momentum effect of an inflationary mindset—if inflation fears take hold, consumer behavior may change a bit (remember the 1970’s) in response, but stockpiling certain goods, paring back on certain types of other spending, etc., since there is only so much income to go around.  Right now, fears of inflation are lower than they’ve been in some time, which is a natural response to what has been a low inflation environment as of late.

(-) Initial jobless claims for the Nov. 22 ending week rose a bit (by +21k) to 313k, surpassing consensus estimates calling for 288k.  Being a bit higher than the trend of the several weeks, it could either be an anomaly or was affected somewhat by the early winter storms in the Northern U.S.  Continuing claims for the Nov. 15 week fell by almost -20k to 2,316k, to its lowest level since 2000, and lower than expectations of 2,348k.

Read the "Question for the Week" for December 1, 2014:

Why have oil prices declined so sharply?

Market Notes

Period ending 11/28/2014

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.







11/21/2014 0.01 0.53 1.63 2.31 3.02







U.S. stock markets rose on the short week, with U.S. and developed markets outperforming emerging markets.  After October’s spike up to the 25 level, volatility (measured by the VIX) has again collapsed down to the 12-15 area as day-to-day fluctuations have tempered dramatically.  At least in the bulk of the market...consumer discretionary and tech names led with 2% gains on hopes of a decent Christmas selling season while industrials and materials lagged.  In a category of its own last week, the S&P energy sector fell off by almost -10% as oil prices continued their slide.

European stocks led the way with strong returns from Germany, Spain and Ireland (with tied-in hopes for ECB intervention), while China gained in the emerging market group, as positive sentiment carried over from interest rate cuts and expansion of equity market access.  On the negative side, heavy oil exporters Norway and Russia were punished by nearly -10% (in keeping with domestic energy sector results). 

Bonds experienced a strong week, with yields falling 10-15 basis points across the treasury curve.  Longer-duration government and corporate investment-grade bonds rallied strongly, while high yield and emerging market debt fell off a bit.  European bonds gained with growing expectations for an expansion in ECB easing measures, which brought the German 10-year yield under 0.7% for the first time. 

In real estate, European and U.K. REITs gained several percent, as did U.S. real estate, while Asia lost a half-percent as a whole (led by a pullback in Japan).  Lodging and healthcare led the domestic group, which as a whole has tended to do well when interest rates stay tempered and, even better, decline.

It was a disastrous week for commodities, and for the first time in a while, it had nothing to do with the strength of the U.S. dollar.  While there are typically a few winners (like wheat and palladium, the other segments, including gold, industrial metals and agriculture all lost several percent, but all paled in comparison to Brent and West Texas Intermediate Crude oil, which lost, based on spot prices, over -12% on the week alone, with WTI prices falling to $66/barrel. 

Have a good week.

Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Goldman Sachs, Marketfield Asset Management, MFS, MSCI, Morningstar, National Association of Realtors, Payden & Rygel, S&P Dow Jones Indices, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Department of Commerce, U.S. Department of Labor, U.S. Department of the Treasury, U.S. Federal Reserve, Value Line, 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.

Additional Reading

Read the previous Weekly Review for November 24, 2014.

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