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Weekly Review - February 13, 2017

Weekly Review - February 13, 2017

Guest Post - Monday, February 13, 2017


In a very light week for economic data, import prices were relatively contained, sentiment fell a bit, labor metrics JOLTs and jobless claims continued to show strength.

Equity markets gained during the week, in the U.S. and even more so abroad. Bonds also fared well, with interest rates ticking down. Commodity prices rose a bit, despite a stronger dollar, with oil ending flattish on net.

Economic Notes

(+) For December, the trade balance shrunk to a smaller deficit than expected, by -$1.4 bil. to $44.3 bil., which was smaller than the expected -$45.0 bil. Exports of real goods rose by +4% in a reversal of the prior few months, while imports of real goods rose by +2%.

(0) Import prices for January rose +0.4%, which was a tenth higher than expected. This was due to a +5% rise in petroleum prices, however, as the ex-fuel index declined by -0.2%, although consumer prices also dropped by -0.1% and autos/parts by -0.5%—despite a falling dollar in January. Such reports are seen as a mixed bag, since large spurts of imported inflation aren’t necessarily welcome from the standpoint of businesses or consumers, as these can translate to higher prices; however, too little can coincide with continued growth challenges. This is why the calibration between just enough, too much and ‘just right’ inflation can be so tricky for policymakers to navigate.

(-) The Univ. Michigan index of consumer sentiment for February fell by almost -3 points to 95.7, which underperformed relative to the forecasted minor decline to 98.0, and reversing a strong multi-month trend where the index rose to a 13-year high. While consumer assessments of current conditions fell just a hair, expectations for the future fell nearly -5 points to lead the decline. From an inflation standpoint, 1-year ahead expectations increased by +0.2% to 2.8%, while the 5-10 year ahead expectations ticked down by -0.1% to 2.5%, which is still contained relative to long-term history. Despite the decline for the month, consumer sentiment has shown strong improvement post-election.

(0) The Fed Senior Loan Officer Survey is an interesting gauge of lending sentiment in a variety of commercial, industrial and residential segments. For the first quarter, little changed overall on the commercial/industrial side in terms of loan standards and loan demand. However, commercial real estate loan standards tightened, and demand for residential loans of several types declined—including construction and multi-family.

The details were a bit more interesting beyond real estate, as the willingness of banks to make consumer installment loans (autos and credit cards) declined by several percent, as did the demand for such loans. Subprime auto loans have been common during the last few years, so could have made up a decent component of this category. On the outlook for lending in the coming year, bankers appeared optimistic to some degree, expecting easier standards on corporate loans and residential mortgages, yet tighter standards for lending in commercial real estate and autos (where asset quality is expected to deteriorate, and are more cyclically-sensitive areas subject to default risks related to the business cycle to a greater degree).

(0) The government JOLTs job openings report ticked lower in December, coming in at 5,501k compared to an expected 5,580k, but the result was generally mixed. The rate of openings decreased by -0.1% to 3.6%, as did the quits rate (a Fed favorite) also by -0.1% to 2.0%, while the hiring and layoff/discharge rates were flat at 3.6% and 1.1%, respectively. There wasn’t much change overall, and reinforces generally solid labor market conditions.

(0/+) Initial jobless claims for the Feb. 4 ending week declined by -12k to 234k, which was far below the 249k expected by median consensus estimate. Continuing claims for the Jan. 28 week, however, rose +15k to 2,078k, which was larger than the 2,058k expected. Claims were a bit higher in Calif. for a few weeks, but seem to have normalized more recently. In fact, another stat has reached an all-time low, of less than 0.2% of the workforce being laid off last week (we don’t often think of it in these terms). The overall picture continues to be quite good, in fact at the lowest levels in almost 45 years, which implies that general levels of layoff and need for displaced workers seeking government insurance continues to run at a low level.

Read the "Question of the Week" for February 13, 2017

What's changed since the election?

Market Notes

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U.S. stocks experienced another positive week, led by hopes later in the week of a ‘phenomenal’ Trump tax policy, including discussions about entitlement reform with fellow Republicans. Cyclical industrials, consumer discretionary, and tech led the way, with gains well over a percent on the week, while energy and materials ended up laggards with flattish results to losses. Interestingly, the S&P has gone almost 40 trading sessions without a swing of +/-1%, which is the longest run of the sort in its history (so we know we’re overdue for some volatility at some point). The VIX, which is the index that measures implied vol in the pricing of S&P options, has been hovering again at very low levels, in the low double-digits. This doesn’t mean we are necessarily on borrowed time for a bout of choppiness, but we know that markets can’t experience everyday flat seas forever.

Foreign stocks continued to offer attractive results relative to domestic names, with emerging markets, U.K., and Japanese equities experiencing the strongest gains, and Europe ending up as the only major group in the negative, which was mostly due a weaker euro. European economic and earnings results can in a bit better than expected, which has helped the recovery in equity prices as of late. In EM, China and broader Asia Pacific gained, with help from stronger trade data in the area.

U.S. bonds fared well during the week from a performance standpoint as interest rates declined across the middle and longer end of the yield curve. Both government and investment-grade credit both performed largely in line, both of which outperformed bank loans and high yield during the week.

A stronger dollar during the week acted as a headwind to foreign bonds, creating positive returns of up to a half-percent, similar to domestic returns, becoming losses when translated to the USD-denominated variety. With less of a currency impact on the week, EM debt generally retained their gains.

Real estate gained on the week, with help from a pro-risk sentiment and lower interest rates. U.S. REITs gained over a percent, similar to Europe, while Asia fared better with stronger regional trade news from China, that can affect pricing for key REIT markets in Australia, Hong Kong and Singapore, in addition to Tokyo. Domestically, residential/apartments gained, while retail slid a bit again and keeping their place as the worse-performing real estate segment intact (albeit with still a positive year-over-year gain). Due to long-term fundamental concerns, underweights to mainstream retail assets have been a help to portfolio positioning in the real estate asset class.

Commodities ticked higher during the week, despite the headwind of a stronger dollar, that can have mixed effects in this space. Energy and precious metals were the leading segments during the week, with a sharp increase in the price of unleaded gasoline, with gains over a percent, while industrial metals and softs lost ground—the latter mostly due to a stall in sugar, which gained over +50% over the past year. West Texas crude oil prices dipped by nearly $2 mid-week, before recovering close to where they started at $53.90, close to a high point in a trading range of roughly $50-54 that has been in place since December.

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 February 6, 2017.

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