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Weekly Review - July 7, 2017

Weekly Review - July 17, 2017

Guest Post - Monday, July 17, 2017


Economic data for the week was highlighted by a decline in retail sales, consumer sentiment, job openings and year-over-year consumer inflation, while industrial production ticked higher. Investors were also reassured by Fed Chair Yellen's comments concerning a continued slow pace of monetary policy tightening.

Equities in the U.S. and many foreign markets experienced gains for the week, as global sentiment improved in a few areas. Bond prices rose upon interest rates falling globally. Commodity indexes rose on the heels of a weaker dollar and rebound in crude oil prices for the week.

Economic Notes

(-) Retail sales for June fell -0.2%, which ran counter to an expected gain of +0.1%. Removing autos, gasoline and building materials brought the core control to a slightly less poor -0.1%, which fared worse compared to an expected +0.3% increase. The weak results for June were relatively spread out among a variety of groups, including grocery, department and misc. retail stores, as well as restaurants/bars. While online retail gains were positive, they came at a slower pace than in May, while electronics/appliances and building materials saw gains. All-in-all not an outstanding report, which could play a role in bringing down Q2 GDP somewhat.

(0) The producer price index for June rose +0.1% on both a headline and core level, which outgained forecasts calling for no headline change but underwhelmed calls for a +0.2% core change. This brought the year-over-year number to +2.0%, which is within range of most other key inflation statistics. Food prices rose somewhat along with the prices for several agricultural commodities due to weather effects, which offset softness in a few other areas; however, the food segment is only +1% higher on a year-over-year basis.

(0/-) The consumer price index for June came in flat on a rounded basis on a headline level and gained +0.1% on a core ex-energy and food basis, each of which was a tenth of a percent below expectations. An almost -3% drop in energy commodities during the month was a detractor to overall inflation, as were falling prices for airfares, lodging and used cars, in addition to more wireless plan and cable TV discounts and methodological measurement changes that have added an unusual deflationary element in recent months. Adding to inflation were increases on the real estate side in both rent and owners' equivalent rent, which gained +0.3% each, as did medical care. Year-over-year, headline and core CPI experienced gains for +1.6% and +1.7% respectively—numbers that have again dipped below policymaker expectations for their 2%-or-so target. Coupled with other recent economic data, such results reduce the odds of Fed tightening this year, seemingly bringing the chances of a rate hike in September to less than 10% and December to about 50% at this point.

(+/0) Industrial production for June rose +0.4%, which beat expectations by a tenth of a percent. The large manufacturing production component rose +0.2%, with the headline number being helped by a +2% contribution from mining and +1% from auto production. Capacity utilization ticked up +0.2% to 76.6%, which is the highest level in almost two years.

(-) The government JOLTS report for May showed -300k fewer job openings, coming in at 5,666k, which was below a less-dramatically changed 5,950k level. It appeared that weakness came through a variety of sectors, including construction, manufacturing and professional/business services, so there were no culprits to pinpoint. This lowered the openings rate by -0.2% to 3.7% for the month; the hiring rate rose +0.2% to 3.7%; the quits rate rose a tenth to 2.2%.

(-) The Univ. of Michigan index of consumer sentiment fell -2 points to 93.1 in the preliminary July reading, compared to a flattish reading of 95.0 expected, and continuing a run of falling readings. Assessments of current conditions experienced a slight gain of just less than a point, while future expectations weighed on the downside, falling by -4 points. On the inflation side, 1-year ahead expected inflation rose by a tenth to +2.7%, as did the 5-10 year forward looking number, to +2.6%.

(0) Initial jobless claims for the Jul. 8 ending week ticked down -3k to 247k, a bit above the 245k expected. Continuing claims for the Jul. 1 fell -11k to 1,945, which was below the unchanged 1,956k level expected. No special factors were reported by the DOL. These remain at cyclically very low levels.

(0) The Fed beige book, which outlines anecdotal conditions within the various Fed regional districts for June, showed a general expansion of economic activity ranging from light to more moderate, and forward-looking prospects also looking relatively modest to moderate. Strength was witnessed in manufacturing (including the energy sector) and labor markets, where there were a few signs of selected upward wage pressures. Consumer spending also gained, except for weaker auto sales in certain areas. Residential and non-residential building expanded at a flattish to slightly higher pace, while tighter inventory appeared to constrain activity. These results were all in keeping with national data and offered few surprises, but was a bit weaker than some hoped.

(0/+) Fed chair Yellen's semi-annual monetary policy testimony before Congress was taken relatively dovishly by markets, as her tone implied a more tempered rate of accommodation removal than some expected. This discussion was in terms of rate increases and the discussion of balance sheet normalization, but also reflected comments that the current fed funds rate is not too far from the ideal level. (That ideal target level is known as r*, or 'r-star', and represents the level of real interest rate that is neither easing nor tightening on the economy, which, of course, proves to be very difficult to pinpoint on a consistent basis.) It was interpolated that balance sheet treasury/agency mortgage reduction will start to take place in the fall, but not likely earlier. Otherwise, comments regarding household and business spending and growth were relatively optimistic, as were expectations of inflation reaching the Fed's target level over the next several years after being held back by 'unusual' factors.

Market Notes

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U.S. stocks ticked up over a percent for the week, as early-week concerns over the fallout from Trump Jr.'s e-mails were helped later by the dovish tone of the Yellen testimony, as discussed above. From a sector standpoint, tech stocks experienced the strongest gains, followed by energy as oil prices gained. Telecom and financial stocks lagged with minor losses for the week, with the latter certainly affected by lower interest rates and the dovish policy outlook. Earnings reports for Q2 will be ramping up in coming week, which could drive sentiment, barring other macro news.

Developed markets Europe and Japan experienced equity gains in local terms largely similar to those of U.S. stocks; however, a falling dollar on the order of almost a percent for the week to near a 10-month low point acted as a tailwind to push returns even higher in USD-denominated terms. Emerging markets fared sharply better, with gains of over +4%, led by strength in Brazil and China. Brazilian stocks were helped by the conviction of former president De Silva (which would physically keep him out of the 2018 presidential race) and the passage of the first labor reform package in over 70 years—both of which are seen as pro-business/anti-leftist developments—as well as early avoidance of corruption charges by the current president Temer. In Brazil and other emerging market nations, the avoidance of disaster can often be taken as bullishly as constructive events.

U.S. bonds fared well during the week as interest rates declined across the yield curve, along with the policy comments and tempered inflation results for PPI and CPI. Corporate credit outperformed governments slightly, with strength in high yield as energy prices rebounded. Foreign bonds experienced gains as well, helped by a weaker dollar. Local currency denominated emerging market bonds fared especially well during the week, gaining several percent, as spreads contracted. Canadian interest rates were raised for the first time since 2010, taking the target rate from 0.50% to 0.75%. This was more significant in terms of signal, as opposed to magnitude, as the economy there, and consequently, monetary policy, tends to be closely tied to that of the U.S. Similar to Australia, however, prices for oil and other commodities tend to be a larger consideration, as is an extremely robust housing market currently in several key cities that some have referred to as a bubble.

Real estate rose in the U.S., helped by a drop in interest rates and weaker dollar. Domestically, regional malls/retail recovered by gaining several percent, while apartments were generally flat. Foreign REITs in Asia and Europe continued their strength with returns stronger than those in the U.S.

Commodities gained several percent on the week, led by the energy group, which rebounded +5%, while precious and industrial metals gained to a lesser degree, and agriculture fell back in contrast to the prior few weeks. West Texas Intermediate Crude oil moved higher from $44.23 to $46.54/barrel upon reports from the International Energy Agency noting sharper demand growth (China being a key factor) and inventories falling in the U.S. a bit.

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 10, 2017.

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