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Weekly Review - January 16, 2018

Weekly Review - January 16, 2018

Guest Post - Tuesday, January 16, 2018


Economic data for the week was led by growth in retail sales, tempered inflation results and mixed but continued strong labor market metrics.

Equity markets gained ground again, with U.S. markets leading the way upon strong sentiment. Foreign markets also gained, with a help from a weaker dollar. Domestic bonds generally lost ground with interest rates ticking higher. Commodities gained across the board, but particularly due to higher crude and natural gas prices last week.

Economic Notes

(-) Retail sales for December rose +0.4%, which slightly underperformed the +0.5% gain expected; however, stats for a few prior months were revised up significantly, which buffered the weaker reading. The core/control version of the report, which excludes cars, gasoline and building materials, rose +0.3%, also lagged consensus estimates by a tenth. In the core measure, the non-store retail (aka ‘online’) and building materials segments both gained by over +1%, while clothing, sporting goods, misc., and electronics/appliances all declined for the month. This series, like many others, can be convoluted on a monthly basis due to the smaller incremental changes and prior month revisions, but, including all of this noise, retail sales for Q4 rose at a seasonally-adjusted annualized +9% rate, which is quite significant. This was the best quarterly pace in four years, and will certainly be additive to the quarter’s GDP reading.

(-) The producer price index fell by -0.1% on both a headline level and core, when excluding food and energy—both trailed estimates calling for a +0.2% gain. Lower food prices were a catalyst on the headline level, as petroleum was unchanged, while other areas gained, such as medical care. It appears that hurricane price increases are finally dissipating, although they remain elevated somewhat.

(0) The consumer price index for December rose +0.1% on a headline level and +0.3% for core, sans food and energy. Each surpassed expectations by roughly a rounded +0.1%. The gain in prices overall were impacted most by a -3% decline in the price of energy commodities, while a +0.4% gain in real estate/shelter accounted for the majority of gains in the broader index for the month. Both new and used car prices also gained significantly during the month, adding to the overall figure, as did medical commodities and lodging. Year-over-year, the headline and core CPI measures gained +2.1% and +1.8%, respectively, which is quite near the Fed’s 2% mandate.

(-) Import prices for December +0.1%, which fell below the median forecast of +0.4%. An increase in fuel prices was the primary catalyst, seen as the ex-fuels index dropped by -0.1%, led by decreases in the prices of food, feed and beverages.

(+) Wholesale inventories for November were revised upward a bit in the final report to +0.8%, a tenth better than expected. The ex-petroleum index rose at the same rate, while the business inventory component rose by a less significant +0.4%.

(-) The government JOLTs job openings report for November showed a decline to 5,879k, compared to an expected 6,025k; additionally, the October level was revised down by over -70k, with declines in the segments of both manufacturing and professional/business services. The openings rate overall fell by -0.1% to 3.8%, as did the hiring rate to 3.7% and the layoffs rate to 1.1%. The quits rate was flat at 2.2%. Despite the drop, the overall levels remain strong and reflective of a healthy labor market.

(0) Initial jobless claims for the Jan. 6 ending week rose by +11k to 261k, contrary to the expected small decline to 245k. Continuing claims for the Dec. 30 week, on the other hand, fell by -35k to 1,867k, lower than expectations calling for 1,920k. No anomalies were reported, other than a larger increase for Calif. by +10k on the week and continued high levels of claims from hurricane-affected Puerto Rico. Otherwise, levels remain low and indicative of strong labor market conditions.

Market Notes

Period ending 1/12/2018

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BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

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10 Yr.

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U.S. stocks experienced another strong week, as continued good economic data and the first signs of the Q4 earnings season were reviewed. Consumer discretionary, industrials and energy all gained—the latter in keeping with higher oil prices—while more defensive utilities, staples and telecom all sold off. Expectations for Q4 earnings overall has risen to about 11-12%, a few points higher than in recent months.

Foreign stocks in developed markets were barely positive in local terms, with small increases in Europe but losses in Japan, but were helped by a -1% decline in the U.S. dollar. Emerging markets also experienced positive returns, and were far less affected by dollar movement than they were the positive move in commodity prices and stronger economic data in China, such as export growth.

U.S. bonds generally lost ground, as yields rose across the curve—this affected treasuries a bit more than corporate credit, which ended the week flattish to slightly lower. Interestingly, bonds were among the leaders in volatility earlier in the week as yields on the 10-year treasury touched 2.6%, the highest level in 10 months, under rumors that the Chinese were considering a pullback in their purchases of U.S. treasury bonds; however, they later denied the report. As a significant buyer, keeping demand and prices high and yields contained, reduced activity could certainly pressure yields upward over time. Underlying trends in inflation showing more normalization also has some investors raising their future inflation expectations.

Foreign government bonds fared similarly in local terms, with losses upon concerns over the ECB withdrawing stimulus support this year, but were saved by the weaker U.S. dollar, which turned these losses into gains. This has been the trend for much of the past year, with zero-to very low-yielding developed market bonds in Europe, U.K. and Japan offering little to speak of in local currency terms, but benefiting from a -10% decline in the dollar, which directly added to their returns by a similar magnitude. A common question involves the benefits or detriments of hedging currencies, particularly in a less volatile asset class like foreign fixed income. The answer, of course, is more complicated, since over the long term, hedging out U.S. dollar risk provides roughly similar returns to not hedging; however, the unhedged form experiences greater volatility from currency fluctuations. However, volatility moves in two directions—the last year has been the beneficial kind for certain unhedged foreign debt.

Real estate also weakened by a few percent along with more defensive equity groups upon rising interest rates, which tend to normally have a negative effect on real estate pricing in the short-term. However, the dollar effect benefited real estate returns for Asia, which ended in the positive. Domestically, economically-sensitive lodging/resorts actually gained for the week, while apartments and health care lost the most ground.

Commodities gained a few percent, with help from a weaker dollar, which translated to gains in energy and industrial metals, and surprisingly in precious metals, but agriculture lost ground with weakness in several tropical soft commodity contracts. West Texas crude rose almost +5% to end the week at $64.30, the highest weekly close since the declines of late 2014, when prices were in a freefall down from over $100 to $45. Catalysts appeared to be concern over changes in Iranian sanctions, continued turmoil in Venezuela—both significant producers—and comments from Russia that supply/demand is not yet in balance. Natural gas also rose around +10%, with a continued deep freeze in much of the U.S., particularly on the East coast, where milder temperatures had been predicted.

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 8, 2018.

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