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Weekly Review - February 22, 2016

Weekly Review - February 22, 2016

Guest Post - Monday, February 22, 2016


  • Economic data on the manufacturing side showed some improvement over the prior month, although several key metrics remained in the negative. Housing numbers released were weaker than expected, although weather could have played a role. Inflation figures were slightly higher than expected, showing strength in the non-energy side, although conditions remain tempered overall.
  • Equity markets recovered globally, while the higher inflation numbers caused bond yields to tick slightly higher. Oil prices experienced some stabilization as several nations discussed the idea of production cuts.

Economic Notes

(-) The Empire State manufacturing index improved in February, rising from -19.4 the prior month to -16.6; however, the result fell below expectations of -10.0. Most underlying details improved for the month, including new orders, shipments and employment. The overall negative result continued to indicate contraction in the manufacturing segment, just to a lesser degree than previously.

(0) The Philly Fed index for February improved from last month, rising from -3.5 to -2.8 (compared to a forecasted -3 level), but remained in contractionary territory. Key components of the index were a bit weaker than the headline figure, with new orders and employment falling several points, while shipments rose further into expansionary territory.

(+) Industrial production in January rose +0.9%, besting expectations of a +0.4% gain. Utilities output was a key component of this, gaining over +5% due to January being a colder month than December. However, manufacturing production also rose by +0.5%—about twice as strong as expected—with strength from motor vehicles. The capacity utilization rate rose sharply from 76.4% to 77.1% for the month.

(0) The Consumer Price Index in January was unchanged on a headline level and rose +0.3% on a core level. Energy fell -3% for the month overall, accounting for the bulk of the difference, while core areas like apparel, medical care services and shelter all ticked higher. Year-over-year, this brought the headline and core inflation increases to +1.4% and +2.2%, respectively. While the headline number is certainly affected by declines in crude oil, this effect will eventually dissipate when the periods of the most dramatic drops fall off, and assuming no other extreme changes, we're likely to see inflation creep back upward.

(0) The January Producer Price Index rose by +0.1% on a headline level and +0.4% on a core basis, which excludes food and energy. Both measures were about three-tenths of a percent stronger than anticipated by consensus. For the most part, the differential between the two was marked by a +1% increase in food prices and -5% decline in energy. After accounting for trade services, however, the gain for the month was less meaningful.

(-) Housing starts in January fell by -3.8% to 1,099k, which disappointed relative to a gain of +2.0% to 1,173k expected by consensus. Both single-family and multi-family each fell by -4% in the month, with weakness perhaps resulting being exacerbated by more difficult winter weather during the month compared to a milder December. On the positive side, single-family permits experienced the best January in eight years and were up +3.5% year-over-year. Building permits also fell, by -0.2% for the month, which was a tenth of a percent less severe than expected; multi-family permits were about +2% higher, while single-family fell by just under -2%. However, December permits overall were revised lower by a few percent.

(-) The NAHB homebuilder index fell a bit in February, to 58, from 61 the prior month and below the expected 60 result. Current sales and prospective buyer traffic declined a few points, while expectations for futures sales edged up a point. The current level remains above the 55 reading a year ago, but below the post-recession peak of 65 which was reached last fall.

(0) Minutes from the January FOMC meeting didn't offer any radical surprises, and were consistent with other recent public messages. Positives noted were a continued improvement in labor conditions, domestic consumption and the positive tailwind of continued lower energy prices. At the same time, uncertainty had increased due to weaker global growth (particularly in China) and a general tightening in financial conditions (bond credit spreads, for one), which has a similar impact as a policy-driven Fed rate increase. Inflation discussions pointed to a lengthening of time needed to again reach target levels due to weak energy prices and dollar strength—this directly led to some participants wanting to see signs of more sustainable inflation pressures before feeling comfortable with pushing for further interest rate increases.

(-) The Conference Board index of Leading Economic Indicators fell -0.2% in January, following several months of gains. Stock prices being lower, jobless claims, and ISM new orders were among the culprits that brought down the index, while the positive interest rate spread, manufacturers' new orders and manufacturing hours were among the positive contributors. The coincident indicators index rose +0.3%, while the index of lagging indicators rose +0.1%. While the decline is a disappointment, the overall trend for the past 6 months remains in positive territory.

(0) Initial jobless claims for the Feb. 13 ending week fell to 262k, lower than the 275k estimate. Continuing claims for the Feb. 6 week rose to 2,273k, higher than the 2,250k consensus expectation. No special factors appeared to be involved, and initial claims appear to be normalizing downward again after a few up-weeks recently.

Market Notes

Period ending 2/19/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















Equities recovered with positive gains for the first time in several weeks with industrial numbers improving as did energy sentiment somewhat. From a sector standpoint, consumer discretionary and information technology led with returns near or above +4%, while more defensive utilities and telecom lagged with gains just over a percent.

Foreign stocks outperformed domestic, and were led by strong returns in Asia, notably Chinese markets, which had been closed the prior week on holiday. Emerging markets Brazil and Mexico sharply outperformed with some stabilization in commodity prices; Japan lagged with minimal gains on the week and perpetuating returns that are among the weakest globally this year. Japanese exports fell almost -13% on a year-over-year basis in January, capping off several straight months of declines—due to slower demand from China and other key trading partners—and representing the weakest export results since the global financial crisis. The U.K. struck a deal with the European Union to give it a 'special status', essentially concessions given to the British in an effort to keep the nation within the EU and prevent what's been termed the 'Brexit', for which a referendum has been planned for mid-year. As a powerful economic growth engine in a union that needs growth, particularly with London as a key if not the key global banking hub, an exit of Britain from the union would leave uncertainties for both sides.

While equities didn't reflect it on the week, other recent worries in Asia have carried over to other markets this year. These surround Chinese growth levels as well as the drawdown of Chinese foreign currency reserves, which is used directly to keep the loose 'peg' in place to the broader world currency basket government officials are using. Anything that causes pain to the Chinese government is seen as weakening the pillars used to keep stimulus intact, which is used to smooth out the recent lackluster growth and prevent a hard landing. Unfortunately, for Chinese policymakers, implied selling of the yuan due to weaker perceived prospects in that part of the world (resulting in the yuan's market devaluation), defending the currency has required selling more and more reserves. As defending a currency can be difficult, the Chinese have let the yuan devalue by 6% since last August; it would have no doubt fallen further without the $500+ billion spent last year to prop up the currency. Reserves are still high, but not what they once were. In other odd news from that part of the world, data from the People's Bank of China regarding capital flights out of the country seems to have 'disappeared' during a trend of outflows—unfortunately these types of inconsistencies with the sharing of bad news doesn't tend to help government credibility with outside investors.

U.S. bonds ticked slightly upward, particularly with the release of CPI that showed inflation a bit higher than expected. With risk assets performing well on the week, high yield corporates outperformed with gains, while long duration Treasuries lagged. Despite a gain in the U.S. dollar, foreign bonds outperformed domestic issues, with emerging market debt and Japanese bonds showing the largest gains—in the case of the latter with rates falling into negative territory (the only way existing bond investors really make money).

Real estate returns were led by more cyclically-sensitive lodging/resorts, which gained upwards of +5% on the week, followed by strong returns in other U.S. categories. Foreign real estate lagged the group with minimal gains.

Commodities fell slightly on the week, in a rare change from the recent volatility. Crude oil bounced up from the $29 level to near $32, as Saudi Arabia, Russia and Venezuela agreed on a production reduction in an attempt to stabilize prices; while Iran showed support for the freeze, it was unclear whether they would participate, leaving energy markets still uncertain.

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 February 16, 2016.

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