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Weekly Review - February 20, 2018

Weekly Review - February 20, 2018

Guest Post - Tuesday, February 20, 2018

Summary

In a busy week for economic releases, highlights included weakness in retail sales and some hints of increasing inflation as measured by import prices, PPI and CPI. On the positive side, manufacturing continues to look robust in several regional surveys and jobless claims remain very low.

Equity markets around the globe gained sharply on the week to rebound from their recent correction. Bonds fell back again as interest rates inched higher in reaction to higher inflation and expectations of stronger growth. Commodities regained some ground as well, led by higher crude oil prices and a weaker dollar.

Economic Notes

(-) Retail sales for January fell -0.3%, which sharply disappointed relative to an expected increase of +0.2%. When removing the more volatile components of autos, gasoline and building materials, the core index was flat, which still disappointed relative to a +0.4% expected increase; revisions for several prior months were also negative by up to a half-percent. The areas of most significant weakness for the month were in health/personal care, sporting goods/hobbies and furniture, while clothing and misc. stores gained over a percent. Some economists are looking at the month as a transition period between the 'old tax rates and implementation of updated tax cut-adjusted withholding amounts in Feb., which are expected to proportionally improve spending in future months.

(-) The New York Empire State manufacturing survey ticked down in February by -4.6 points to +13.1, which disappointed relative to expectations for an +18.0 reading. Under the hood, employment and new orders gained several points, while shipments weakened. All areas, however, remain in expansionary over-zero territory.

(+) The Philadelphia Fed index rose by +3.6 points to +25.8, surpassing forecasts calling for a +21.8 reading. New orders and employment gained sharply, by +14 and +8 points respectively, while shipments fell by a similar amount. Prices paid also rose significantly.

(0) The producer price index rose +0.4% in January on both a headline and core level, which was on target with expectations of a similar increase for headline, but surpassed expectations of a core PPI increase of only +0.2%. Headline prices were most heavily affected by a +3% increase in energy prices, while medical care pricing was a key factor in the core measure.

(0) The consumer price index for January rose +0.5% on a headline level and +0.3% for core—each about two-tenths higher than expectations—in a month where the rate of change is being watched far more closely than expected, especially in light of stronger acceleration in wage gains in recent weeks. For the month, a +6% rise in energy commodity prices was a key catalyst. In the core component, apparel rose +2%, followed by transportation and medical services showing price strength; other segments, such as shelter, rose in keeping with the broader index. On the other side, prices for new cars and lodging fell, as did airline fares. Year-over-year, the headline and core figures evolved higher to +2.1% and +1.8%, respectively.

(0) Import prices gained +1.0% in January, surpassing the +0.5% gain expected. With the +4% gain in petroleum prices excluded, however, the price gain declined to +0.4%, with higher pricing for autos, foods/feeds/beverages and industrial supplies while other areas were little changed. Unsurprisingly, as seen in other measures such as PPI, there are signs of some cost pressures creeping into the system, but this data can be choppy on a month-to-month basis.

(-) Industrial production in January declined by -0.1%, which ran counter to forecasts calling for a +0.2% increase. Underlying results were mixed, as manufacturing production was flat for the period, mining activity fell by -1% and utilities production rose by just over a half-percent. Capacity utilization ticked down by -0.2% to a still robust 77.5% level.

(+) Housing starts for January experienced a rose of +9.7% to 1,326k on a seasonally-adjusted basis, far surpassing the +3.5% gain expected and again nearing highs for this recovery cycle. In addition, December starts were revised upward. On the downside, the gains were led by the more volatile and investment-driven multi-family group, which rose +24% and accounted for much of the increase in the overall total. Single-family starts gained a more modest +4% for January. Regionally, the Northeast experienced the sharpest gain (of over +45%, likely due to weather effects), while the West and South also gained significantly. Building permits also fared well for the month, gaining +7.4%, relative to an expected no change. In this series, multi-family permits rose +27% due to those in the South rising by a whopping +93% in the aftermath of post-Hurricane rebuilding efforts; single-family permits fell back for the first time in several months by -2%.

(0) The NAHB homebuilder index for February was flat at 72, in keeping with expectations. Current sales fell by a point, future sales expectations improved by a few points, while prospective buyer traffic was unchanged. Regionally, the Northeast and West declined by several points of sentiment, while the Midwest ticked up slightly. This index remains in solid territory, near the highs for this business cycle and near levels seen in the 2005 era—which could be an economic positive going forward as strong homebuilder sentiment tends to correlate with building activity.

(+) The preliminary February report for the Univ. of Michigan consumer sentiment index rose +4.2 points to 99.9, beating the 95.5 level forecast. Both assessments of current conditions as well as expectations for the future both rose to nearly equivalent degrees, and seemed to not be affected overly by recent stock market volatility. Inflation expectations for the coming year were flat, at +2.7%, as were expectations for the coming 5-10 years at +2.5%.

(0) Initial jobless claims for the Feb. 10 ending week rose +7k to 230k, which was just a tick above the 228k level expected. Continuing claims for the Feb. 3 week rose by +15k to 1,942k, which was higher than the 1,925k expected. No anomalies or unusual events were reported by the DOL, and overall claims levels remain very low, and indicative of an extremely strong labor market.

Market Notes

Period ending 2/16/2018

1 Week (%)

YTD (%)

DJIA

4.36

2.37

S&P 500

4.37

2.46

Russell 2000

4.49

0.63

MSCI-EAFE

4.27

1.35

MSCI-EM

4.98

3.56

BlmbgBarcl U.S. Aggregate

-0.21

-2.12


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2017

1.39

1.89

2.20

2.40

2.74

2/9/2018

1.55

2.05

2.52

2.83

3.14

2/16/2018

1.62

2.21

2.63

2.87

3.13

U.S. stocks recovered lost ground last week as volatility returned in the positive direction—with stocks experiencing their strongest-returning week in five years. Every sector ended in the positive, with information technology and industrials gaining the most ground, while telecom and energy came in last place. The recovery appeared to be led by strong earnings and fundamentals, fewer concerns over inflation strengthening, and other news, which included details about the administrations infrastructure plan, such as over a trillion dollars of new investment and a streamlined regulatory environment. Speaking of earnings, 80% of firms in the S&P have now reported, with the index showing a Q4 year-over-year gain of +15%. Although energy has led the way with strong year-over-year comparatives, S&P ex-energy is also up a solid +13%. Revenue gains are also up in the +10% range. Interestingly, dividend payouts are also rising.

Foreign stock returns in Europe, U.K. and Japan were also positive for the week, to a lesser degree—however, a weaker dollar pushed returns up to a level equivalent to those in the U.S. As in the previous few weeks, the primary driver of non-U.S. equity returns appeared to be market sentiment in the U.S., although fundamentals and earnings growth abroad continues to show improvement. Japanese GDP grew for the 8th consecutive quarter, albeit only at an annualized rate of +0.5%, with imports rather than exports leading the way—a shift from prior trends. In emerging markets, stronger global growth and, to some degree, commodity pricing has again boosted Brazil, China and Russia, while South Africa earned double digit returns as the problematic long-standing president finally stepped down.

U.S. bonds lost ground again as interest rates continued to move higher along with increased year-over-year inflation data and heightened expectations. High yield bonds were the best-performing segment, with indexes moving higher, while floating rate bank loans also outperformed traditional bonds, with flattish performance. Foreign bonds ended the week little changed in local terms, but a weaker dollar pushed these several percent higher for the week. Emerging market bonds fared slightly better than developed, as spreads again contracted.

Real estate gained slightly, to a lesser degree than broader equity markets. In the U.S., mortgage and timber REITs fared best, with gains more similar to other stocks, while retail/malls showed weaker gains in keeping with weaker retail sales results. Europe and Asia fared better, due to the tailwind of a weaker dollar.

Commodity indexes gained ground as the dollar fell. All segments ended the week with positive returns, led by industrial metals and energy. Crude oil recovered over the week by +4% to end at $61.55, despite reports of increased production upcoming and even fears of a glut.

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 12, 2018.

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