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Weekly Review - July 18, 2016

Weekly Review - July 18, 2016

Guest Post - Monday, July 18, 2016


Economic data for the week was fairly positive, with improvements in retail sales, industrial production and jobless claims. Inflation ticked a bit higher due to housing costs and energy, while manufacturing remained mixed.

Global equity markets gained ground on the week, with foreign stocks outperforming those in the U.S., particular in emerging markets. Bond prices fell back on the week as interest rates rose. Commodity prices were slightly higher as oil and industrial metals ticked upward.

Economic Notes

(+) Retail sales for June rose +0.6%, outperforming the +0.1% gain expected by consensus. Removing the more volatile monthly components of autos, gas and building materials, the 'core/control' version of this showed a similarly strong +0.5% gain, with strength in non-store (online) retail, furniture and sporting goods, while clothing and restaurants fell back a bit.

(-) The New York Empire manufacturing index fell over -5 points in July to a barely expansionary +0.6. Under the hood, new orders, shipments and employment all fell several points in an apparent retracement of stronger results from last month. Manufacturing data overall has been very sporadic in recent months, teetering on the edge of contraction or expansion, depending on the month.

(+) Industrial production rose by +0.6% for June, surpassing expectations calling for a +0.3% gain. The manufacturing component of this was flat, but utilities production rose by over +2% due to warmer weather during the month creating higher air conditioning demand. Mining production (which includes the energy sector) also rose a few tenths of a percent, likely helped by stronger confidence from improved crude and natural gas prices.

(0) The producer price index for June rose +0.5% on a headline level, and +0.4% on a core basis, less energy and food prices. These were actually relatively sharp increases relative to expectations, which were +0.3% and +0.1% respectively, for the month. Energy prices rising +4% was the primary catalyst for the change, as other factors were far less affected other than 'trade services', which can be volatile. On a year-over-year basis, headline PPI is up +0.3%, which is quite tempered and in keeping with reports over recent quarters.

(0) The consumer price index for June rose +0.2% on both a headline and core level (after rounding, as slicing and dicing this into hundredths doesn't really add much). Gasoline and fuel oil both rose over +3% on the headline side, while rent inflation was firm again as it's been for several months straight, contributing to overall inflation being a larger index weight. Other areas were generally in line with trend, including medical care and transportation, while vehicles fell in price a bit. Year-over-year, the headline and core rose +1.0% and +2.3%, respectively. While the headline number includes the extensive decline of oil/gasoline prices over the past year, core prices sans food and energy has shown increasing resilience and a return to normalized levels somewhat with higher inflation from shelter, services and medical care (which have all gained in the 3-4% range over the past 12 months).

(0) Wholesale inventories rose +0.1% for May, which was about half the gain expected. Petroleum inventories were up +3%, which led the increase, as other elements were little changed. The overall inventory-to-sales ratio has also be declining as of late.

(-) The preliminary University of Michigan consumer sentiment index for July fell a bit to 89.5, short of expectations calling for a flat reading of 93.5. Both consumer assessments of current conditions and future expectations declined for the month. Interestingly, inflation expectations for the coming year ahead rose a few tenths to 2.8%, while the 5-10 year forward inflation expectations were unchanged at 2.6%. Generally, inflation expectations have been fairly well anchored as of late and reflect a rate of change closer to the longer-term normal than they are now.

(-) The government JOLTs report for May showed that vacancies declined to 5,500k, relative to the 5,650k expected. However, the drop wasn't dramatic and remains near peak levels for the business cycle recovery and April figures were revised higher to an all-time high level. The layoff and discharge rates were flat at 1.2%, as were the hiring and quit rates at 3.5% and 2.0%, respectively.

(0) Initial jobless claims for the July 9 ending week came in flat at 254k, which was below the 265k expected. Continuing claims for the July 2 week came in at 2,149k, which was slightly above the 2,130k forecast. While no official comments from the DOL alluded to any special factors, some auto plant shutdowns this time of year can affect some of the seasonal adjustments used.

(0) The Fed Beige Book, which outlines economic conditions around the country, didn't change much for the May/June period from the previous book. Consumer spending, while positive, appeared to soften a bit in some areas but sentiment remained optimistic. Manufacturing was a bit better than in the previous edition, in keeping with recent indexes. Labor markets showed continued strength, with some areas of tightness in a few regions/industries (IT and healthcare being two of those). Real estate markets looks to have strengthened over recent months, and demand for loans has grown. Inflationary pressures remained low, although it appeared input prices had risen a bit more than selling prices. Overall, the moderate growth conditions noted in these anecdotal comments are in keeping with other measured data.

Market Notes

Period ending 7/15/2016

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Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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U.S. stocks fared positively with economic reports that were better than expected as well as decent showing in early earnings releases. In fact, the S&P hit all-time highs for five days in row, something which last happened in 1998. From a sector standpoint, cyclical materials and financials led the way, while defensive utilities and consumer staples lagged the broader market by the greatest degree.

Foreign stocks outperformed U.S. names in almost all regions. Japan was one of the bigger winners, gaining almost 10% in local terms (4% in USD), as investor absorbed the idea that the Japanese Central Bank may embark on deeper monetary stimulus—in the form of 'helicopter money'. This is, a concept of more direct infusions of cash to the public in order to stimulate spending. Accordingly, with the prospect of more easing, the strong yen finally fell last week (largest weekly drop in 17 years in fact). The odd strength of the yen, despite very low interest rates, a weak economy and prospect for even more intensive easing, has been one of the most baffling mysteries for economists and portfolio managers (especially in fixed income) during the past several quarters.

Despite expectations for a cut of 0.25% or even 0.50%, the Bank of England decided to leave interest rates unchanged in the aftermath of Brexit. They've noted their intentions to review and likely lower rate policy during the summer, so August is still on the table. Markets have remained largely stable in the weeks following the vote, which provides a signal to central banks at times regarding sentiment and liquidity in financial markets (that things aren't as bad as first feared). This is a long, drawn-out process, however, so no doubt much more to come on the timing and implementation of this. The British pound did strengthen on the news, which helped the currency retrace back some of its decline following the vote.

The attempted military coup in Turkey occurred largely after markets closed, but the Turkish lira fell just over -5% on the news (recovering somewhat since), and risk markets are lower. Turkey had become an increasingly stable location for emerging market investors, in terms of better financial market credibility and regime stability compared to perceptions of decades past. However, in recent years, disagreements in policy among central bakers and the administration have given some investors pause, and the regime appears to have strayed a bit away from its traditional secular underpinnings (the supposed cause of the coup attempt in the first place). Events like this don't help the cause for such nations, although the impact here appears to be contained. In a worst-case scenario for nations in these situations, currencies decline, which creates higher price inflation for imported goods, and often corresponds with monetary challenges—as higher rates would help the inflation problem and stabilize the currency, in theory, but lower rates could enhance liquidity and stimulate economic growth if conditions became less certain. Neither may be needed here, but the Turkish central bank has declared their support for the lira, which has helped market sentiment.

U.S. bonds lost ground on the week as interest rates reverted higher. Longer duration treasuries lost the most ground, while high yield corporates and bank loans earned positive returns. Foreign bonds were mixed, with strong gains in locally-denominated emerging market debt. Developed market debt lost significant ground as interest rates ticked upward, in keeping with U.S. government markets.

Real estate gained ground in all areas, albeit to a lesser degree in the U.S. as results lagged broader equity markets and interest rates increased. Sharper gains, on the other hand, were experienced in Asia and Europe, where pricing has been more challenged; the U.K. was a particular outperformer, gaining +6%, as fears over post-Brexit illiquidity abated somewhat.

Commodities gained slightly, as oil ticked up from $45 the prior week by just over a dollar a barrel. Differing reports indicated both an increase and decrease in inventories, which largely offset each other. Gold fell back by a few percent in line with other safe haven assets, as flows continued into equity and risk markets. Natural gas also fell back after a recent strong run of gains, due to a rise in inventories. Industrial metals also experienced gains, particularly in copper due to storm in South America that are delaying shipments to major consumers such as China. These are the types of 'random' events that are often used as examples of commodities' value in a portfolio.

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 11, 2016.

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