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Weekly Review - January 26, 2015

Weekly Review - January 26, 2015

Guest Post - Monday, January 26, 2015


  • A light week in U.S. economic data was dominated by housing numbers, which came in a little better than expected. The bigger news came from Europe, where the ECB announced a large quantitative easing program of 60 billion euro/month, targeting mostly sovereign and agency debt, in an attempt to boost inflationary impulses and economic growth.
  • Domestic stock markets were higher on the week, but dwarfed by strength in foreign equities—led by the ECB announcement. Bonds were mixed upon a flatter yield curve and strength in the U.S. dollar. Crude oil was weaker again, falling to just over $45 with reports of high inventories coupled with demand uncertainty.

Economic Notes

(+) The FHFA house price index from November (we list this first, as it's the oldest news by now) rose +0.8%, which outperformed expectations of +0.3%; however, the prior month's gain was revised down by a few tenths. This was the largest monthly gain in almost a year and a half, as prices rose in 8 of the 9 U.S. geographic reasons. Aside from the monthly noise, the year-over-year gain was +5.3% on a national basis.

(-) The NAHB housing market index fell a bit for January, from 58 (where it was expected to fall again) down to 57. Present single-family home sales were flat, while expectations of sales as well as prospective buyer traffic both declined by several points. The Midwest was the sole positive region, as all others declined. This index has tended to be a leading indicator for housing starts in months following—sentiment may have been affected by higher-profile companies discussing the possible impact of lower energy prices affecting employment (and consequently housing demand) in certain geographic areas, but the depth of this impact remains to be seen. Broader employment continues to slowly improve, though, which is a positive for housing generally.

(-) Existing home sales for December rose +2.4%, which disappointed relative to hopes for a +3.0% increase, but did serve to partially reverse the negative trend from November. Single-family home sales rose +4%, offset a bit by a -5% drop in condos/co-ops (a much smaller group). South and West sales rose while the Midwest and Northeastern U.S. fell for the month. The months' supply of homes on the market declined by -0.7 to 4.4 months (despite not being seasonally-adjusted, so likely contains some holiday quirks).

(0/+) Housing starts for December came in a bit better than expected, gaining +4.4% to 1,089k compared to consensus calls for a +1.2% gain. Single-family starts gained over +7%, while the volatile multi-family group fell -1%. Building permits provided the opposite result, falling -1.9% compared to an expected +0.8% gain. Single-family permits rose +5%, which was offset by a large drop in the multi-family variety—better weather has also appeared to help this series somewhat. From a longer-term perspective, starts over the past six months are at their best pace since 2008, but some headwinds continue to keep housing depressed compared to earlier cycles—some likely cyclical, other structural/demographic—so coming months (notably in the spring season of higher construction and buyer shopping activity) will be especially notable to watch.

(0) Initial jobless claims for the Jan. 17 ending week fell -9k to 307k, although still ending up a bit worse than expectations of 300k. Continuing claims for the Jan. 10 week rose +15k to 2,443k, above expectations of a 2,400k figure. No unusual events were reported by the DOL for the week. These figures are obviously noisy on a week-to-week basis, so the short-term changes should almost be discounted. Taking a step back to view the general trend shows that claims have continued to fall to lower and lower levels on a cyclical basis, as seen in the chart pattern below.

Graph - Initial Claims over Time

The European Central Bank implemented a program that has been widely anticipated—their own form of quantitative easing. It will take the form of up to 60 billion euros per month from March 2015 to September 2016 (dependent on need during that period), bringing the potential total spending to just over a 1 trillion euros. This will include sovereign and agency debt, but also the current asset-backed securities market purchases and 'covered bonds' (a certain form of bank debt), and will be conducted across the yield curve—from 2- to 30-year maturities—so a bit broader than U.S. QE was in terms of the range of bonds involved. The goal is reaching a 'sustained adjustment' in the path of inflation, towards the bank's goal of 2%—matching the U.S. target. The wrinkle, as one would expect with a variety of countries participating in the decision, the outcome was a negotiated one. Being in the union's strongest economic position, Germany has been naturally reluctant to promote QE or take on more risk than it needs to, which it sees as letting peripheral nations 'off the hook' for their own problems. So, the conclusion is that the bulk of any losses will be 'risk-shared' proportionally among the various central banks involved in implementing the policy.

The challenge to jumpstart growth is steep in Europe, where deflation is technically underway and isn't expected to get much better in 2015. So, this effort could take a while, and from their comments, the program is open-ended enough to keep the switch turned-on until objectives are met. In the short history of QE programs around the world so far, they've tended to be a positive for risk assets. While the effects on interest rates (bond yields lower, raising bond prices) have been more immediate, per the objective, effects on equities have also been positive, but often require signs of economic and earnings growth to fully be reflected in prices over time. If traditional relationships hold true, QE should weigh on the Euro currency (likely what forced the Swiss to break away from their peg two weeks ago), and perhaps caused the inverse reaction of further strength in the dollar and other key currencies. At the same time, any asset flows into Europe to take advantage of sentiment and byproducts of better growth inspired from QE could serve to sustain euro valuations somewhat.

Market Notes

Period ending 1/23/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















Foreign stocks were even stronger on the week, led by rebound returns in several emerging markets, such as Russia, South Africa and the Far East. Interestingly, these regions outperformed developed markets (which also performed positively—particularly, peripheral Europe) as the implications of European easing are assumed to bode well for the prospects of non-European nations, including China. India's week was helped by a small interest rate cut to combat disinflation pressures (the idea of 'too little' inflation in an emerging market nation is almost unimaginable a few years ago).

Interestingly, foreign equities, which everyone wished they hadn't allocated a single percentage point to over the last several years, have led the way in 2015—although it's still early. This is yet another reminder about market behavior and our expectations. It's not how an economy is expected to perform outright—it's how well (or poorly) securities are expected to perform relative to already-baked-in expectations. If things are even a little better than feared, there's a decent chance of profit. (As little intuitive sense as that might make for clients not in the investment business.)

Bonds were mixed as the yield curve flattened a bit—shorter-term debt saw increases in yield while rates on longer-maturity bonds fell. Risk-on performed better than risk-off, which benefitted high yield bonds and bank loans in the U.S., while the natural recipients of European QE (peripheral debt, such as Italy and Spain) showed strong gains. A strong dollar resulted in mixed results abroad generally, with USD-pay bonds in emerging markets, for example, sharply outperforming the local currency variety.

In real estate, Europe outperformed as expected, rising in line with general equities and expected benefits from a stronger economy from QE (it's all about tenant demand). U.S. REITs were marginally higher, with gains of less than a percent.

Commodities suffered another difficult week, with the S&P GSCI falling -3% along the equivalent level of dollar strength. Oil ended up losing ground again down to just over $45, led by U.S. inventory data (supplies much larger than expected) and lowering of future forecasts, which isn't too surprising. Precious metals continued their strong 2015; this is somewhat related to European easing, which is expected to compress real yields, although the crosswind of dollar strength is a bit unique.

Clarification note: In last week's review, in regard to the Swiss franc discussion: 'The specifics were the setting of a price limit of 1.20 franc/1 euro, or understood another way through its inverse of 1 franc/0.80 euro.' This should have been indicated more specifically as 1 franc/0.833 euro. Occasionally, we round figures for simplicity, so regret any confusion for readers doing the math and ending up with a slightly different answer.

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 19, 2015.

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