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Weekly Review - July 10, 2017

Weekly Review - July 10, 2017

Guest Post - Monday, July 10, 2017


Economic data for the holiday-abbreviated week was mixed, with stronger ISM and non-ISM index data, while the monthly employment situation report underwhelmed a bit in some respects.

Equity markets were mixed with the U.S. edging slightly higher, while foreign equities lagged across the board for the most part. Bonds lost ground in most sectors as interest rates again edged higher, with U.S. debt outperforming foreign. Commodities lost ground again due to continued weakness in energy prices.

Economic Notes

(+) The ISM manufacturing index rose +2.9 points to 57.8, the highest reading in 3 years, beating consensus estimates calling for a more tempered rise to 55.2. Underlying statistics were also strong, with new orders, employment and production all falling in the high 50's to low 60's, which signifies a significant expansionary pace. Prices paid also remained high on the back of higher prices for industrial metals, while energy kept the index tempered. Inventories, however, fell back just under 50 to contraction. With the agreement between the headline number and components, this was a positive development on the manufacturing side.

(+) The ISM non-manufacturing 'services' index rose +0.5 of a point to 57.4, comparing favorably versus the expected minor drop to 56.5. The underlying segments were a bit mixed, with gains in new orders and business activity (to very strong levels above 60), while employment pulled back but remained quite favorable (above 55). Prices paid and new export orders also increased slightly. Overall, this index continues to show a positive story for services growth, with acceleration moving at a decent pace.

(-) Factory orders for May fell -0.8%, which disappointed a bit relative the forecasted -0.5% drop. Durable goods orders fell in line with the index, although the final number was revised higher from earlier reports. Core capital goods orders were also revised up several tenths to +0.2%, as were core capital good shipments, to +0.1%.

(-) Construction spending came in flat for May, compared to an increase of +0.3% expected. Private residential and non-residential spending each fell by over a half-percent, while public spending rose +2%, with large gains in the residential side for the month, including the impact of some revisions.

(+) The May trade balance narrowed to -$46.5 bil., which was still a bit wider than the forecasted level of -$46.3 bil. The key portion of the narrowed level was in the ex-petroleum segment, with non-petroleum exports rising just under a percent while non-petroleum imports fell.

(-) The ADP employment report of June private job gains rose by +158k, which was disappointing compared to the +188k level expected; in addition, May job growth was revised downward by -23k. For June, service jobs led as usual, gaining by +158k, with professional/business services, trade/transports/utilities and education/healthcare leading the way. Jobs in goods-providing segments ended flat, with a small gain in manufacturing netted out by a decline in natural resources. While the ADP report isn't always a completely accurate predictor of the 'big' government employment number on Friday of the same week, larger spikes or drops can be correlated to the same for the government report at times.

(-) Initial jobless claims for the Jul. 1 ending week rose by +4k to 248k, which was above the 243k expected. Continuing claims for the Jun. 24 week also rose, by +11k, to 1,956k, which came in above the 1,940k level expected and represented the fifth straight week of increases. While the DOL didn't report any unique anomalies, the summer season can be affected by seasonal shut-downs such as periodic retooling of automobile plants, etc.

(+/0) The June employment situation report came in better than expected in some respects, like payrolls, but was mixed from an overall level. The headline number appeared to please investment markets, and offered a mixed message to those attempting to read the tea leaves for potential Fed rate activity in coming months. Probabilities for a September move have decreased as of late, with December still a more likely possibility—balance sheet reduction announcements aside. (As a side note, Euro unemployment for May came in at 9.3%, which was the lowest level in eight years and added to improved optimism—and a reminder that all such data is relative.)

Nonfarm payrolls rose by +222k, compared to +178k expected by consensus. Additionally, the April and May figures were revised up a bit, closer to original expectations at the time. June gains were most notable in the areas of health care (+37k, in both services and hospitals), social assistance (+23k), financial activities (+17k), as well as professional/business services (+35k). Mining, which includes petroleum extraction activities, added +8k, and continues its improvement over the past year. Construction also gained a healthy +16k, and retail reversed almost a half-hear of declines, by gaining +8k.

The unemployment rate ticked slightly higher to a rounded 4.4%. The labor force participation rate came in at 62.8%, up a tenth, but in a similar range to where it's fallen over the past year. The U-6 rate of underemployment rose +0.2% to 8.6%, which could reflect the impact of summer youth employment in the measurement, but is an increase regardless. The household measure of employment ticked +245k higher for the month, reversing a decline for the prior month.

Average hourly earnings for June rose +0.2%, which fell short of expectations by a tenth of a percent; additionally, May earnings were revised downward a bit. This brought the year-over-year rate to a lower-than-expected +2.5%. The average workweek lengthened by a tenth to 34.5. Aggregate hours, in fact, came in with the strongest result in three years, at least on a 3-month annualized basis.

(0) The FOMC minutes tend to be especially in focus when new announcements or more controversial items surface—as investors look for more clarity and insight. The June meeting offered the introduction of a plan to begin paring back the Fed's extraordinarily large balance sheet. While effectively a 'normalization' move in reducing the stimulus in the system by letting long-term treasury and MBS bonds mature and not be reinvested into more stimulus, it effectively reduces demand and raises supply in bond markets, which, based on magnitude and policy communications, could serve to push interest rates higher (all else equal, of course). The timing of this was debated, as to whether this summer or fall was an appropriate time, and it appeared that it likely would not be coupled in the same meeting as a rate increase—as to not hit bond markets too hard on the policy front. Inflation continued to be a discussed topic, as the primary Fed mandate, with recent weakness in CPI dismissed as 'transitory', although debate continues about the accuracy of this as well. As usual, policy goals can be in conflict at times, with intended outcomes such as strong labor markets and ultimately wage inflation being offset by some members' concerns over higher equity market valuations. While some can debate the appropriateness of the Fed intervening in capital markets from the standpoint of valuations, the secondary goal of 'financial stability' can have a broad footprint. There continues to be an ongoing hesitancy of members to push too far on the policy tightening side, and risk a higher recession risk for a slower-growth economy that could be more fragile than those of decades past that featured higher growth rates.

Market Notes

Period ending 7/7/2017

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BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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In a lower volume holiday week, U.S. stocks rose slightly in the U.S., with financials experiencing the sharpest gains, while energy lagged by the greatest degree, in no doubt due to lower oil prices. Higher interest rates, particularly due to comments in Europe about removing easing, as well as geopolitical concern over North Korean missile tests lurking in the background of sentiment.

Foreign stocks were down on net, with small gains in Europe—with strong industrial production in several countries, but tempered by a higher dollar—being offset by more dramatic losses in Japan and the U.K., the latter being affected by weaker manufacturing numbers. Concerns over the lifting of ECB quantitative easing policy continue to dominate sentiment, and officials there, like Fed governors in the U.S., are using their communication platforms to further refine the message (tempering it as necessary to sooth financial markets). Emerging markets also fell back, despite strong gains in India, China and Russia. The Brazilian corruption situation remains in the headlines, but the intensity of concern seems to have dissipated somewhat.

U.S. bonds lagged across the board, with higher interest rates across the yield curve in keeping with a strong-enough jobs report that didn't look to derail Fed tightening policy. Investment-grade credit outperformed governments, with the exception of high yield, which lagged due to higher exposure to the oil-driven energy sector. Foreign bonds lagged U.S., as European rates rose to a greater degree in a continued concern over the ECB moving forward with removing stimulus options—affecting rates in the periphery more than core nations such as Germany.

Real estate lost ground, along with higher interest rates. In the U.S., malls and healthcare fared the worst, while lodging/resorts ended mostly flattish for the week. Year-to-date, foreign real estate assets have made gains in the low double-digits, while U.S. returns have been largely flat.

Commodities lost ground on the week, with pressure again in energy segments oil and natural gas as U.S. production picked up once again. West Texas Intermediate Crude fell -4% on net, with prices initially rising early in the week before falling back to just above $44/barrel. In other segments, precious metals prices declined on a higher dollar and rising interest rates, while agricultural prices for wheat, corn and soybeans all rose sharply again with concerns over drought conditions in the U.S. putting a damper on supply at harvest time. In fact, the price of wheat in particular has spiked to its highest level in two years.

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 July 3, 2017.

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