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Weekly Review - February 9, 2015

Weekly Review - February 9, 2015

Guest Post - Monday, February 09, 2015


  • It was a relatively busy week for several economic reports, including a lackluster but positive ISM number and an employment report that came in better than expected.
  • U.S. equity markets rebounded strongly higher on the week with an easing in geopolitical concerns between the EU and Greece, stabilization in oil prices and end to a less-than-apocalyptic earnings season. Bonds suffered one of their worst weeks in some time with interest rates shooting higher. Commodities also gained sharply on the back of oil's gains.

Economic Notes

(0) The ISM Manufacturing index continued to expand but at a weaker pace than expected for January at 53.5, down -1.6 points from the prior month, and below the 54.5 level expected. All three primary components of new orders, production and employment all declined by a few points. New export orders also fell, into a negative sub-50 level, which is not surprising due to the stronger dollar. Prices paid also fell by several points, affected by cheaper oil input costs.

(+) The ISM Non-Manufacturing Index came in about in line with expectations, ticking up two notches to 56.7 from last month, beating forecasts of 56.4. In the underlying components, business activity improved, as did new orders, while employment fell by several points. Export orders and prices paid fell, which was no surprise with a strong dollar and commodity price weakness. Other than in the oil industry, anecdotal comments were positive.

(-) Construction spending for December rose +0.4%, which fell short of the +0.7% forecasted gain. Private residential rose +0.3%, with single-family performing quite well and multi-family falling off a bit. Private nonresidential fell -0.2% with several sub-categories weaker. Public construction efforts gained over a percent in the month. Year-over-year total construction activity was up +2.2% in 2014; public gained a lot more than private, which was almost flat, but accounts for under a third of total activity so the impact was muted.

(-) Factory orders for December fell -3.4%, which was slightly below the expected -2.4% decline. The drop was due to weaker civilian aircraft orders (seen in durable goods) as well as lower commodity prices. Core capital good shipments were revised up a bit for both Nov./Dec., however. The key takeaway is that manufacturing inventories grew at a slower pace near year-end, which could affect final Q4 GDP assumptions.

(0) The Federal Reserve's Senior Loan Officer Survey for the first quarter showed a modest easing in lending standards across a variety of loan types—but demand expanded at a flatter rate than in previous quarters. Commercial/industrial loan standards loosened overall over the past three months, seen by lower loan cost spreads, but a smaller net number of banks reported loosening standards than the last report. Yet, demand for such loans continued to increase. Commercial real estate standards were generally unchanged from last quarter, and rates of easing seemed to decelerate for both residential and construction/development loans; on the positive side, demand continued to increase in all of these areas. Standards on residential mortgages continued to ease; however, demand also fell—with subprime loan demand falling at twice the rate of prime. Banks showed a flat to slightly increased willingness to provide consumer installment loans—a trend that has generally flattened—as has demand for auto loans and credit cards.

(+) New home sales for December rose +11.6% to 481k, which sharply outperformed the expected +2.7% increase (to 450k). The Midwest was the sole laggard, while the other three national regions gained. This was a particularly strong month, although there is a bit of noise in this series and revisions can alter these dramatically after the fact.

(0) Personal income for December rose +0.3%, beating expectations by a tick. However, the underlying pieces were less inspiring, as wages/salaries only rose a tenth of a percent and transfer payments/proprietor income ended up being the bulk of the gain. Personal spending fell -0.3% for the month, which was as expected; the net effect was a rise in the implied personal savings rate of +0.6% to 4.9%. The PCE price index on a headline and core level fell by -0.2% and rose just a hair above zero, respectively. For the year-over-year 2014 period, the headline index gained +0.8% and core gained +1.3%. Compared to other standard inflation measures, these were right in line and reflect both the effects of energy on headline inflation, but core is certainly below-average as well.

(-) The trade deficit for December came in larger than expected, widening to -$46.6 bil., relative to a forecast of -$38.0 bil. Exports declined by almost a percent, led by a sharp decline industrial supplies. Imports rose +2%, with real petroleum imports gaining +18%. While this could serve as a takeaway from revised Q4 economic growth, it's possible the repercussions on Q1 could be positive.

(0/-) Nonfarm productivity for Q4 fell by -1.8%, underperforming expectations calling for a slight increase of +0.1%, and bringing the year-over-year figure to flat. Unit labor costs rose +2.7% for the quarter, which was about twice the rate expected; this was due to a near-1% rise in compensation/hour.

(0/-) The ADP employment report came in a bit below expectations, with +213k openings compared to consensus estimates calling for +223k. However, December's figure was revised up by +12k to +253k—ADP revisions upward seem to be a trend as of late. There were few surprises in the report, with trade/transports/utilities posting the largest gains (over +50k).

(+/0) Initial jobless claims for the Jan. 31 ending week rose by +11k to 278k, but fell below the forecasted 290k. Continuing claims for the Jan. 24 week were little changed from the prior week at 2,400k, which was also on target with consensus. The DOL reported nothing unusual in the release, including any impacts from weather.

(+) The employment situation report for January ended up better than expected. Nonfarm payrolls rose +257k, beating estimates calling for +228k, and revisions for November and December added almost +150k jobs to those original numbers. Increases were led by gains in trade/transports/utilities, as well as health services, both of which were up about +50k; construction employment added +39k, while oil/gas extraction jobs only fell by -2k (a closely-watched segment for last month—there could be more weakness to come in future reports). Temporary employment also fell by -4k, which could be due to some seasonal reversal effects at the turn of the year.

The unemployment rate rose a tenth from last month to 5.7%—versus an expectation of no change. The U-6 'underemployment' rate also increased a tenth to 11.3%. The labor force participation rate was up two ticks to 62.9%, which could help account for this. The household survey job gains, which are tied in with these calculations, were quite strong as well. Average hourly earnings rose +0.5% in the month, which was two-tenths higher than expectations; previous monthly earnings data was also revised higher. The year-over-year earnings gain ended up at +2.2%, just above standard inflation measures. The average workweek was flat at 34.6 hours. As they usually do, markets are watching these metrics closely for a variety of reasons. One, stronger employment is a natural byproduct of a stronger economy, and as the rate ticks down into the mid- to lower-5's, the theoretical level of 'full employment' approaches, at which point, continued strong improvement becomes less likely. Second, this full employment level would leave one of the Fed's mandates fulfilled—affecting timing of interest rate policy changes.

Read the "Question for the Week" for February 9, 2015:

How does a bond end up with a 'negative' yield?

Market Notes

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U.S. stock markets rallied on Greek sentiment, good employment numbers and gains in crude oil prices. Telecom and energy led the way, while utilities were the sole losing sector, down several percent. This isn't entirely surprising, as utilities valuations are a bit extended and a tick up in rates hurts their relative attractiveness versus other assets.

Foreign equities were also positive, but not as much so as were U.S. stocks. The winners on the week were Greece and Russia, as well as nations like Norway that naturally benefit from oil price recovery. Investors may have been surprised that Russia's GDP actually grew at a 0.6% pace in 2014.

The Greek situation early in the week was focused on an ECB announcement that it was removing the waiver for Greek debt's use as collateral in monetary policy operations, which was quite important to Greek banks. This caused a plunge of Greek stocks, until the ECB refined the comment, that they've extended funding to local banks directly through their emergency lending authority, which brought Greek stocks back almost to where they started two days prior. The situation there is a combination of practical and political. The ECB is trying to walk the tightrope of protecting themselves yet also encouraging their larger agenda onto the new Greek leadership, while the new Greek leadership from the anti-austerity party is caught in a balance of tough talk for its home constituents, but also realizing the stark realities facing the nation if things go wrong with the EU.

China relaxed bank reserve ratio requirements by -0.5% from 20.0% to 19.5% last week to help provide additional stimulus—effectively injecting 600 billion Yuan into the economy—and boosting equity sentiment. This is a tool in every central bank's toolkit, but you don't see it quite as often as direct rate guidance.

Interest rates ticked up by almost a quarter-percent, due to risk-on sentiment noted above that boosted equities. This provided bonds with a terrible week and a taste of what rising rates can do to fixed income returns. High yield led with strong gains, no doubt related to eased pressures on energy sector components,

In foreign bonds, the dollar fell a bit, but increased risk-on sentiment related to Greece provided a boost to the European periphery, including Italy. European debt in general performed well on the news, providing positive performance to offset weakness in the U.S. The dollar was not much of a factor on the week.

Real estate returns were mixed, with strong positive returns in Europe and Asia and a pullback in U.S. REITs—no doubt partially interest-rate related.

Commodities, as represented by the GSCI index, rose +5% on the week. Those who blinked may have missed it, but crude oil has been on a reversal rally as of late—up +9% last week (biggest 1-week jump in three years) and almost +20% from lows a few weeks ago. This has helped not only the commodities complex, but peripheral industries as well, not to mention high yield bonds and the like. Gold and other precious metals fell by several percent, not helped by higher U.S. interest rates/real yields.

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 2, 2015.

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