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Weekly Review - February 6, 2017

Weekly Review - February 6, 2017

Guest Post - Monday, February 06, 2017


Economic data for the week was highlighted by a Fed meeting marked by no action, stronger ISM manufacturing data and employment, with middling non-manufacturing, housing and consumer confidence data.

Equity markets experienced a mixed, flattish week on net, with emerging markets leading the way with stronger returns. U.S. bonds were generally flat, while foreign bonds and commodities gained in line with a weaker dollar during the week.

Economic Notes

(0) As we discussed mid-week, the FOMC elected to stand pat at their first meeting of 2017, as expected. Since the narrative was also little changed, other than a minor acknowledgement about sentiment improving, commentators are now looking to how many Fed Funds rate increases might take place this year, and when. Right now, there's roughly a one-quarter to one-third chance baked into the March meeting, so the 2-3 expected hikes are back-ended to at least mid-year and beyond it seems.

(+) The ISM manufacturing index for January rose by +1.5 to 56.0, beating expectations of a smaller rise to 55. All major individual segments experienced gains, including employment, production and new orders to the largest extent. The prices paid report also showed an increase of several points to 69.0, a 5-year peak, showing some byproduct of commodity inflation. This continues to point to a strong recovery trend in the manufacturing space over the last several months. Despite the lower dependence on manufacturing in our economy versus services in recent decades, the correlation between stronger ISM numbers and lack of upcoming recession remains strong (which makes sense considering the cyclicality of the series).

(0/-) The ISM non-manufacturing index fell just slightly, by -0.1 of a point to 56.5, which was short of expectations calling for a small rise to 57.0. New orders and business activity were down, but employment ticked higher, which was an encouraging sign. Overall, despite the flattish result, anything in the upper 50's represents substantial strength in the services sector.

(-) The Chicago PMI for January fell -3.6 points to 50.3, which disappointed relative to a consensus expectation for a small gain to 55.0 or so. Three of the five main components declined, including new orders and production, while order backlogs and supplier deliveries coming in as the bright spots for the month. Per the Chicago ISM, some seasonal factors could be a factor, while respondents weren't overly concerned by the potential for Fed rates hikes going forward. At the same time, the measure has remained in expansionary territory.

(0) Personal income for December rose +0.3%, which was a tenth lower than forecast, in line with wages/salaries. Personal spending did a bit better, gaining +0.5%, which was on target with expectations; the net savings rate fell by -0.2% to 5.4%. The PCE price indexes, which accompany this government release, were up +0.2% for headline and +0.1% for core, which brought the year-over-year numbers to +1.6% and +1.7%, respectively. The composition of these is a bit different than CPI, so the 2% the Fed generally uses tends to be PCE related, implying a slightly higher number for CPI.

(-) Construction spending fell -0.2% for December, which ran contrary to an expected +0.2% increase; however, this was offset a bit by an upward revision for the prior month. Private residential rose a half-percent, private non-residential was unchanged, and local/state government declined almost -2%.

(+) The S&P/Case Shiller home price index rose +0.9% for November on a seasonally-adjusted basis, which beat the consensus forecast of +0.7%. Prices gained in all 20 index cities, with Boston, Denver and New York demonstrating the largest increases at just over a percent each. Year-over-year, the index continued along at a healthy pace of +5.3%. It's easy to get used to, but when looked at from a long-term perspective, this growth rate is quite robust. Over the last century, smoothing out the booms and busts (which have been severe in several cases), home prices have generally kept up with inflation, with an additional real return of up to a half-percent or so per year (although it's run at a few tenths of a percent higher than that for the last few decades).

(+) Pending home sales for December rose +1.6%, which outperformed forecasts calling for only +1.0% and reversing a decline the prior month. The Western region gained +5%, followed by the South, while the Northeast and Midwest experienced declines.

There has been some discussion about the impact of rising mortgage rates on homebuying activity, which there may be some evidence of, but not consistently. Mortgage rates have tended to be closely pegged to the 10-year treasury rate, plus an additional spread of 1-2%, so sustained bond price increases can certainly cause mortgage affordability to suffer—a phenomenon the Fed is very aware of and is one reason for a slower unwinding of the Fed's balance sheet of longer-term debt, which is a different part of the yield curve than the Fed Funds rate targeted by the FOMC.

(-) For January, the Conference Board's consumer confidence index dropped -1.5 points from its prior 15-year high to 111.8, disappointing a bit relative to the smaller expected decline to 112.8. Perceptions of present economic conditions rose +6 points, accompanied by a smaller rise in the measure of jobs being plentiful versus difficult to find, while future expectations fell by almost -7 points, resulting in the net decline.

(+) The ADP employment report for January showed a gain of +246k jobs, which far surpassed the +168k expected by consensus expectations. As usual, services led with +201k jobs, mostly in professional/business services, trade/transports/utilities and education; however, production jobs also increased with impressive gains in construction and manufacturing.

(+) Initial jobless claims for the Jan. 28 ending week fell by -14k to 246k, which was just below the 250k expected. Continuing claims for the Jan. 21 week dropped even further, by -39k, to 2,064k, but still came in +1k above expectations of 2,063k. It appeared a good portion of the decline in initial claims was a reversal from sharp increases in Calif. the prior week, but otherwise, the data continues to point to strong labor conditions.

(+) The employment situation report for January turned out to be a positive one. Nonfarm payrolls rose by +227k, compared to the +180k expected by consensus. Leading segments included retail trade (+46k), construction (+36k) and financial activities (+32k), some of which may reflect some areas of weather-related rebound. In other areas, manufacturing gained +5k while government jobs declined by -10k. However, due to some annual seasonal adjustments, two prior months were revised down by a total of -39k. It's an important reminder that this series does contain a variety of seasonal and other adjustments, are subject to sometimes substantial later revision, and prone to a wide room for statistical error on the lines of +/ 50k to 100k per month, which is a sizable proportion of the entire report. Nevertheless, of course, strongly positive reports are still taken more favorably by the market than substantially weak ones.

The unemployment rate ticked up by a tenth to 4.8%, compared to expectations of no change, some of which was due to a two-tenths of a percent rise in the labor force participation rate. The U-6 'underemployment' measure rose +0.2% to 9.4%; the differential here is somewhat related to the quality of jobs being added (the lower wage variety has been more prevalent in this cycle, but economists debate this issue). The household survey also ended up with a strong showing of +457k, reversing a decline of similar magnitude last month.

Average hourly earnings rose +0.1%, which trailed expectations calling for a +0.3% gain, but coincided with some prior revisions downward, bringing the year-over-year increase to +2.5%. Average weekly hours were flat at 34.4 after some upward revisions affecting the prior month.

Unit labor costs rose at an annualized +1.7% for the 4th quarter, which was a few tenths of a percent below expectations. Nonfarm productivity came in at +1.3 for Q4, which outperformed more tempered expectations calling for +1.0% by consensus, which happened to be the year-over-year rate for the series. Economists are still looking for signs of substantive wage growth, which has begun to pick up in a few segments; compensation per hour rose +2.9% over the past year, so a few ticks above the broader inflation rate. Looking ahead, 19 states raised their minimum wage per hour for this year, a shift that is likely to carry forward into compensation stats to varying degrees.

Market Notes

Period ending 2/3/2017

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YTD (%)





S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

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2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks began the week on a lackluster note, due to unhappiness about President Trump's immigration announcements the prior weekend, and subsequent backlash by legislators, corporations and others. The market impact results not so much from the direct soundbites but the potential deterioration in the relationships with other Republican leaders, which could make the pro-growth agenda items more difficult to pass quickly, such as tax reform. Later in the week, equities recovered on the back of pro-business action on the part of the administration, including promises to attack the recent DOL fiduciary rule and a major scale back of Dodd-Frank regulation. These naturally were seen as positives by financial industry and stock market.

Defensive sectors health care, utilities and consumer staples outperformed, with positive returns, while materials, industrials and energy were all down over a percent. Interestingly, controversy over the healthcare sector continued, with comments from President Trump during the week condemning prices of certain pharmaceuticals as outrageous, but also promised industry executives help in tax reform as well as expediting the FDA drug approval process.

Foreign stocks were flattish in developed markets, with a small positive return in Europe and slight losses in the U.K. and Japan in U.S. dollar terms. Positive GDP growth was a key focus in Europe, as were earnings, where growth was finally expected to surpass U.S. growth for the first time in at least a year. The U.K. under performed with losses for the week, which was related to the discussion of a 'hard Brexit' beginning date in March. Of course, and assuming parliamentary approval, this just starts the clock on an approximately 2-year process during which there will be inevitable twists and turns in the negotiations. Emerging markets outperformed with slightly better returns, led by market gains in India, Mexico and Turkey—the latter two as the result of central bank currency strengthening measures and rhetoric.

U.S. bonds were little changed across most of the yield curve on net, with the exception of 30-year yields, which ticked about 5 basis points higher. Consequently, investment-grade bond returns were mixed, with stronger returns from continued strength in high yield debt. The dollar declined nearly a percent on the week, which boosted the USD-denominated returns for foreign bonds, both in developed and emerging regions, but particularly in the latter.

Real estate generally outperformed broader equities in the U.S., with even stronger results abroad, due to a weaker dollar. Domestically, regional malls recovered somewhat following a bout of volatility and negative sentiment for brick-and-mortar stores, while cyclically-sensitive lodging/hotels pared back by a few percent.

Commodity sectors generally gained, with a tailwind of a weaker dollar. This particularly helped precious metals, but agriculture and energy also experienced gains. Crude oil prices also ticked up slightly on the week, from the lower $53's to $53.85, or just over +1%. Energy market sentiment remains extremely sensitive to the balance between OPEC supply cuts and increasing swing supply from areas such as U.S. shale. The Saudis have insisted that 80% of the agreed-upon OPEC cuts have happened, in addition to production cuts by Russia last week, while the U.S. rig count has also jumped in recent weeks, adding to the supply gap somewhat and likely keeping price increases in check.

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 January 30, 2017.

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