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Weekly Review - February 21, 2017

Weekly Review - February 21, 2017

Guest Post - Tuesday, February 21, 2017

Summary

In a busy week for economic releases, several manufacturing indexes shined with strong results, inflation came in stronger than in recent months, and housing numbers were a bit mixed.

U.S. equity markets again showed strong gains, although foreign stocks also came in positive. Bonds were flattish with little changes in interest rates, although high yield bonds continued their momentum. Commodities fell on the week, although crude oil prices were little changed.

Economic Notes

(+) Retail sales for January ended higher by +0.4%, which surpassed forecasts calling for a meager +0.1%. This report also included a slight revision higher for prior months, and the core/control version of the series, removing autos, gasoline and building materials, rose by the same amount as headline. Key areas appeared to be sporting goods, electronics and restaurant meals.

(+) The February New York Empire manufacturing survey rose over +12 points from the prior month to +18.7, which far surpassed the expected minor gain to +7. The components of the survey were similarly positive, particularly in new orders and shipments, while employment also moved from negative to positive.

(+) The Philadelphia Fed manufacturing index did even better, rising by almost +20 points in February to +43.3, which was, interestingly, the highest reading in over 30 years. New orders and shipments both gained sharply, although employment and inventories declined.

(0) The producer price index rose +0.6% for January on a headline level, which was double the increase expected, and, in fact, the largest rise in over 4 years. On a core level, ex-food and energy, PPI gained +0.4%, although much of this was due to a nearly +1% increase in the trade services segment—one that is relatively new and very volatile month-to-month.

(0) The consumer price index for January rose +0.6% on a headline level, with a strong influence from energy prices (which rose +4%, mostly due to gasoline and natural gas, not so much crude oil). Core CPI, ex-food and energy items, rose a more tempered +0.3%, with most areas rising, but led by apparel, vehicles, car insurance and airline fares. Year-over-year, on an unadjusted basis, headline and core CPI are up +2.5% and +2.3%, respectively, which is a faster pace than we're used to, but not egregious. For the trailing 12 months, double-digit gains in energy prices were a large contributor to headline inflation, which also trickles into pricing to core to some extent through transportation, air fares, materials costs, etc. Price gains in the traditional core component continue to be driven by health care services/supplies and shelter—the latter due to price appreciation in real estate markets. One thing that these inflation numbers has triggered is a higher probability for Fed action in March as well as June, although this could be just a timing issue as opposed to changing the overall number or magnitude of interest rate changes.

(-) Industrial production for January fell by -0.3%, compared to an expectation of no change, in addition to a downward revision for the prior month. However, the key component was a drop in utilities production, which fell -6% due to warmer weather, although auto production fell -3% as well. On the other hand, the mining segment (which includes energy production) increased, as did business equipment slightly. Capacity utilization ended the month -0.3% lower, at 75.3%, which again appeared to be related to lower utilities production levels.

(0) Housing starts fell -2.6% for January, compared to expectations of no change; however, due to some underlying prior month revisions, the result ended up being not as bad as expected. Single family starts rose +2% to remain at a high level, while multi-family fell -10%, accounting for the overall results. Building permits, in contrast, rose +4.6%, beating expectations calling for a minor +0.2% increase. In that series, single-family ticked downward by -3% while multi-family rose +20%, although month-to-month volatility can be quite substantial.

(-) The NAHB homebuilder sentiment index in February fell -2 points to 65, as opposed to an expectation of no change. All three components came in weaker, including current sales, future sales expectations and prospective buyer traffic. Regionally, the Northeastern U.S. declined the most, followed by lesser declines in the Midwest and South, while the Western U.S. came in flat. This index continues to run at a very high level.

(+) The Conference Board's Index of Leading Economic Indicators rose +0.6% for January, continuing a string of consecutive monthly gains. The single-month reading was aided by improvements in the yield spread, building permits and jobless claims. This took the annualized gain for the past six months to over +3%, compared to the near-1% for the prior six months The index of coincident and lagging indicators also improved, to a lesser degree, of +0.1% and +0.3%, respectively, while the rates of change for the past several months continued to show positive trends.

Leading Economic Indicators rose for January

(+) Initial jobless claims for the Feb. 11 ending week rose +5k to 239k, which still fell below the 245k expected. Continuing claims for the Feb. 4 week came in at 2,076k, down -3k from the prior week but above the 2,050k expected. The state of Calif. was responsible for the bulk of the increase in initial claims, which could be weather-related. Overall levels, however, remain low, which point to low layoffs and strong employment activity.

Market Notes

Period ending 2/17/2017

1 Week (%)

YTD (%)

DJIA

1.88

4.77

 

S&P 500

1.60

5.32

Russell 2000

0.82

3.27

MSCI-EAFE

0.86

4.35

MSCI-EM

0.95

8.90

BarCap U.S. Aggregate

-0.02

0.44

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

2/10/2017

0.55

1.20

1.89

2.41

3.01

2/17/2017

0.50

1.21

1.92

2.42

3.03

U.S. stocks experienced yet another solid week, with gains over a percent and little volatility. Corporate earnings for the prior quarter came in at their best pace in over two years, showing growth year-over-year of 8-9% generally. Even Janet Yellen's congressional testimony, which was mixed to a bit hawkish, didn't deter market gains. From a sector standpoint, financials and health care showed strength with gains of several percent, with hopes for higher rates for the former and biotech/pharma for the latter, while energy lagged as the sole loser during the week, down nearly -2%.

Foreign stocks also fared positively, to a lesser degree than U.S. equities, with strength in Europe and the U.K., while Japan lagged during the week. Emerging markets fared the best yet again, in keeping with recent trend, as hopes for stronger global growth and cyclical influences will translate to better conditions in those areas; keeping in mind that sentiment over the last several years had been so low that it was hard to imagine much worse priced in. Sentiment has been improving in Europe with stronger earnings for the prior quarter, although projected real GDP remains in the half-percent range it's been in for the past several years with no strong catalysts upward. Japanese results lagged as GDP came in positive, but weaker than expected, with domestic consumption looking flattish, which is a concern for underlying growth fundamentals.

U.S. bonds were mixed and generally slightly negative on the investment-grade side, as interest rates ticked up slightly across the yield curve. High yield corporate debt bucked the trend, gaining about a quarter-percent on the week, followed by bank loans, both of which have continued strong momentum in recent months. Spreads have moved higher in key European markets Germany and France with the upcoming election in France showing support for populist rhetoric (as it is in Italy as well), which is a negative for the euro. Emerging market bonds sold off somewhat during the week.

Commodities indexes declined on the week, with gains in gold and silver but sharp declines in industrial metals, agriculture and energy—the latter due to declines in natural gas prices. Crude oil bounced around little changed on the week, ending just short of $54/barrel.

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 13, 2017.

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