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Weekly Review - December 19, 2016

Weekly Review - December 19, 2016

Guest Post - Monday, December 19, 2016


Economic news for the week was highlighted by the Federal Reserve raising short-term interest rates by another quarter-percent, as expected. Retail sales disappointed, while several regional manufacturing surveys and homebuilder sentiment showed far stronger results and inflation ticked slightly higher.

U.S. stock markets were mixed, with large-caps outperforming small-caps. In foreign markets, developed markets experienced stronger gains but were held back by a stronger dollar. Bonds suffered again as interest rates rose in keeping with more anticipated Fed moves next year. Commodities gained a bit as oil finished higher along with expected production declines.

Economic Notes

(0) The FOMC meeting, as noted previously, raised the target Fed Funds by 0.25%, in keeping with expectations. The other releases, including the famous dot plot and summary of economic projections, caused investors to assume the committee was taking a more hawkish stance in the coming year—with assumptions of 3-4 rate increases built into expectations. At the same time, this has been predicted to be the case for each of the last several years, with growth and inflation each year falling below expectations, causing assumptions to again be downgraded. Whether this same pattern happens again, or the economy achieves 'escape velocity' remains to be seen. In terms of actual accommodation removal and monetary tightening, some of this has been done through higher market-driven long-term rates as well as a stronger dollar, which indirectly takes some of the hiking pressure off the Fed.

(-) Retail sales in November on both a headline and core level rose +0.1%, which was below the +0.3% increase expected for each. This gain was at a slower pace than for October, which also included a downward revision by -0.2% (about a quarter of the growth for that month). Results were a bit mixed, with furniture and restaurants showing healthy increases nearing +1%, while electronics, general merchandise, non-store ('online') areas barely ticked upward.

(+) The NY Fed Empire manufacturing survey for December rose from +1.5 to +9.0, which surprised relative to expectations calling for a +4.0 reading. Under the hood, new orders rose in the same magnitude as the index, shipments were flat (but remaining positive), while the employment component declined.

(+) Similarly, the Philly Fed survey for December rose from +7.6 to +21.5, far surpassing an expected +9.1 reading. New orders remained positive, although to a lesser degree than in the prior month, while shipments accelerated and employment improved into the positive.

(0) Import prices for November declined by -0.3%, which was a tenth of a percent better than forecast. Much of this was due to a -5% drop in imported petroleum. This took the ex-fuels index down by only -0.1%, with auto prices and other consumer goods declining by this same amount. A stronger dollar can trigger dampened imported inflation, which is one benefit of currency strength.

(0) The producer price index rose +0.4% on a headline level and +0.2% for core, besting forecasts calling for increases of +0.1% and +0.2%, respectively. In looking at the major items, an energy decline of -0.3% neutralized gains in food of +0.6%, while the core segment was pushed upward by health care, which gained +0.3% and services, which includes trade and transportation, rose +0.5%. This brought the year-over-year series to +1.3% on a headline basis and +1.8% when food, energy and trade services are excluded. While core inflation by this metric has shown some tightening, it remains well within recent ranges.

(0) The consumer price index for November came in at +0.2% for both headline and core, on par with general expectations. Energy prices gained just over +1%, food prices were flat, while core areas gained in owner's equivalent rent and used cars by a few tenths of a percent, but declined in apparel, airfares and hotel lodging. All-in-all, few surprises.

(-) Industrial production for November declined by -0.4%, which was a tenth lower than forecast. The culprits included utilities production, which fell -4% due to warmer weather, and autos, which fell by just over -2%, and business equipment also lost ground. Mining production (which includes energy extraction) experienced a relatively strong gain of +1.1%. As a sub-component, manufacturing production fell by -0.1%, but excluding of autos, rose by +0.1%. Capacity utilization fell nearly a half percent to 75.0%. Business inventories also declined -0.2%, which is a negative. All-in-all, this was a weaker report that could take GDP estimates down for Q4.

(+) The NAHB homebuilder sentiment index for December rose by +7 points from an expected unchanged result up to 70, a post-recession high and, in fact, the highest level seen in over 11 years. All components of the index increased, including future sales expectations, current sales, and to a slightly lesser extent, prospective buyer traffic. Regionally, the Northeast and West rose +10 or more points, while the Midwest and South also experienced gains. This serves to be a positive indicator for future homebuilding activity.

(-) Housing starts in November declined -18.7%, which far surpassed the -7.0% drop expected. As usual, the multi-family group provided the bulk of the monthly volatility, with a drop of -45% and reversing a sharp gain the prior month. Single-family starts lost -4%, also reversing gains for the prior few months. Building permits were also down, falling -4.7%, compared to -1.6% expected. Here, single-family permits rose slightly, while permits for the smaller multi-family group lost ground in the double-digits.

(0) Initial jobless claims for the Dec. 10 ending week fell to 254k, which was just below the 255k level expected. Continuing claims for the Dec. 3 week ticked upward a bit to 2,018k, above the 2,003k expected. In the whole scheme of things, claims readings around the Holidays can be a little off, due to seasonal adjustments and temporary employment effects, etc., so weekly results around this time might be less reliable than average.

Market Notes

Period ending 12/16/2016

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.



















U.S. stocks were mixed on the week, with mega-caps, represented by the Dow especially, gaining ground, while small caps fell back by the greatest degree. From a sector standpoint, defensive telecom, utilities and healthcare experienced the strongest gains, while industrials and materials, strong in the post-election rally, reverted backward and lagged. While the FOMC rate hike was largely anticipated, the tone and estimates for hikes in the coming year was slightly more aggressive than expected by the market, which tempered some of the recent optimism.

Foreign stocks fared decently in Europe in local terms, as a stronger dollar is being viewed as a positive for exporters there, and could trickle in as needed economic growth. However, that same dollar strength held back foreign stock returns for U.S. investors in major indexes. Italian shares gained sharply after the conclusion of the prior week's constitutional vote, which cleared up some uncertainty and potential further anti-European sentiment, but left ongoing problems. Winning emerging market nations, such as Russia, tended to be those benefiting from higher oil prices, while China and Brazil declined—the latter due to news of a new corruption probe. Mexico also lost ground after again raising rates by 0.50% to combat weakness in the peso (raising interest rates is one technique nations can use to defend their currency, as it's intended to attract investors enticed by the higher rate).

U.S. bonds declined almost across the board, due to rates moving higher in intermediate- to longer-term segments of the yield curve. However, corporate credit outperformed government bonds, and high yield debt losses were minimal; bank loans, as expected, continued to gain ground and have attracted an increasing amount of investor attention. Foreign debt in developed markets gained just slightly in local terms, while this was converted to a sharply negative number as a result of dollar strength. Emerging market debt continued to perform negatively.

Real estate equities declined a few percent in keeping with higher rates and expectations for rates in 2017—behavior which is not surprising. However, Asia and Europe fared worse, due to currency effects. More cyclically-sensitive parts of the real estate space have outperformed as of late, which include hotels/lodging and self-storage, as well as apartments last week. While attractiveness varies from sector to sector, per usual, the broader real estate market in the U.S. continues to benefit from a lack of supply, which could perpetuate and elongate this particular cycle.

Commodities gained ground slightly on average, led by strength in oil, and weakness in natural gas as well as precious and industrial metals. Oil bounced around within a range before ending higher, just under $53, a gain of just under +3%, after signing of OPEC production agreement. At this more 'normal' level, there is less room for error, meaning that weekly inventory numbers and rig counts are being watched more closely. The reason for the OPEC deal in the first place was to limit output, which would push prices higher, thereby raising oil revenue for affected developing nations and lessen the strain on government fiscal budgets. (Unsurprisingly, their budgets don't look pretty when oil prices decline dramatically and, if this goes on long enough, can end up causing a whole host of economic and societal problems, such as unrest, regime stability issues, etc.). On the other end, if oil prices get too high, U.S. shale producers are more than happy to ramp up output to fill the gap, as long as their costs are covered. The resulting extra supply can have a dampening effect in keeping prices contained within a range.

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 December 12, 2016.

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