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Weekly Review - December 22, 2014

Weekly Review - December 22, 2014

Guest Post - Monday, December 22, 2014


  • Last week's domestic economic data were mixed. Good news came from the stronger industrial production report in November and lower than expected jobless claims.
  • Disappointing news came from December's Empire manufacturing report, slightly worse than expected housing market data and November's soft CPI report.
  • Stocks rebounded significantly from the prior week's slump, as depressed energy prices showed some signs of stabilization, the U.S. economy continued to strengthen, and the Fed expressed patience regarding the timing of rate liftoff. However, bond performance was muted. REITs delivered small positive returns that were offset by negative performance from the commodity markets.

Economic Notes

(-) The New York Empire manufacturing index for December fell 14 points to -3.6, its first negative reading in nearly two years. The weaker reading missed the consensus forecast of 12.2, signaling a decline in business activity for New York manufacturers. The major components of the headline index, such as new orders, shipments, unfilled orders, delivery time and inventories indices all retreated below zero. Although unusual high snowfall in the northeastern part of New York might contribute to some softness in the headline index, overall weather was likely not the primary factor behind the weakness as month-to-month changes in the regional surveys can have bigger fluctuations. The forward-looking index for business conditions six months ahead fell to a lesser extent from November's 47.6 to 38.6, which is still a fairly healthy number by historical standards.

(+) Industrial production rose 1.3% month-over-month to 106.7 (2007=100) in November, significantly exceeding the market consensus +0.7% rate. Over a one-year period, total industrial production rose 5.2%. Within the major industry groups, the output of utilities jumped 5.1%, as November's unusual cold weather spurred heating demand; however, on a year-over-year basis, utilities production was up 1.8%. In addition, manufacturing production was up 1.1% last month, which was stronger than the expected consensus of +0.5%. The capacity utilization rate for the industrial sector grew 0.8% from 79.3% in October to 80.1% in November, which was above the expected consensus of 79.4%. The utilization rate is the same as its long-term (1972-2013) average rate of 80.1%

(-) The National Association of Home Builders Housing Market Index (NAHB HMI), which acts a leading indicator of housing starts, fell one point in December to 57, which was slightly below the forecasted consensus of 59. The sub-indices gauging current and future sales conditions both decreased one point to 61 and 65 respectively. Meanwhile, the sub-index tracking traffic of prospective buyers stayed the same as the previous month at 45. On a three-month, moving-average basis, the West and the Northeast HMI scores improved while the Midwest and the South registered a slight decline in their readings.

(-) Housing starts in November came in at a seasonally adjusted annual rate of 1,028k, which was down 1.6% from October, missing the consensus expectation of a 2.8% gain and coming in 7% below the level in November 2013. The reading's monthly decline was driven mainly by the single-family category's 5.4% decline in housing starts. By region, only the South saw starts decrease last month. Building permits in November were at a seasonally adjusted annual rate of 1,035k, which was down 5.2% compared to October and worse than the consensus expectation of a 2.5% reduction. The decrease in building permits resulted mainly from the volatile multifamily category.

(-/0) The Headline CPI decreased 0.3% in November, month-over-month on a seasonally adjusted basis, slightly below the consensus expected 0.1% decrease. The food index rose 0.2%, while the energy index declined 3.8% in November. In the last 12 months, CPI was up 1.3% before seasonal adjustment, including a 3.2% increase in the food index and a 4.8% decline in the energy index. Excluding food and energy, the core CPI increased 0.1% in November as expected by the consensus forecast. For the last 12 months, the core CPI has gained 1.7% mainly due to price increases in the shelter and medical care sub-indices.

(+) Initial jobless claims for the week of Dec. 13 came in at 289k, which was 6,000 fewer claims than the consensus forecasted figure of 295k. There were no special factors explaining the latest initial claims. Continuing claims for the week of Dec. 6 came in at 2,373k, which was 63k lower than the 2,436k expected and a 147k decrease from the previous week's revised level of 2,520k. The 4-week moving average was 2,397k, which was 438k below the comparable 4-week average claims of 2,835k in 2013.

Market Notes

Period ending 12/19/2014

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YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















Last week's capital markets were mainly driven by what happened in the oil markets and what language the FOMC released at the end of its two-day meetings on Dec. 17. At the beginning of the week, the Russian Central Bank was forced to hike its key interest rate by 6.5% to 17% to curb the rapid devaluation of the Ruble and surging domestic inflation. Investors were concerned that depressed prices in oil markets and associated weakness in oil-exporting countries were likely to drag global economic slowdown even further. It was not until the latter part of the week when investors' confidence returned. In light of the slow improvement on the labor market and the transitory effects of lower energy prices on inflation, the Fed pledged to be patient in its process of normalizing its interest rate policy. The Fed also maintained its language of "a considerable time" to keep rates at current historical low levels following the end of the QE3 program in October.

Domestic equity markets rallied by the end of the week. The S&P 500 index rose 3.4% to reverse its downward trend of the previous week and ending its year-to-date performance above 14%. Small cap stocks outperformed both large cap and mid cap stocks. Within the S&P 500 index, the energy and materials sectors rebounded the most, up 9.7% and 5% respectively. The consumer discretionary and consumer staples sectors lagged the most, each only up by 1.7% and 2.1% respectively.

Outside the U.S., EAFE and emerging market stocks underperformed the domestic stocks as the U.S. dollar appreciated against most of the other major currencies. The MSCI Pacific index declined 12 bps, 1.5% underperforming the MSCI Europe index. Within the emerging markets, the MSCI EM Europe index declined 2.8%, lagging the MSCI EM Latin America index's 3.8% return by 6.7%.

The BarCap U.S. Aggregate Bond index was slightly negative, down 27 bps. Compared to the above 3% yield level at the beginning of the year, the U.S. 10-year Treasury yield slightly widened last week to 2.17% from the prior week's 2.10% level. As the markets approached the year-end holidays, light issuance supplies and thin trading volumes all contributed to the muted bond performance.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were down by 85 bps, lagging the emerging market bonds' positive return of 1.6%.

U.S. REITs were up 1.6%, beating foreign REITs by 1.3% last week. The WTI crude oil prices still traded at the depressed level of between $54 and $57 per barrel. Commodity returns were negative, down 1.9% as measured by the Bloomberg Commodity Index (former DJ-UBS index). It was slightly worse than the energy-heavy S&P GSCI Commodity index's weekly return of -1.6%.

We wish you a merry Christmas.

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 December 8, 2014.

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