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Weekly Review - January 29, 2018

Weekly Review - January 29, 2018

Guest Post - Monday, January 29, 2018

Summary

Economic data for the week was highlighted by a weaker-than-expected result for the prior quarter's GDP and prior-month housing sales, but stronger showings in durable goods, jobless claims and the index of leading economic indicators.

Equity markets continued to grind higher in both the U.S. and abroad, with the latter helped by a sharp decline in the U.S. dollar, as the result of off-the-cuff comments from the administration. Bonds were flattish with little changes in interest rates, while commodities gained ground.

Economic Notes

(-) The advance edition of 4th quarter GDP ended up disappointing somewhat on a headline level, coming in an annualized gain of +2.6%, compared to the +3.0% result expected—that would have kept the string of 'threes' intact. Under the hood, a drag of almost 2 percentage points came from net trade and inventories, while private demand rose nearly +5%. Business investment also grew at a +7% pace, including double-digit gains in equipment, while residential investment and government spending also rose at a good clip. The GDP price index gained +2.4%, which was a bit above expected levels, while core PCE rose at a pace of +1.9% for the quarter, which was on par with consensus.

Overall, while the overall growth number was weaker than hoped, and underlying details somewhat mixed, there were signs of strength in several areas, which grew at the fastest pace in several years—as did GDP as measured on a year-over-year basis. It appears that tax reform and a rollback in regulations has spurred stronger business activity, which had been lagging under a cloud of uncertainty for several years. Interestingly, the IMF estimated that the U.S. economy may grow in coming quarters at a rate of 3% as a result of recent tax cuts, while the Atlanta Fed's GDPNow forecast for Q1 has come out at just over +4%.

(+) Durable goods orders for December came in at +2.9%, beating the median forecast of +0.8%. The key element was a +15% rise in defense and +7% increase in transportation equipment, which elevated the choppy headline number. Removing those components, core orders declined -0.3% for the month, which disappointed relative to the expected +0.6% increase. Core shipments, however, rose +0.6%, beating expectations by a few tenths, and inventories also rose at a decent pace.

(0) The December advance goods trade balance widened to -$71.6 bil., as opposed to a tightening to -$68.9 bil. Total export and imports both rose by approximately +3%, with exports being led by food/beverages and the category of 'other', while imports were led by consumer goods and autos. Trade activity is high on both sides, with a variety of geopolitical and economic influences that could affect the numbers going forward, including controversy about the future of the NAFTA treaty, tariffs on Chinese-made goods and perhaps others added to the list, as well as a trend of a weaker dollar (inappropriately endorsed, perhaps, in recent speeches by administration officials).

(0) The FHFA house price index for November rose +0.4%, but was a tenth below the forecasted gain. Regionally, prices gained in all but two of the nine regions, with the upper Great Plains states and South Atlantic (MD through FL) both up nearly a percent for the month; prices in East South Central (KY through MS) prices fell a percent. Year-over-year, home prices rose +5.0% on that measure, which remains strong on a post-inflation basis.

(-) Existing home sales for December fell by -3.6% to a rate of 5.57 mil. homes on a seasonally-adjusted annualized basis, which surpassed the expected decline of -1.9%. For the month, single-family sales fell -3%, while condos/co-ops declined a more extreme -12%. All four national regions experienced declines as well, with the Northeast and Midwest down in the high single-digits to lead the pack. Year-over-year existing sales crept slightly higher at just over +1%, while the trailing quarter's pace was far better. It continues to appear that a lack of available supply is impacting the housing market the most—ratified by the fact that available inventory has reached an all-time low (for the nearly 40-year-old data series) of 1,310k homes. On the other hand, demand appears to be relatively steady to stronger, with the MBA mortgage application index rising to its highest level since 2010, and are growing at a +5% year-over-year rate.

(-) New home sales for December unexpectedly fell -9.3% to a seasonally-adjusted annualized rate of 625k units, in a reversal of highs the prior month and compared to a less-severe expected drop of -2.0%. Sales fell in all four U.S. regions, most notably in the South and West, while the Northeast was generally flat. Inventory improved, as available supply crept up by +1 month to 5.7 months. While weather can play a role in seasonal adjustments with winter housing stats, year-over-year, new home sales are up +14%.

(+) The Conference Board's Index of Leading Economic Indicators continues to run at a high level, moving above highs last set earlier in the decade. For the month of December, the leading index rose +0.6%, led by strength in several areas, including manufacturing new orders, credit, stock prices and consumer expectations. For the latter six months of the year, the index gained at a +6.3% annualized pace, surpassing the +5.2% pace for the first six months of 2017. For December, the coincident and lagging indicators also gained, by +0.3% and +0.7%, respectively—as they did for the trailing six-month period, although at a more moderate pace than the leading indicator. All-in-all, this set of indexes continues to bode well for forward-looking business prospects, as seen visually in the chart below.

Leading Economic Indicators of December 2017

(0) Initial jobless claims for the Jan. 20 ending week rose +17k to 233k, just a shade under the 235k expected, in a reversal of revised claims figures the prior week representing a new 45-year low for the series. Continuing claims for the Jan. 13 week fell -28k to 1,937k after revisions, coming in above expectations calling for 1,925k. No special situations were noted by the DOL. The current low levels are impressive not only on a relative basis in the recent recovery period, but on the multi-decade timeframe considering population growth over that period.

Market Notes

Period ending 1/26/2018

1 Week (%)

YTD (%)

DJIA

2.09

7.77

S&P 500

2.23

7.55

Russell 2000

0.66

4.76

MSCI-EAFE

1.50

6.54

MSCI-EM

3.28

9.89

BlmbgBarcl U.S. Aggregate

-0.02

-0.95


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2017

1.39

1.89

2.20

2.40

2.74

1/19/2018

1.44

2.06

2.45

2.64

2.91

1/26/2018

1.41

2.13

2.47

2.66

2.91

U.S. stocks gained for the week, with large caps outperforming small, to keep their relative lead intact for the year-to-date. From a sector standpoint, health care and consumer cyclicals led the way, due to merger activity in the former, while energy and industrials lagged with the smallest gains. A variety of earnings estimates came in stronger than expected, with broader market estimates being increased again—a flood of earnings reports will be coming through this coming week, which could drive market sentiment in the absence of surprises from the macro side or the President's State of the Union address Tuesday night, which can serve to highlight areas of focus for the coming year.

The U.S. dollar fell sharply, by over -1.5% on the week, to its lowest level in three years, following Treasury Secretary Mnuchin 'talking down' the currency by acknowledging how a weaker dollar can benefit U.S. exports. While this is commonly held to be true in economic circles, it is unusual for a government official to admit as much—as they've typically stayed true to a more politically-palatable 'strong dollar' mantra over the years. This is done in no small part to keep foreign investor demand for U.S. treasury debt high. Mnuchin and other officials later back-pedaled to reduce the damage from the perceived misstep.

Foreign stocks fared better under the dollar backdrop, with developed market losses in local terms morphing into gains. Little news appeared to affect conditions outside the U.S., as the ECB and Bank of Japan met and kept current monetary policy unchanged, as expected, although improving economic conditions are creating questions about how long such accommodative policies will last this year. Interestingly, despite the positive outcome for U.S. investors, a weaker U.S. dollar relative to broader key currencies is bad news for foreign exporters, which could well have weighed on sentiment. Emerging markets fared even stronger, led by Brazil, which rallied as the unusual situation of a court dismissed the appeal of former president da Silva—most likely keeping him off the ballot in the new presidential election later this year.

U.S. bonds were little changed on the week in terms of total return, and while the U.S. Treasury yield curve was little changed on net, the 10-year yield reached its highest level in four years. Credit on both the investment-grade and high yield side outperformed, as did bank loans. To no surprise, foreign bonds in translated terms fared best, as the drop in USD outweighed other yield considerations, which were minimal, pushing foreign developed market debt into the lead for the week along with emerging market local debt.

Commodities gained several percent, led by strength in the energy sector predominately. Crude oil ticked higher by over +4%, finishing the week at $66.14, thanks to falling U.S. inventories and the sharp decline in the value of the U.S. dollar (in which oil and other commodities are generally priced). Natural gas prices rose even more sharply, over +7%, with falling inventories also a key factor.

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 22, 2018.

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