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Weekly Review - December 2, 2016

Weekly Review - December 5, 2016

Guest Post - Monday, December 05, 2016


Economic data for the week was highlighted by improvement in several manufacturing releases, as well as in consumer confidence. Friday's employment situation report came in not far from expectations, surprising neither on the upside or downside but appeared likely strong enough to keep the potential Fed rate increase in play for December.

Equity markets took a breather in the U.S. and abroad, following post-election positivity. Bond returns were flattish, while commodities gained due to oil prices jumping significantly after announced OPEC production cuts.

Economic Notes

(+) The ISM manufacturing report for November showed an increase to 53.2, surprising on the upside compared to a 52.5 reading anticipated. The majority of key components improved, including production, new orders, supplier deliveries and inventories, while employment declined a fraction of a point. Per the other manufacturing data released during the week, the expansionary ISM reading demonstrated a welcome pick-up in activity.

(-) Construction spending rose +0.5% in October, which disappointed a bit compared to the +0.6% increase expected. Residential construction gained nearly +2% to lead the way, as non-residential declined by a few tenths of a percent for the month. September spending was also revised upward by over a percent from the original report, however.

(+) Chicago PMI for November bucked a decline the prior month by increasing to 57.6, surpassing expectations calling for 52.0, and reaching its highest level in nearly two years. New orders and production were key components of the gain, while order backlogs and supplier deliveries also improved to a lesser degree, and employment declined back into contraction under 50. From the anecdotal side, sentiment regarding business growth going into 2017 was also quite positive.

(+) The second release of 3rd quarter GDP was revised upward from the initial estimate of +2.9% to +3.2%. The bump was due to a sharper increase in consumption, although the bulk of the quarter's growth remained the result of inventories and exports (soybeans in particular, oddly, which reversed completely by October). Expectations for the 4th quarter remain in the 2.0-2.5% range, with thoughts about next year coming in near a similar range, although some of the more optimistic forecasts are calling for 3% or above. These are the results of hopes for Trump-driven fiscal stimulus, like tax breaks, looser regulation and infrastructure programs, etc. laying the groundwork for better growth than we've seen in the last few years. Whether this is straightforward to implement remains to be seen.

(0) The S&P/Case Shiller home price index rose +0.4% for September, which was on target with expectations. Tampa and Dallas led for the month, with gains close to +1%. Year-over-year, home prices are up +5.1%, which remains strong relative to history especially on an inflation-adjusted basis.

(+) The Conference Board's consumer confidence survey rose to 107.1 for November, which surpassed expectations calling for 101.5 and was the strongest reading since summer of 2007. Perceptions of current conditions and future expectations both rose by over +5 points, as did the 'labor differential' measuring how difficult jobs were to find. It appears survey responses were received right around the time of the election, with some before and some after, which could have influenced the results.

(0) Personal income in October rose +0.6%, beating expectations by two-tenths of a percent, while personal spending grew +0.3%, which underperformed consensus by -0.2%. Spending was led by a decent increase in goods, but weakness in services, but that was mostly due to a drop in utilities spending from warmer weather. This brought the implied savings rate up a few tenths to 6.0%. The headline and core PCE price indexes rose by +0.2% and +0.1%, respectively. This took the year-over-year PCE results to +1.4% on a headline level and +1.7% for core, which continue to demonstrate below-target underlying inflation pressures.

(0) Pending home sales for October ticked up +0.1%, which was as expected. The Midwest and West experienced the strongest sales on a regional basis, coming in at 0.5-1.0%, while the South declined just over -1%.

(+) The ADP employment report for November showed a gain of +216k jobs, which dramatically beat expectations calling for +170k. At the same time, October's figures were downwardly revised by almost -30k, tempering some of the effect. As usual, service jobs led the way, rising by +228k, while goods-providing jobs fell by -11k.

(-) Initial jobless claims for the Nov. 26 ending week increased by +17k to 268k, which fell above the 253k forecast. Continuing claims for the Nov. 19 week came in at 2,081k, which was a bit more than the 2,033k expected. As the initial claims week included Thanksgiving, some of the seasonal adjustments may have gotten off-kilter, which can affect the accuracy of holiday weeks at times.

(0) The November employment situation report on Friday was again not outstanding, but decent, with eyes focused on it being 'good enough' for the Fed to feel comfortable taking action to raise interest rates next month.

Nonfarm payrolls rose by +178k, which fell just short of the expected +180k. The total consisted of +139k service jobs and +17k goods-producing jobs (the bulk of where in construction, as manufacturing jobs again declined). Government employment rose by +22k, which was a significant increase over the prior month.

These releases each month are an interesting reminder of how service-oriented the U.S. economy has become, due to the large proportion of service jobs-to-goods producing jobs in the report; however, the manufacturing component does remain still correlated to business cycle activity, rendering it important, even if a much smaller piece than one might think from hearing political campaign rhetoric.

The unemployment rate fell to 4.6%, and the U-6 'underemployment' rate ticked down by two-tenths of a percent to 9.3%. Both figures are lows for this recovery cycle, although the labor force shrunk a bit in size overall during the month. Interestingly, the proportion of 'job leavers' (aka those quitting as opposed to being fired), rose to a level above that of the last cycle ending just prior to the Great Recession, which is a positive statistic demonstrating a stronger labor market. Average hourly earnings fell by -$0.03 to $25.89, which slowed the pace of increases on a year-over-year basis to +2.5%. Wages continue to show signs of growth in certain niche segments but remain under control overall.

(0) The Fed's beige book that described national activity from Oct. through the middle of Nov. showed a bit of slowing growth in several regions from an overall standpoint, although the majority of areas described economic growth as 'moderate' or 'modest'. Manufacturing activity remained mixed, as has been the case for quite some time. Consumer spending showed improvement, however, as did residential investment. Labor markets continued to also improve, but signs of wage growth remained contained. All-in-all, this was similar to many recent reports.

Market Notes

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U.S. stocks fell back last week, as some of the Trump-oriented gains came back to earth somewhat. Energy was the leading sector, gaining nearly +3% due to oil price increases described below, while information technology was the losing group for the week, due to some perceived earnings uncertainty. Higher-beta small caps, which had outperformed in recent weeks, significantly lagged large caps.

Foreign stock returns were similar to those in the U.S. on net, but after a sharp decline in the dollar, ended up far more tempered. Japanese stocks ended up as the best performing by a slight margin, followed by Europe and the U.K. Emerging markets were mixed, with strength in Russia due to oil prices, while Brazil and Turkey lagged.

Interestingly, Italian stocks were among the leaders for the week in the run-up to the Italian referendum, which was voted on yesterday—and failed. The result would have been to reduce the size of the senate and streamline government by changing legislative duties and was strongly backed by the Italian prime minister (who promised to resign if it failed, and he appears to be holding true to his word). Then again, Italy has had 65 governments in the last 70 years, so this isn't as unusual an event as it sounds. Much of the concern was focused on two things, and these problems remain despite the vote's outcome: how this will affect political movements and political sentiment toward remaining in the European Union, and how governmental changes will affect the structure of the Italian banking system, which has been under a high degree of stress in recent years. It could require a bailout due to bad debts, and EU membership offers the ability to absorb these bad debts under the larger umbrella, while Italy breaking off on its own a la Brexit could be much more troublesome.

U.S. bond prices ticked up slightly, despite rates rising a bit more on the longer end of the curve, despite remaining relatively flat on the short end. Credit and mortgages outperformed governments, while high yield and bank loans also performed positively and led the broader group. Developed market foreign bonds gained a bit, while emerging market fixed income was mixed but generally positive, helped by a weaker dollar.

We discussed the dynamics of the bond market last week, and the unpredictability and fickleness of yields persists. Even the perception that growth or inflation increasing can cause rates to rise, although these can also be quick to adjust should conditions change.

Real estate came in flattish in the U.S., led by gains in cyclical lodging/resorts and brought down by retail/malls. REITs gained ground in Asia, but lost ground in Europe.

Commodity returns were solidly higher, led by both a weaker dollar and the energy sub-group gaining well over +10% for the week. Industrial metals and agriculture declined by a few percent each, however, to offset these gains somewhat. The most anticipated news was the outcome of the Wednesday OPEC meeting, about which opinions concerning potential outcomes had been driving energy price sentiment for several weeks. It turns out OPEC agreed to cut crude oil production by over 1 mil. barrels a day, or just over -3%, to keep a cap at 32.5 mil.—the first such cut in 8 years. This boosted prices immediately over above $50, ending the week at $51.70, representing a +12% net increase. Naturally, the question remains now about how 'sticky' this agreement will be and how much cheating happens by other producers to take advantage of the higher prices.

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 November 28, 2016.

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