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Weekly Review - February 1, 2016

Weekly Review - February 1, 2016

Guest Post - Monday, February 01, 2016


  • In a packed week for economic news, the FOMC kept the interest rate level unchanged, while the Japanese decided to lower rates to negative territory. The flurry of other data was generally variable, with economic growth, manufacturing, housing and sentiment measures coming in showing mixed and occasionally contradictory results.
  • Global equity markets ended the week on the positive side following the Japan easing news on Friday. Bonds also ended positively, with long-term interest rates falling back below 2%. Commodities gained as oil prices recovered somewhat on the week.

Economic Notes

(0) The FOMC meeting for January ended as generally expected—no action. However, the tone has changed a bit along with recent economic and financial market struggles. The committee wasn't quite as optimistic on the balance of upside vs. downside risks as they were in December when they raised target rates by a quarter-percent, with references to manufacturing and business spending improving at a slower pace, and inflation pressures even more tempered. As we noted in the separate mid-week piece, the Fed will no doubt remain data dependent, which could change the layout and timing of the several interest rate hikes expected to occur this year. The FOMC also published its annual long-run goals and policy statement, in which it reaffirmed its 2% inflation target, but did acknowledge the problems in an ongoing inability to achieve it.

(-/0) The advance (first) estimate of 4th quarter 2015 GDP came in at +0.7%, which was just a tick below the +0.8% gain pegged by consensus. Consumer spending rose by +2.2%, which was lower than the pace of recent quarters, but about a half-percent higher than expected. A weak point was gross private investment, which fell by -2.5%, as well as slower inventory accumulation, which also removed a half-percent from the overall GDP result. Investment in structures was down, although removing energy from the equation resulted in positive growth for other industries—again demonstrating the negative influences from the energy area. Net exports also removed a half-percent from the total GDP figure, no doubt due to continued effects from the strong dollar. On the inflation side, PCE headline and core showed increases of +0.8% and +1.2%, which were slightly higher than expected but well within recent tempered inflation ranges. Employment costs rose by +0.6% in the quarter, bringing the year-over-year total compensation change to +2.0%. Based on the first estimate, GDP for 2015 as a whole is estimated at +2.4%. Economist estimates for 2016 appear to be in the familiar 2.0-2.5% range again, as it looks at this point.

(-) Durable goods orders for December fell -5.1%, which was a disappointment compared to the expected minor -0.7% decline. While the volatile category of civilian aircraft orders showed a sharp decline, core orders were also down a significant -4.3%, compared to the -0.2% expected, much of which was due to transportation equipment. Core shipments fell by two-tenths of a percent, compared to expectations of a +0.8% gain for the month. In keeping with other manufacturing metrics, this data point showed some late year weakness, which is a just another piece economists/strategists will be watching for signs of the slowdown's magnitude.

(+) The Chicago PMI index bounced back strongly in January to an expansionary 55.6, from a weak 42.9 in December, which was the highest pace of growth in a year. Most sub-components gained for the month, led by large increases in new orders and production, order backlogs gained but remained in contractionary territory, and employment stayed in contractionary mode where it's been for over a quarter. Overall, this was a piece of good news on the manufacturing front, which has been in need of some better data.

(0/+) The FHFA house price index rose +0.5% for November, which was on target with forecast. The bulk of U.S. regions ended up with home price increases, with the largest gains in the Mountain and Pacific regions, while the Southern Central areas fell a bit. Year-over-year, the index gained +5.9%—a solid annual performance.

(0/+) The Case-Shiller home price index rose +0.9%, which beat expectations by a tenth. Similar to the FHFA report, the bulk of cities experienced gains, led by Charlotte, Detroit and Portland. The more meaningful year-over-year gain came in at a similar +5.8%.

(+) New home sales rose +10.8% in December to 544k, which was well above the +2.0% gain expected, and represented a +10% year-over-year increase. This was in addition to revisions, which added almost +30k in additional sales to several prior months. All regions gained, led by the West and Midwest, and, for the month at least, better-than-usual seasonal weather may well have helped results. As a side data point, the MBA Purchase Mortgage Index is up +24% year-over-year, which points to another positive sign in the housing market through better credit availability.

(-) Pending home sales for December rose just +0.1%, which underperformed expectations of a +0.9% gain. Year-over-year, pending sales rose by +3%. For the month, the Northeast region led the nation with a +6% gain, which was likely affected by far warmer than average weather, which almost always acts as a benefit to real estate activity. The other three regions, on the other hand, lagged with losses up to -2%, with the West coming in worst. The pending sales metric tends to be a good indicator of actual new homes sales a few months in the future when transaction paperwork gets worked out.

(+) The Conference Board consumer confidence index rose to by +1.8 points to 98.1, surpassing forecasts calling for a flattish 96.5. As households' opinion of the current situation was unchanged, and view of the jobs market fell slightly, more positive forward-looking expectations led the increase in the index. This series remains near a post-crisis high point.

(-) The final version of the Univ. of Michigan consumer sentiment index fell just over -1 point from the initial version, to 92.0, compared to expectations of little change to 93.0. Consumer assessments of current conditions rose over a point, while forward-looking expectations were taken down several points. Inflation expectations for the coming one year and 5-10 years were 2.5% and 2.7%, respectively, which remained well within historical ranges.

(+) Initial jobless claims for the Jan. 23 ending week fell to 278k, which was a bit below expectations of 281k. Continuing claims for the Jan. 16 week came in a little higher than expected, however, rising by +60k to 2,268k, which surpassed the consensus estimate of 2,218k.

Market Notes

Period ending 1/29/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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Stocks started the week in the red again, with a negative response after the Fed statement, mixed manufacturing and earnings results, as well as continued concerns about oil and China as has been the case for several recent weeks. However, hopes were rescued Friday with a big announcement from the Bank of Japan that interest rate policy levels would be lowered into negative territory until inflation moves closer toward their 2% target. Being one of the largest global economies, this raised hopes that stimulus would again be a tailwind for the global economy and equity earnings. What this means in practicality is that the BOJ will charge a fee (instead of pay interest) to commercial banks for holding capital reserves. The idea, like the case with several European nations who've employed the same technique, is pushing more money out into the economy to stimulate growth and discouraging the hoarding of cash.

In U.S. markets, telecom and energy fared best, with gains over 4%, while health care ended up as the sole sector in the red, losing -2% on the week. Overseas, emerging markets and, specifically, commodity producers—including Brazil, Russia and South Africa—fared best with gains in the higher single digits. Offshore Chinese stocks gained while local returns were hit with additional losses, as negative sentiment among retail investors there continues to be very pervasive (local A shares are down -25% year-to-date).

U.S. bonds held up well, as the 10-year treasury yield fell back under 2% and the lowest level since last April. No doubt the weaker growth environment and dovish Fed statement led to hopes that the pace of rate increases could be slowed down to below what was originally expected for this year. Long-term U.S. treasuries and other longer-duration debt globally fared best with gains over a percent. Emerging market and high yield corporate bonds also fared well, with risk being in favor and oil prices recovering somewhat. The Yen weakened upon the news, which is no surprise, due to unfavorable interest rate carry and additional stimulus burden.

Domestic real estate generally gained on the week, albeit to a lesser extent than broader equities. Asian REITs fared much better, particularly in Japan, with the additional stimulus measures offered last week by the BOJ, which should act as a boost to all risk assets.

Commodities rose on the week, as oil moved from the $30 to the near-$34 range upon news of discussions between Russia and OPEC concerning production levels—presumably geared at stabilizing prices. Other commodities also gained a few percent, including industrial and precious metals.

Have a good week.

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 January 25, 2016.

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