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Weekly Review - January 23, 2017

Weekly Review - January 23, 2017

Guest Post - Monday, January 23, 2017


A fair amount of economic news for the week was released, including strong regional manufacturing and industrial production numbers, slightly stronger housing data and relatively contained inflation, as expected.

Equity markets declined a bit in both the U.S. and abroad. Bonds also lost ground with interest rates ticking higher due to stronger economic data. Commodities were little changed on net for the week.

Economic Notes

(0/+) The NY Empire State manufacturing survey in January decreased in pace a bit to +6.5 from +7.6 the prior month, below expectations calling for a rise to +8.5, but conditions remain expansionary. The employment subcomponent rose about +10 points to barely contractionary territory, while new orders and shipments declined somewhat, while remaining positive.

(+) The January Philly Fed survey increased by almost +4 points to +23.6, surpassing the expected decline to +15.3, to reach a two-year high. A sharp gain in new orders by +11 points was the primary reason, as was strength in the employment measure, while shipments slipped a bit. Obviously, this represents a solid start to the year and points to general improvement in manufacturing activity.

(0) The consumer price index for December rose +0.3% on a headline level and +0.2% for core, removing food and energy prices—both were generally in line with expectations. While headline CPI was helped by a +1.5% increase in energy prices, these were offset a bit by flattish food prices (home-prepared food has become cheaper, while restaurant meals have become more expensive over the past year generally). Core prices were mixed, with cheaper apparel, down -1%, and a slowing of price increases in the medical category and housing. Year-over-year, this release translates to inflation rising +2.1% for headline and +2.2% for core, which has drifted upward to target levels focused on by the Federal Reserve. Recent movements have been due to calendar effects as much as inherent components.

(+) Industrial production for December rose +0.8%, which was two-tenths of a percent higher than forecast. The core manufacturing production measure gained +0.2%, which was about half the gain expected. Other factors affecting the broader number included utilities output, which gained +7% due to colder weather, a +2% rise in auto production as well as the strongest result for business equipment in several quarters. Capacity utilization ticked up more than a half-percent to 75.5%, led by strength in the utilities sector. However, despite strong gains from lows in the upper 60's during the 2009 recessionary troughs, utilization remains far lower than the long-term average of roughly 80%. It tends to have an inverse relationship to unemployment, which makes sense as a stronger labor economy leads to higher and more productive employment; however, in this cycle, employment has improved far faster than productivity.

(-) The January NAHB homebuilder sentiment index fell -2 points from its cyclical high to 67, which underperformed compared to expectations calling for no change. Current sales, future sales expectations and prospective buyer traffic all experienced declines from the prior month. Regionally, the Midwest was unchanged, while the West experienced the most severe decline for the period.

(+) Housing starts rose +11.3% in December to a seasonally-adjusted annualized 1,226k, which surpassed forecasts calling for +9.0%, and offset a decline the prior month. As usual, the underlying monthly stats veiled significant volatility, as multi-family starts rose by +57% (to reverse a sizable similar decline the prior month), while single-family starts fell by -4% for the second straight month. Year-over-year, single-family starts rose +4%, while multi-family gained +9% for the same period. Building permits slipped by -0.2% for the month, contrary to an expected +1.1% increase. In this series, single-family permits rose +5% in a string of nearly 6 months straight of positive results, while multi-family fell by -9% for December. Of course, this time of year contains a myriad of seasonal adjustment issues for the construction industry, including bad weather on top of the usual holiday downturn.

(+) Initial jobless claims for the Jan. 14 ending week fell by -15k to 234k, which was far lower than the expected 252k. Continuing claims for the Jan. 7 week came in at 2,046k, which was also lower than the 2,075k expected. There were no unusual issues noted from the DOL, as holiday seasonality issues continue to work themselves off. Regardless, these claims levels remain very low and point to a continued strong labor market.

(+) The Fed beige book that outlined regional activity from later November through December showed a continued economic expansion ('moderate' or 'modest') across the majority of districts, which was a slight improvement on the prior report where activity was less consistently positive. Consumer spending improved a bit, as did manufacturing—both of which were welcome news. Interestingly, it was mentioned that traditional retailers were continuing to struggle in some respects versus online competition—a theme we've discussed many times. Real estate was mixed. Employment conditions continued to show strength with tighter labor markets, some of which were marked by increases in wages—hikes in various states' minimum wage laws could have accounted for some of this. Anecdotally, firms appeared more optimistic than earlier reports, which is consistent with other business and consumer surveys.

Market Notes

Period ending 1/20/2017

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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 ended the week lower, as investors digested potential early moves in the Trump administration and perhaps embarked on some profit-taking. Defensive sectors consumer staples and telecom led, with gains, while financials and health care ended weakest. Small-caps also suffered worse than large-caps, as higher-beta segments lagged during the week. So far, just under 15% of S&P companies have reported their fourth quarter earnings, but results have surprised a bit on the positive side. Overall year-over-year earnings growth expected to be in the low- to mid-single digits—the first time in a few years that we will have seen back-to-back quarterly earnings gains.

Foreign stocks declined in the bulk of key regions, but a weaker dollar versus the euro and pound, specifically, led to better results than in local terms. The ECB met last week, and despite some recent signs of improving growth and inflation in the Eurozone, which caused some observers to wonder about the impact on any tapering off of QE. However, it wasn't mentioned in the more dovish press conference—perhaps central bankers are interested in keeping sentiment and perception fully focused on continued accommodation, which also has the benefit of keeping the euro weaker against the U.S. dollar. In the U.K., Prime Minister May noted the final Brexit vote will be put to parliament, but details about what a full or partial separation would look like remain murky—the uncertainty surrounding which markets find less appealing.

Emerging market returns were slightly negative as well, with strength in Brazil and China offset by weakness in Russia and India. Projections for Indian growth this year were cut by a percent to 6.6% by the IMF due to some residual effects from the prime minister removing the two largest denominations of currency notes from circulation—noted by many as a major policy mistake. Chinese GDP came in at 6.8% versus the 6.7% expected, which was a positive, and continues to point to stronger growth catalysts in EM, notably the Pacific ex-Japan region.

U.S. bonds lost ground as interest rates ticked higher, due to stronger economic data as well as a bump in new issuance on the corporate side. Bank loans and high yield debt fared better, with flattish to slight positive returns, while longer-duration government and corporate bonds lagged. Results were similarly negative for developed market bonds overseas, while emerging market debt bucked the trend by gaining ground as spreads tightened.

Real estate in the U.S. bucked the trend of declining equity prices, with gains, in keeping with more defensive groups. Foreign real estate, however, declined.

Commodity indexes were generally flat on the week. The overall energy sector was taken negative by a -5% decline in natural gas prices, which are extremely weather and short-supply dependent. Crude oil prices ticked up just under a dollar higher to $53.20, as continued promises of OPEC production cuts have been balanced by predictions of increased U.S. production; the U.S. acting as 'swing producer' could temper price increases by keeping supply high. Strength in precious metals were also offset by weakness in industrial metals, although both groups have retained strong gains of +5% year-to-date, due to a weaker dollar and rebound in commodity prices.

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 17, 2017.

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