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Weekly Review - February 29, 2016

Weekly Review - February 29, 2016

Guest Post - Monday, February 29, 2016

Summary

  • Economic data for the week came in stronger than expected in areas such as durable goods, personal income/spending, home prices, jobless claims and an upward revision to last quarter's GDP; consumer sentiment measures were mixed.
  • Equity markets rose in the U.S. as economic data outweighed the global growth concerns of recent weeks; foreign stocks rose as well, with an effect tempered by a stronger dollar. Bonds were flat on the week with minimal moves in interest rates. Oil prices ticked upward as talk of a production cut by major global producers subsided.

Economic Notes

(+) Durable goods orders for January came in far better than forecast, with a +4.9% gain, compared to the +2.9% increase estimated by consensus. Much of this was due to a +54% gain in civilian aircraft orders, which are notoriously volatile month-to-month. Removing these more sporadic components, core capital goods orders also gained more sharply than expected, up +3.9% compared to the median forecast of +1.0%, led by gains in machinery (up +7%). Core capital goods shipments fell -0.4% for the month, which was a tenth less severe than the -0.5% drop forecast.

(+) The 2nd 'preliminary' 4th Quarter 2015 GDP number came in at +1.0%, which was actually better that the first estimate of +0.7% and far better than the forecasted adjustment downward to +0.4%. Personal consumption growth was revised down two-tenths to +2.0% for the quarter, and business spending was revised further into the negative (to -1.9%). Much of the difference, as usual, was based on adjustments for inventory (higher in this case) as well as a narrower trade deficit. The strength of the dollar has leveled off somewhat in recent months, so the more dramatic negative effects may be starting to fall off.

Expectations for the 1st quarter of 2016 are falling in low 2's again, from 2.0-2.5%. As is usually the case, inventory adjustments in one quarter affect the next, so a better Q4 perhaps means a few fractions of a percent being pared off of Q1. Interestingly, overall growth rates are high enough and similar enough to recent quarters that a recession looks increasingly less likely—despite some early year warning signs from manufacturing, sentiment and equity markets. Then again, forecasts calling for recession aren't especially common from an economist standpoint (large market declines and other things like flat/inverted yield curves and sharply wider bond credit spreads have been much more telling in recent decades).

(+) January personal income and personal spending both rose +0.5%, which were each a tick or two above expectations. Wages and salaries rose +0.6%, with increases in both goods and services areas. PCE inflation for January rose +0.1% and +0.3% on a headline and core level, respectively. Both were just slightly higher than expectations and led by higher prices for durable household goods/furniture, clothing, transportation services and food services. Year-over-year, headline and core PCE inflation measures rose +1.3% and 1.7%, respectively—both showing continued tempered inflationary pressures.

(-) The trade balance widened a bit from -$61.5 bil. in December to -$62.2 bil. for January. Goods exports overall fell by -3%, bringing the 12-month change to -10%; goods imports fell -1.5%, for a one-year change of -7%. The exports portion of the report was due to drops in industrial supplies/materials, of which energy is no doubt a critical component.

(0) The S&P/Case-Shiller home price index rose in December by +0.8%, although that was a tenth below expectations of +0.9%. Every city except for Miami showed gains for the month. Year-over-year gains remained consistent with the prior month, at +5.7%, which, especially on an after-inflation basis, continues to show decent national real estate growth although it was noted that the pace of growth is slowing a bit overall. Leading cities for the last 12 months are Portland, San Francisco and Denver, with gains over +10%; Washington D.C. was weakest, with +2% gains.

(0) Similarly, the FHFA house price index rose +0.4%, which fell just below the +0.5% increase expected. The bulk of regions experienced price gains, with KY through AL showing gaining nearly +2%, and +1% gains for New England and NY/NJ/PA. Year-over-year, the index rose +5.7%, matching the Case-Shiller stats.

(+) Existing home sales for January rose +0.4% to 5.47 mil. seasonally-adjusted annualized units, which outperformed relative to an expected decline of -2.5%—an expected bounceback from a very strong December that was partially convoluted with changes in mortgage disclosure rules. For January, single-family rose +1%, while multi-family fell -5%. It appears inventories for single-family remain a bit tight overall.

(-) New home sales for January fell -9.2% to 494k, which fell below the -4.4% forecast decline, and reversed strong gains from December. Sales in the Western U.S. fell by -52k, which was responsible for the bulk of the decline, as other areas were far less volatile. On the positive side, several earlier months were revised upward by 10k and year-over-year sales are in the +10% range; however, levels are about half of the 1.0 mil. or so level from the prior cycle in the early 2000's period.

(-) The Conference Board consumer sentiment index for February fell to 92.2, substantially lower than expectations of 97.2 and last month's 97.8. Assessments of current conditions and expectations for the future both declined, as did the labor differential—that measures jobs being plentiful vs hard to get.

(+) The final version of the University of Michigan consumer sentiment survey for February improved more than expected, rising a point from the initial release to 91.7, surpassing expectations of 91.0. Most portions of the report were stronger, as consumer assessments of current conditions and future expectations both moved higher. Inflation expectations for the coming 5-10 years also rose a tenth to 2.5%, but continued to fall well within recent ranges.

(0) Initial jobless claims for the Feb. 20 ending week rose to 272k, which was +2k over consensus. Continuing claims for the Feb. 13 week, on the other hand, fell to 2,253k which was right on target with expectations. No special factors appeared to be at play and the multi-week moving average of claims results, which is a better indicator, by smoothing out week-to-week volatility, continues to trod downward again.


Read the "Questions of the Week" for February 29, 2016:

What's with all the negative interest rate talk again?


Market Notes

Period ending 2/26/2015

1 Week (%)

YTD (%)

DJIA

1.56

-3.99

S&P 500

1.63

-4.32

Russell 2000

2.73

-8.51

MSCI-EAFE

0.15

-8.95

MSCI-EM

0.13

-6.82

BarCap U.S. Aggregate

0.02

1.95

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

2/19/2016

0.31

0.76

1.24

1.76

2.61

2/26/2016

0.33

0.80

1.23

1.76

2.63

U.S. stocks gained on the week with decent economic data, led by materials and consumer cyclicals up nearly +3%, while defensive utilities and consumer staples trailed the pack with marginally positive returns. Small caps led the way, followed by mid-caps as the beta effect took hold. Interestingly, while market weakness as of late had pushed more higher-quality companies into 'attractive' territory, in all market cap areas, we're also seeing some wash-outs. These are coming from specialty/niche consumer and technology firms such as GoPro and FitBit.

In local currency terms, foreign developed market stocks gained in line with U.S. indexes, but when translated for a stronger dollar, returns were generally flat. A similar pattern occurred in emerging markets, although overall returns were lower, hovering around zero or below. Country returns were led by emerging nations Russia and Turkey, along with strong showings from the European periphery. However, overall European numbers, such as PMI, sentiment, exports and inflation, all came in lower than expected—as did German GDP, which only rose 0.3% in Q4. Hopes remain for further easing upon the next ECB meeting; however, uncertainty regarding the possible 'Brexit' remains high as poll numbers are forecasting an even probability of the U.K. staying or leaving at this point. The British pound has taken a hit on this question as well; while opinions are mixed as to long-term effects, the short-term adjustment period would likely be extensive due to the interlinkages on the financial and trade side.

Chinese returns brought up the rear on continued economic uncertainty and higher domestic money market yields—which have been taken as reflecting poorer credit conditions. The Chinese continue to mark down the renminbi/yuan during their daily 'fixing' sessions, which surprised some observers considering the G20 meeting that was upcoming over the weekend in Shanghai (the Chinese have tended to not aggravate the international economics community prior to large global meetings like this, but will wait until other times to do it).

U.S. bonds were extremely flat (near zero returns) on average, as interest rates experienced the smallest weekly change in recent memory. However, risk credits such as domestic high yield corporate bonds and emerging market debt gained ground by over a percent as credit spreads contracted. Developed market foreign sovereign bond indexes gained a bit in local terms as interest rates fell, but a stronger dollar translated this into losses for the most part.

Real estate gained several percent, led by strong showings in healthcare, mortgage REITs and industrial/office on the U.S. side. As of late, the worries over interest rate hikes have dissipated, removing one of the key shorter-term headwinds for real estate valuations, while fundamentals in tenant demand and rents remain strong. Coupled with the translation effect of a stronger dollar, markets in Europe, U.K. and Asia fell for the week.

Commodities recovered a bit, with most key indexes ticking higher—notably those with the largest exposures to energy. Oil again popped up over the $30 mark to end the week at just under $33. The week prior to last, oil prices rose a bit following talk of an agreed-upon production freeze (at January levels) by Saudi Arabia, Russia, Venezuela and Qatar (and rumors of Iran). However, last week, the Saudi oil minister retracted the action, blaming the inability to restrain the output of other producing nations. This is turning into a soap opera again, but the bottom line is that low oil prices have played havoc on the budgets of oil exporting nations. This has turned into a battle of wills and staying power between the Middle East and U.S. shale, as to which entities can survive the longest under low prices. Interestingly, it looks as if a few smaller oil/gas operators are using the low energy price environment to threaten/use Chap. 11 bankruptcy protections in order to void long-term contracts with pipelines, presumably to renegotiate more favorable pricing. This may exacerbate uncertain sentiment for both energy high yield debt and MLPs.

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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