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Weekly Review - January 9, 2017

Weekly Review - January 9, 2017

Guest Post - Monday, January 09, 2017

Summary

In the first week of the year, a variety of economic data releases pointed to continued expansion, including the ISM manufacturing and non-manufacturing indexes. The employment situation report for December, however, was decent but didn't meet expectations.

Equity markets in the U.S. and abroad gained in the first week of the year. Bonds also rose to a lesser degree as interest rates declined. Commodities were mixed, with oil rising slightly for the week.

Economic Notes

(+) The ISM manufacturing index rose +1.5 points to 54.7, surpassing expectations of a smaller increase to 53.7, and representing its highest level in two years. The underlying components also showed strength, including new orders, production and employment; however, the supplier delivery and inventory segments declined a bit, and prices paid/inflation rose to its highest level in several years. Overall, this represents a decent report which points to continued strength in manufacturing.

(+/0) The ISM non-manufacturing index, on the other hand, was unchanged at 57.2, but this was better than the expected decline to 56.8. New orders rose sharply to over 60, while employment fell by nearly -5 points, but remained expansionary nonetheless. Overall business activity also ticked down a bit but remained solidly expansionary as well (over 60). Overall, this services series continues to look extremely solid.

(0/-) The trade deficit widened by about -$3 bil. to -$45.2 bil., but was not quite as wide as expected. Goods exports fell by -1% for the month, mostly in capital goods and automotive, while industrial and consumer goods exports rose a bit. Imports rose by +1%, mostly in industrial supplies.

(-) Factory orders declined -2.4% in November, which was about a tenth worse than expected. Durable goods falling -5% were a primary culprit, while core capital goods results were revised upward to further positive territory, offsetting some of that impact. Shipments of core capital goods and manufacturing inventories each rose a few tenths of a percent.

(+) Construction spending for November rose +0.9%, which surpassed forecasts calling for +0.5%. Gains were seen across a variety of areas, including private residential and non-residential construction, as well as public construction—all of which gained in similar magnitude as the overall index.

(-) The ADP employment report for December showed a gain of +153k jobs, but disappointed relative to expectations calling for +175k. Service jobs rose by +169k, as usual, taking on the bulk of the work, which included trades/transports/utilities of +82k, education/heath of +29k and professional/business services of +24k. As implied by the underlying total, manufacturing jobs fell by -9k and mining (which includes energy) fell by -5k. Despite the disappointment, economists are mixed as to whether this series has much relevance on predicting the government monthly numbers, but can be a useful ancillary gauge for private employment.

(0) Initial jobless claims for the Dec. 31 ending week fell by -28k to 335k, which was lower than the expected 260k. Continuing claims for the Dec. 24 week rose by +16k, to 2,112k, which exceeded the 2,045k expected. As we've mentioned, seasonal adjustments may have played a role, but this effect should be tapering off in the next few weeks as conditions normalize from the Holidays.

(0/-) The employment situation report for December a bit weaker than expected, but not terrible—again, in line with results from the past several months. The outcome was not strong enough to cause economists to speed up their forecasts for the Fed raising rates in 2017, which remains at a handful of times, based on the average view.

Nonfarm payrolls rose by +156k, which was a slight disappointment compared to the +175k expected; however, several prior months were revised higher by almost +20k. Gains were led by the healthcare/social assistance area, which saw an increase of +43k, while food services/drinking rose by +30k, and transportation/warehousing, financial activities and manufacturing all gained roughly by +15k, give or take a few thousand. However, temporary employment fell by -16k, which is a negative, as was construction, likely due to weather effects.

The unemployment rate ticked up a bit less than +0.1% to 4.7%, which was in line with expectations. The labor force participation rate was slightly higher for the month, and interestingly, very little changed for the entire year really. The household survey showed a +63k gain, following a much stronger rise the prior month of +146k. The U-6 rate of 'underemployment' ticked down a tenth of a percent to 9.2%, which is a new low for this cycle, last seen in April 2008 as underemployment was rising from a low in the 8% range in 2007.

Average hourly earnings rose +0.4% for December, which was a tenth stronger than expected, bringing the year-over-year change to +2.9%, which is a high for the recovery so far. The average workweek came in at 34.3 hours, which was a bit lower than expected.

(0) The FOMC minutes from the December meeting offered a few interesting tidbits, mostly in its somewhat hawkish tone of the comments, in keeping with raising rates during the meeting. Mostly, this appeared to be due to assumptions for easier fiscal policy upcoming by about half of the members of the FOMC; however, assumed higher rates and a strong dollar appeared to balance these concerns out a bit (a strong dollar has a 'tightening' effect on the economy through less competitive conditions for global trade). Additionally, members appear a bit split on GDP growth prospects (which they've been relatively incorrect in forecasting for the most part), as well as possible undershoots for the unemployment rate too far beyond 'full' employment—the latter concern would create an upward push for rising rates at a faster rate as opposed to slower, but consensus range currently lies at 2-4 rates moves this year.

Market Notes

Period ending 1/6/2017

1 Week (%)

YTD (%)

DJIA

1.07

1.07

 

S&P 500

1.76

1.76

Russell 2000

0.76

0.76

MSCI-EAFE

1.78

1.78

MSCI-EM

2.18

2.18

BarCap U.S. Aggregate

0.17

0.17

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

1/6/2017

0.53

1.22

1.92

2.42

3.00

U.S. stocks generally rose on the week with continued optimism about 2017's prospects and decent economic data to begin the year. The Dow Jones Industrial Average again just missed the 20,000 mark, by only a half-point by Friday. By sector, healthcare and technology led with returns well over 2%, while telecom and utilities lagged.

Foreign equities outperformed domestics, led by Japan and emerging markets, while the U.K. and Europe ended up similar to U.S. markets. While no major news emerged during the week, sentiment continues to revolve around the pace of growth. In both Europe and Japan, expectations are low, and volatility could be a factor in the former as several key elections are on the calendar early this year. On the other hand, based on historical tendencies, results that simply beat tempered expectations could be enough to spark more positive results. Emerging market results were broad-based, with positive returns coming from Latin America, Eastern Europe and Asia.

U.S. bonds fared positively on the first week of the year, with interest rates again ticking down somewhat off of highs reached during the last several weeks. The bulk of investment-grade debt gained ground for the week, with longer duration as well as high yield corporates leading the way with the strongest gains. Emerging market bonds also gained, while major developed market bonds lagged as rates rose as inflation results in Europe came in higher than expected, at 1.1%, which is the fastest pace in about three years.

Real estate gained several percent in the U.S. and Asia, in keeping with broader equities, while developed European returns were positive to a lesser degree.

Commodity indexes were mixed on the week, with energy down (mostly due to a drop in volatile natural gas), industrial and precious metals higher, as were several futures in the softs category, like sugar and coffee. Despite beginning the week with a decline of about a dollar, West Texas Crude ended the week up +0.5% to just a shade under $54/barrel.

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 3, 2017.

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