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Weekly Review - January 19, 2015

Weekly Review - January 19, 2015

Guest Post - Monday, January 19, 2015


  • In a full week of economic releases, retail sales were somewhat disappointing (although cheap gasoline exacerbated the poor result), inflation declined dramatically due to cheaper energy costs, while sentiment improved to much higher levels.
  • Domestic equity markets were weaker, while foreign names generally experienced positive sentiment from Europe. Bonds gained ground on continued declines in yield, which also benefitted REITs to some degree. Oil prices stabilized somewhat at just under $50/barrel.

Economic Notes

(-) Retail sales for December came in weaker than expected, falling -0.9% relative to a forecasted -0.1% decline. Additionally, November and October sales gains were trimmed by a few tenths each. The headline retail sales figure was obviously strongly affected by gasoline prices (down -6.5%), which have fallen along with crude oil. The core/control portion (removing all volatile sectors, such as gasoline/food/building materials) declined a more tempered -0.4%, which was weaker than the expected +0.4% gain experienced by the core segment. The declines were generally spread throughout a variety of sectors, but electronics and misc. retailers (like office supplies, gifts and other odds-and-ends) were especially hard hit. Despite the rough month, retail sales for the quarter as a whole were up +4% annualized, which may end up translating well into GDP growth numbers for the period due out at the end of January.

(+) The Empire state manufacturing survey for January came in strong at +10, compared to December's -1.2 outcome and outperforming expectations of a +5 reading. Under the hood, new orders, shipments and employment all rose by several points. However, capex spending plans for the coming six months ticked downward a bit while remaining positive.

(-) The Philly Fed manufacturing index came in weaker than expected for January, gaining +6.3, compared to a consensus figure of +18.7. Shipments, new orders and employment were all lower, as were prices paid due to the likely influence of lower commodity prices. Despite the weaker reading, it was above zero, so implied growth.

(0) Industrial production for December fell -0.1%, on target with forecast. However, manufacturing production as the primary sub-component of this rose by three-tenths of a percent; however, a -7% drag in utilities output stemmed from warmer weather in December. Mining production also rose by a few percent, which surprised some people. Capacity utilization fell from 80.0% to 79.7%, which was a bit short of forecast. Overall, utilization has increased by over +3% in 2014, symbolizing how efficiently capacity is being put into place with current equipment. Long-term average utilization rates since the late 1960's hover around 80%, so we're close to 'normal' in that regard.

(0) The headline Producer Price Index for December fell -0.3%, which was slightly less severe than the expected -0.4% decline. The ex-energy/food core PPI rose +0.3%, two ticks higher than forecast. Energy prices falling nearly -7% represented the primary catalyst during the month. Year-over-year, the headline and core PPI measures rose +1.1% and 1.3%, respectively, both of which remain quite low.

(0) The consumer price index for December fell -0.4%, while the core reading (sans food and energy) was unchanged for the period. The gasoline index fell over -9% and energy in general represented the major culprit for downward move in the month, as was some volatility in airline ticket prices (hard to adjust for). Core prices were flat on average, which is only the second time that's happened in the last five years. Medical care and shelter did increase a bit, but were offset by declines in a variety of other areas. For the entirety of 2014, headline and core CPI rose +0.8% and +1.6%, respectively, as the weakness in energy certainly tricked through. Regardless, inflation by traditional measures is extremely low and below what the FOMC would like to see given their mandated 2% target.

(+) The import price index dropped -2.5% in December, two ticks less than expected. The price of imported petroleum fell -15% in the month, leading the contributors, as the non-petroleum group was barely changed. The year-over-year index change was -5.5%, with a flat reading when the impact of petroleum is removed.

(+) The NFIB Small Business Optimism index for November rose +2.3 points to a new recovery high of 100.4, exceeding consensus expectations of 98.5. Gains were led by higher real sales, as well as capex sentiment ('now is a good time to expand' as well as plans to actually do it in 6 mos.), as well as plans to raise worker comp, all of which were up by several points.

(+) The University of Michigan consumer sentiment index rose to 98.2, and higher than the 94.1 expected, to its highest level in ten years. Current conditions and expectations for the future both improved by several points. Inflation expectations for the coming year moved down almost a half-percent to 2.4%, while longer-term expectations remained just under the long-term average of 3%. As we know over the shorter term covered by these surveys, changes in sentiment are driven by consumer budgets, which have been given a major boost by much cheaper gasoline, so this strength isn't entirely surprising.

(+) The November JOLTS report showed 4,972k job openings, which bested the prior month's 4,830k and expected 4,850k result—this was the best openings level since 2001. The hiring rate moved down a tenth to 3.7%, and the quit rate remained unchanged at 1.9%.

(+) Initial jobless claims for the Jan. 10 ending week came in at 316k, up +19k from the prior week and +16k above expectations. Continuing claims for the Jan. 3 week fell down to 2,424k, which was still higher than the expected 2,400k level. No special conditions appeared to skew the results.

(0/+) The Fed Beige Book from the January FOMC meeting sounded more encouraging, with the 'modest to moderate' growth description again returning. Consumer spending increased in most areas, as did auto sales, which were helped from lower gas prices (especially in the Chicago region). Holiday spending appeared to be a mixed bag, however. Manufacturing activity grew generally, while the demand for energy products/services did not, and that segment was one of the weaker areas of the survey (notably in the Dallas/Kansas City regions). Construction activity was generally flat nationwide on the residential side, while commercial activity picked up a bit. Labor demand expanded at moderate levels, while wage growth (on par with other measures) was more limited.

Read the "Question for the Week" for January 19, 2015:

What was the big deal in Switzerland last week?

Market Notes

Period ending 1/16/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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U.S. equity markets were generally down on the week as further concerns about the energy complex and global growth weighed on sentiment. The defensive utilities and telecom sectors led on the week with gains 1% plus, while financials and technology fared the worst, losing several percent. Energy stocks lost ground, but didn't fall into the 'worst' camp last week, which was an improvement over recent trend. Company earnings releases for the 4th quarter have already started, so expect news to be focused on this for the next few weeks.

Foreign stocks outgained domestic issues last week, led by peripheral Europe on the developed market side, although core Europe was up several percentage points as well. The reason? The European Court of Justice essentially provided the go-ahead to the ECB's plan of an all-out quantitative easing program. This was a wildcard, as from a political standpoint, it was not a certain outcome.

India was the best-performing emerging market, as the World Bank reported that the nation's GDP growth will expand to a 7% rate in 2017, becoming the world's fastest-growing economy. This is on the heels of recent hopes of business-friendly reforms in that economy under a new administration. (China is expected to be a close second at +6.9%; forecasts for global growth were also decreased, which didn't help market sentiment). On the more negative end, eastern Europe continued to struggle with Russia and low oil prices weighing down sentiment, but more specifically in Poland due to close mortgage market ties to Swiss banks (and denominated in francs) and would be affected by currency changes.

U.S. bonds experienced another strong week, as 10-year treasury rates fell 15 basis points. Long duration governments fared best (and are leading so far year-to-date), as did developed European debt with hopes for ECB stimulus. High yield and floating rate, unsurprisingly, were among the weakest areas of the week. Foreign debt performance in general was mixed, based on currency impacts in a strong dollar week.

Real estate experienced another solid week, with U.S. REITs gaining almost +3%, but Europe and Asia also fared well. U.S. healthcare and residential led the way on the week, while mortgage REITs lagged, despite lower interest rates. Overall, tenant demand continues to look strong in this space, and our preferred measure of valuation (share price-to-underlying property net asset value) continues to point to valuations near or even a bit below fair value for high quality firms.

Commodity indexes fell about a percent on the week, in keeping with the equivalent strength in the U.S. dollar. Precious metals, led by silver, saw very strong gains on the week, and natural gas and unleaded gasoline also recovered somewhat. Wheat and copper were especially weak, being the losers for the period. Crude oil experienced an up-and-down week, moving in a range of under $45 to $49, before ending on that higher side. Everyone's looking for a 'bottom,' and it remains to be determined where that bottom will fall.

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 13, 2015.

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