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Weekly Review - December 21, 2015

Weekly Review - December 21, 2015

Guest Post - Monday, December 21, 2015


  • The most significant piece of economic data for the week was the FOMC's decision to raise the fed funds rate for the first time in a decade, as overall conditions appeared stable enough to policymakers to withstand such a policy shift. In other news, several industrial indicators continued to show some weakness, inflation remained tempered and monthly housing stats came in stronger for the prior month.
  • Equity markets began strongly in advance of the FOMC meeting, but gave up gains by week's end. Interest rates ticked slightly higher, which brought down bond returns during the week. A trend of a strong dollar and low oil prices continued, which negatively affected commodity prices.

Economic Notes

(+) As we discussed mid-week, the FOMC increased the fed funds rate by a quarter-point to a new range of 0.25-0.50%. We list this as a positive as it has increasingly appeared that markets wanted some certainty here—either raise rates or stop talking about it. Credibility is critical for a central bank's functions and continued inaction created some worry about what other 'shoe' was poised to drop that we didn't know about behind the scenes. Action finally removed this concern. However, the post-meeting statement included an emphasis on the word 'gradual', as expected, especially concerning current low rates of inflation. Other changes coincided with this policy move, generally in the +0.25% range, including changing the rate of interest on excess reserves (IOER) and reverse repo (RRP) facility from 0.05% to 0.25%, upping the discount rate from 0.75% to 1.00%—several of these are typical changes intended to incent certain activity by banks and other financial institutions. The FOMC projections for longer-term interest rate expectations didn't change much, which no doubt assured markets of this gradual pace.

(0) The consumer price index for November was unchanged on a headline level from the prior month, while the ex-food and energy core measure rose two tenths of a percent—both were on target with expectations. In the month, energy prices fell -1.3% over the month, which accounted for much of the difference for the headline, while core prices were influenced by higher pricing from medical care services which gained over a percent, although education and transportation saw gains as well. Over the trailing 12 months, the headline and core CPI indexes rose +0.5% and +2.0%, respectively. Overall, energy has obviously retained a moderating influence while core CPI has remained near the Fed's target.

(0) The December New York Fed Empire manufacturing survey improved to -4.6 from -10.7 the prior month, and better than the expected -7.0 reading, although this still falls in contractionary mode. Under the hood, new orders and shipments both improved dramatically, while employment and average workweek length declined further into the negative, so a mixed result overall.

(-) The Philly Fed survey fell from a slight positive the prior month to a negative -5.9 for December, under expectations calling for a +1.0 reading. Underlying components included a decent drop in new orders; however, employment and shipments moved upward into more strongly positive territory. This is in keeping with general manufacturing softness recently.

(-) The NAHB housing market index fell a point to 61 in December, contrary to expectations of a +1 rise to 63. Current sales and future expectations for sales both fell a bit, as did prospective buyer traffic, so the drop was generally broad-based. Conditions in the Midwest declined but the four other regions were little changed. This index has come off its autumn peak, but remains near recovery highs.

(+) Housing starts for November rose +10.5%, which bested the median forecast calling for +6.6%. Multi-family starts rose by +16%, correcting a sharp decline the previous month, while single-family also rose +8% to a recovery high point. Building permits similarly gained +11.0%, sharply beating an expected -1.0% decline for the series. In permits, the multi-family also led the way, with a +27% increase, while single-family only gained a percent. Changes in the multi-family series are extremely volatile month-to-month, so this has to be taken with a grain of salt somewhat. The year-over-year improvement in starts ticked back upward to +16.5%.

(-) Industrial production for November fell by -0.6%, which was below the expected -0.2% drop. The manufacturing component of this was flat, implying that weakness originated from utilities (from warmer weather than expected on the East Coast especially) and mining (which encompasses the oil patch). Auto production slowed down by a percent, but most other categories, like business equipment, came in higher. Capacity utilization came in at 77.0% for the month, which was a few ticks below the forecasted 77.4%.

(+) The Conference Board's index of leading economic indicators for November showed an increase of +0.4%; this was led by items such as building permits, interest rate spread, stock returns and positive lending metrics accounting for the gain. Over the past six months, the index has risen at a +3.0% annualized rate, which is a bit slower than the +3.9% annualized rate over the previous half-year period. The coincident and lagging indicators also gained for the month, at rates of +0.1% and +0.3%, respectively.

(0) Initial jobless claims for the Dec. 12 ending week fell by -11k to 271k, reversing a gain the prior week and below expectations of 275k. Continuing claims for the Dec. 5 week were little changed at 2,238k, higher than the 2,200k expected. Claims levels overall have moved up in recent weeks, but remain extremely low, which continues to be a positive labor signal.

Read the "Question for the Week" for December 21, 2015:

2016 (Part 1): How is the economic environment shaping up?

Market Notes

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

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Stocks performed well early in the week, prior to and just after the FOMC rate hike announcement, but pulled back late. Friday was also subject to 'quadruple witching', which refers to a date on which a variety of stock options and index futures all expire at once, which can tend to exacerbate volatility dramatically due to last-minute positioning. From a sector perspective, defensive utilities and telecom outperformed with positive returns, while energy/materials and technology lagged, with losses.

Abroad, perhaps surprisingly, emerging markets came in with a strong showing, perhaps as investors realized higher U.S. rates wouldn't mean the end of things for their part of the world. South Africa was the surprising winner, gaining over +10%, but due to internal factors related to an abrupt change in finance ministers, than from fundamentals. China, Mexico and India were among other winners, which helped the emerging group gain ground on the week. On the other side, commodity-sensitive nations, such as Brazil and Russia, as did Japan, following a surprise announcement of additional BOJ stimulus and was coupled with a yen decline. This is perhaps another example of a perhaps-usual positive reaction being upended by imperfect communication.

Another foreign event that has cropped up is China's decision to add another wrinkle in the yuan currency story. Chinese officials have decided to break their traditional peg to the dollar (many forget they have one), and instead will use a basket of currencies as their pegging instrument. The conspiracy theorists out there have taken this as the next step in the dollar losing its supremacy as the global reserve currency, but due to the dollar's strength as of late, this move naturally made sense as a backdoor way to weaken the yuan.

U.S. bonds fell in price slightly as interest rates ticked upward. Surprised? Due to the high levels of transparency by the Fed, the rate hike was largely baked into expectations, so the immediate impact was actually subdued. As always, it's the surprises that hurt. Also interestingly, emerging market (esp. local currency) bonds rallied as investors perhaps realized the impact of the Fed won't be quite as bad as first feared. On the negative side, high yield indexes rebounded strongly early in the week following the prior week's market credit concerns, but fell back again due to additional weakness in energy.

Real estate rallied, again oddly, led by U.S. mortgage, residential and retail. The impact of rising rate policy on real estate can be complicated, as long-term rates are more meaningful in borrowing costs than are short-term, and the Fed signal of a strong-enough economy to raise is a plus for real estate fundamentals, such as tenant demand. Interestingly, the congressional budget bill that passed last week including a relaxation of restrictions on foreign investment in U.S. real estate, which could be seen as a positive due to the possibility of new sources of funding capital being made available.

Commodities lagged on the week with the influence of a stronger dollar, but energy was the primary culprit as other segments only suffered marginally. Crude oil bounced around in a fairly tight range, ending in the mid-30's, while natural gas was hit harder from warmer-than-seasonal weather which reduced inventory drawdowns—causing prices to fall -25% over the past month. From another angle, last week's congressional budget bill has the potential of affecting this asset class as well, as it proposed the removal of the 40-year export ban on U.S. crude. Reaction is mixed, as it would naturally benefit exporters of crude directly, but likely hurt refiners (although they're being given a tax break to help ease the pain).

We wish you and your families a safe and happy Holiday season.

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 14th, 2015.

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