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Weekly Review - January 13, 2015

Weekly Review - January 13, 2015

Guest Post - Tuesday, January 13, 2015


  • The economic news of the week was led by a somewhat disappointing ISM non-manufacturing report early, Fed minutes that were largely as expected and a mixed employment report with stronger payrolls but weaker wage growth.
  • Equity markets lost ground globally, while bonds of all types earned positive returns, as did real estate. Oil prices slipped again and closed under $50/barrel—one of the most closely watched items in recent months.

Economic Notes

(-) The ISM non-manufacturing index for December fell by 3.1 points to 56.2, disappointing relative to consensus calls for 58.0. In the underlying data, business activity and new orders fell by several points, while employment dropped minimally. The prices paid index also declined by almost 5 points, and was a likely reactor to lower commodity prices, namely oil. While remaining strong, new export orders also fell by a few points, while Despite the weaker month, it's important to note that all figures are solidly in the '50's,' which remains quite solid and signifies growth —putting month-to-month choppy data into perspective.

(-) Factory orders for November fell -0.7%, slightly worse than the expected -0.5% decline, partially led by durable good order declines and lower petroleum inventories (due more to pricing, most likely, than actual inventory volume).

(+) Wholesale inventories for November rose +0.8%, outperforming expectations calling for a +0.3% gain, and was coupled with a prior month revision. The increase was led by stronger inventories in computers and drugs (legal). This data point seems to matter, as it can affect the inventory assumptions in Q4 GDP, for which it might provide somewhat of a boost.

(0) Total vehicle sales for December came in at 16.8 mil. units, which was down from the prior month's 17.1 mil., but was a +6.5% year-over-year gain. The +6% gain in 2014 full-year sales volumes were the highest in eight years.

(+) The November trade balance (aka deficit) came in at -$39.0 bil., which was narrower than the forecasted -$42.0 bil., as both imports and exports declined. As is often the case, the bulk of the difference was energy-related, as real petroleum imports fell off by -6% and prices continued to decline.

(0) Initial jobless claims for the Jan. 3 ending week came in at 294k, a drop of -4k from the prior week, but about +4k above consensus. Continuing claims for the Dec. 27 week ticked upward a bit to 2,452k, about +92k above consensus, but remaining near lows of the cycle. No unusual factors appeared to skew the results, per the DOL.

(-) Initial jobless claims for the Dec. 27 ending week rose a bit to 298k, up +17k from the prior week and +8k higher than forecast. Continuing claims for the Dec. 20 week, by contrast, came in -15k lower than expected to 2,353k, and -53k lower than the prior week. The Dept. of Labor made no mention of any special factors, but the holiday season can sometimes create more week-to-week volatility due to seasonal employment and other year-end adjustments.

(+) The ADP employment report ADP rose +241k in December, which outperformed expectations by +16k. Additionally, November's release was revised upward closer to the government's nonfarm payrolls figure. For Dec., professional/ business services led the way with almost 30k more jobs than last month, reaching 69k. The year-end report can be a little deceiving at times due to payroll adjustments at year-end, so further revisions could amend this release.

(0) The December employment situation report was mixed to decent. Nonfarm payrolls came in at +252k, which was +12k over expectations and prior month numbers were revised up a bit. Construction added almost +50k jobs, in an especially strong showing, but strength was relatively broad-based, including gains in factory employment and business services. Oil/gas extraction and support activities were generally unchanged, suggesting that oil price declines haven't carried through as of yet. At the end of the year, there are sometimes holiday and delivery-type jobs that can skew the results somewhat, but that didn't appear to be the case as much this year.

The unemployment rate fell 2/10ths from 5.8% to 5.6%, beating expectations calling for 5.7%. The U-6 'underemployment' measure fell by the same rate, down to 11.2%. Labor force participation also declined by two-tenths to 62.7%, which explains a good part of the improvement in the unemployment rate.

On the more negative side, average hourly earnings fell -0.2% (compared to an expected gain of +0.2%), which was the worst month since that series began in 2006, interestingly enough. This brought the year-over-year gain in earnings to +1.7% —generally on par with trailing inflation (or even a bit above it), but economists continue to hope for signs of stronger wage growth to demonstrate that the jobs picture has solidified and broadened somewhat. This hasn't yet happened. If one were to look through the likely eyes of the Fed as to what this report meant for monetary policy, it could be a mixed view —strong, but perhaps not strong enough of an all-encompassing jobs number in their minds to speed up the process of tightening.

Why is wage growth so slow? The San Francisco Fed penned a recent piece on the topic, discussing how certain artificial constraints in the labor market can foster such an outcome. To summarize, in a perfectly efficient market-based economy, employers would be able to raise and lower salaries and add/trim jobs as needed quickly in response to changing economic conditions. In reality, however (especially in certain industries), it's much more difficult to lower salaries and cut positions during difficult times then it is to add positions/raise salaries during boom periods (and anecdotal evidence tells us employers have historically been hesitant to cut if it can be avoided). Consequently, this mismatch creates a 'stockpile,' for lack of a better word, of salary cut credits to be worked off before wages increase again. This effect varies by industry, degree of labor organization, etc. The obvious societal benefits are a smoother income stream and more stable employment base than would otherwise be the case if faster-moving economic forces adjusted things on the fly; but this smoothness is paid for somewhat on the other end, at least for a longer period of time.

(0) The FOMC minutes from December didn't hold a lot of surprises, as is often the case. Members seemed to agree on changing the 'forward guidance' language from putting off rate increases 'for a considerable time' to the implication of being 'patient' in getting conditions back to normal. This is a small difference in semantics, but important from the standpoint of policy sentiment. Inflation remaining under the 2% target did seem to be a concern for several members as well, with the implication that the lack of inflation is playing a role in the continued delay towards rate hikes and normalized policy. The committee feels consumer spending has improved in the latter part of 2014, and downplayed negative effects of the strong dollar somewhat.

Market Notes

Period ending 1/9/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

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U.S. stocks ended up down on the week as concerns filtered through about the weakness in energy prices affecting domestic industry and infrastructure, based on anecdotal company comments. Interestingly, the S&P is off to its fourth worst start in history. From a sector standpoint, defensive health care and staples outperformed while energy lost ground again by -4% or so with lower oil prices.

Eurozone inflation turned negative, and that stoked headlines from that part of the world. Adding fuel to the fire, last weekend Angela Merkel made comments indicating that a Greek exit from the Eurozone would be acceptable, so this pressured Greek names, as well as Italy, which is often put in a similar category. However, despite the election rhetoric from Greek politicians and parties, neither a complete write-off of Greek debt nor exit from the broader Eurozone appear to be in the base case of analysts. With such news, Europe (especially the periphery) was the worst-performing region of the week. On the positive side, problem children of Turkey, Russia and Mexico were among the best-performing areas of the week in a bit of a rebound.

Domestic bonds rallied as 10-year treasury rates fell under 2.0% again, before recovering back towards that mark by the end of the week. The 'risk-off' response of bonds relative to higher stock volatility so far in 2015 isn't entirely surprising, but rates this low, with economic data improving, is somewhat. Foreign bonds in developed countries came in positive on the risk-off sentiment, with German Bund yields coming in at under 0.50%, but were held back by a 1% stronger US Dollar Index —the exception was wider spreads in the European periphery, which weighed on price returns there. Emerging market bonds generally gained all around, in both terms, as the dollar didn't have the same impact in EM.

Real estate trusts led the way with +5% gains on the week, at least in the U.S. Sectors were all in general alignment, with malls, retail and residential all performing strongly, a bit better than industrial and lodging. European and Asian REITs also gained, but to a much lesser degree. Falling interest rates and improving fundamentals have certainly helped the REIT space over the past year, especially with volatility in other equities.

Commodities experienced another painful week —more so for energy-heavy indexes and contracts than for the more diversified mixes, and the dollar strengthened by another 2%, adding fuel to the fire. Just when it was thought that conditions for oil couldn't get any cheaper, West Texas crude prices declined from $53 to $48, before. On the positive side, coffee, sugar, nickel and gold all gained a few percent, bucking the trend of broader category. Gold has benefitted from lower interest rates, which has served to shrink 'real' yields and lower the opportunity costs for owning precious metals over other financial assets.

In many markets, including commodities, 'round' numbers tend to have importance from a trading/sentiment side, although the straight downward move has bucked that trend this time. Perhaps $50 will be that rough support point for oil, or maybe it won't. Without beating this to death, many economists/analysts still seem to agree that the lower price environment of petroleum (being now a smaller component of consumer budgets, leading to other spending) is more of a benefit than the pain because of it (headwinds for energy firms, such as drillers and infrastructure operations). The tricky part is that the U.S. oil market is forecast to provide 75% of non-OPEC supply growth this coming year, so while great for factors favoring oil independence, there are some difficult decisions to be made at the margin while this adjustment happens.

Per stats provided by Deutsche Bank, this recent correction in crude has been one of the most powerful in its history, surpassed only by the collapse in 1986 (-67%) and 2009 (-74%), is close to the -58% crop from Jan. 1997-Dec. 1998. While markets have been startled by the magnitude of the correction, and are still undecided about its implications, these movements don't continue indefinitely and, eventually, momentum runs its course. Where the fair value of crude 'should' be remains to be determined, but such volatility may ultimately create other investment opportunities.

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 January 5, 2015.

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