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Weekly Review - July 20, 2015

Weekly Review - July 20, 2015

Guest Post - Monday, July 20, 2015

Summary

  • In a busy week for economic reports, most came in a bit weaker than expected, including retail sales, manufacturing activity and business/consumer sentiment. However, housing continued to experience an uptick.
  • Stocks gained on the week globally with positive sentiment from improved situations in China, Greece and Iran. Fixed income also performed well, with the mixed economic data and dollar strength which contributed to higher demand for bonds, creating lower rates.

Economic Notes

(-) Retail sales for June were disappointing, falling -0.3%, in addition to some small downward revisions included for recent months (expectations had called for a +0.3% increase for June). Removing the more volatile components, the ‘core’ sales figure was slightly better, albeit also showing a decline—at -0.1%. The headline figure was affected by drops in autos and building materials at just over a percent each, while gas station sales gained just under a percent. In the core segment, furniture, home furnishings, clothing and online sales all fell from a half-percent to 1.5% on the month.

(+) Import prices fell -0.1% in June, which was the opposite of the +0.1% forecasted increase. Petroleum price gained a percent, largely affecting the overall results, while non-energy prices fell by -0.2%. Year-over-year, import prices are down -10% (!) on a headline level and -2% ex-fuels. Naturally a strong dollar coupled with the general energy price decline has played a significant role in the results—imported deflation is much less damaging (and even perversely desirable) as opposed to domestic deflation, which can be a sign of bigger problems.

(0) The June Producer Price Index (PPI) rose +0.4% in June, outpacing an expected +0.2% increase. Removing food and energy, core PPI rose +0.3%, which was also a few ticks higher than expected. Energy prices rising over the month was the largest contributor (on the headline side), while the core number was affected by gains in transportation services and final demand goods in general. Year-over-year, the headline PPI fell -0.7% while core rose +0.8%, reflecting continued tempered inflation trends and a large influence from last year’s energy price drop.

(0) Similarly, the Consumer Price Index (CPI) showed subdued influences. For June, the headline figure rose +0.3%, on par with expectations, while ex-energy and food core inflation rose +0.2%. Owners’ equivalent rent gained +0.4%, which was the fastest pace for that series in almost a decade; rents also picked up at almost the same rate. On the other hand, medical care commodities were flat and services fell by -0.2%. Other core goods, such as furnishings, clothing and used cars fell by -0.1%. Over the last 12 months, headline and core CPI measures rose +0.1% and +1.8%, respectively—on par with continued below-target rates.

(+) The Empire manufacturing index rose +3.9 for July, beating forecasts calling for +3.3. The details were mixed, as new orders, shipments and employment all fell, but capital spending plans increased dramatically.

(-/0) The Philly Fed manufacturing index came in at a positive +5.7 for July, but down from June’s strong +15.2, and below expectations calling for +12.0. Shipments and new orders both came in positively, but at a weaker pace than last month, in keeping with the broader index figure. The employment component fell just into negative territory. While the Philadelphia and NY surveys weren’t as strong as last month, they are still expanding.

(+/0) Industrial production for June rose +0.3%, beating expectations by a tenth. Utilities output rose +1.5%, representing the bulk of the increase (utilities often play a role in either extremely cold or hot weather), while manufacturing production was flat with a negative contribution from autos, for which production often partially shuts down over the summer. Oil/gas production posted a moderate gain, in a reversal of prior trends and in keeping with recent gains in energy pricing.

(+) Housing starts for June rose +9.8% to 1,174k, beating forecast calls for a +6.7% gain and reversing the -10% drop in May. Single-family starts fell -1% while multi-family rose a dramatic +29%. Building permits rose +7.4%, which sharply outperformed an expected -8% decline, and were also led by a double-digit move in multi-family and a slight increase in single-family. The permits series may have been boosted by a one-off situation in NYC, where some stalled projects were cleared to move on through via new tax credit legislation. The NAHB homebuilder index of forward-looking activity came in at 60 for July, a point above expectations. Taking a higher-level view of this, and as related to portfolios, the heightened building level of multi-family structures is directly related to recent demand for rental units—apartment REITs have been among the best performers over the past several years.

(-) The NFIB small business optimism index for June fell to 94.1, relative to an expected 98.5 reading, and representing the lowest reading in a year. Earnings trends and inventory expansion plans were especially weak; the number of firms planning to and actually raising worker compensation has also declined, as did capex plans.

(-) Univ. of Michigan consumer sentiment fell by almost -3 points to 93.3 in June, as consumer assessments of both current conditions and future expectations both declined by several points. Perhaps the big rise in gasoline prices year-to-date has helped erode this confidence, as is often the case. This is perhaps also seen in expectations for forward-looking inflation having risen a bit as well.

(+) Initial jobless claims for the Jul. 11 ending week fell -15k to 281k, less than the expected 285k, bucking several straight weeks of increases. Continuing claims for the Jul. 4 week fell -112k from the prior week to 2,215k. No special factors were reported by the DOL.

(+) The Fed beige book, which expounds on various regional conditions around the country, showed an expansion of activity across the majority of districts (ten of the twelve showed ‘modest’ to ‘moderate,’ while the other two were ‘steady’ to ‘stable/improving’). Retail sales and manufacturing activity was generally positive—transportation was especially good—while energy continued to be a weak spot. Labor market conditions showed improvement, except for energy, as some layoffs were reported; wage growth remained slow. Inflation pressures were noted as unchanged from prior reports. All-in-all, this information is on par with recent trends of moderate growth but no shocks in either direction, other than lingering uncertainty and weakness in the oil patch.

(0) Janet Yellen’s prepared remarks for the semi-annual monetary policy testimony before Congress were fairly uneventful, which is not surprising considering how scripted these things are. The key message from her was that rate hikes looked appropriate ‘before year-end,’ of course dependent on data, as they’ve been all along. Labor conditions and inflation have both tightened in recent months, which gives the FOMC even less reason to hold off on rate hikes.

Market Notes

Period ending 7/10/2015

1 Week (%)

YTD (%)

DJIA

1.86

2.78

S&P 500

2.42

4.42

Russell 2000

1.22

5.89

MSCI-EAFE

2.03

8.25

MSCI-EM

0.95

-1.53

BarCap U.S. Aggregate

0.42

-0.01

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

7/10/2015

0.01

0.65

1.68

2.42

3.20

7/17/2015

0.03

0.68

1.67

2.34

3.08

U.S. stocks gained on the week, with dramas surrounding Greece, China and Iran all lightening somewhat, taking a few bricks off of the usual wall of worry. For Greece, parliamentary approval of austerity measures allowed going forward of a needed European bridge loan that would help cover financing needs for about three years and recapitalize the banking system (which reopened this morning). Based on several watched metrics such as mutual fund cash levels, option put-buying, and ratios of bulls-to-bears, it appears that recent sentiment may have become a bit overly negative.

From a sector standpoint, technology and financials gained with strong returns on the week, while energy and materials lagged, in keeping with lower commodity pricing. In fact, the tech-oriented NASDAQ reached a new record high. While earnings are just beginning to come in, strong performances by Google, Netflix and a few mega-banks set a positive tone last week. Overall, it’s expected that quarter-over-quarter Q2 EPS growth has improved from -5% to -3.5% or so—not a great absolute number, but has at least been moving in the right direction (notably, when the energy sector is excluded, growth transforms into an expected positive +5% for the quarter). We’ll certainly have more on this front in the next few weeks.

Foreign stocks also gained, led by strong performances in India and China, but also in Japan and the U.K. European stocks were higher, just less so, while Brazilian and similar commodity-heavy nations suffered on the week. Positivity in China stemmed from government measures to stem the negative bear market spiral; in addition, Chinese GDP came in at 7% (miraculously close to target and two-tenths above expectations). The service sector was a main driver, up over 8%—ironically, much of this appeared to be driven by high levels of financial brokerage activity.

U.S. bonds experienced a strong week with bond yields falling, despite strength in equities as well. Despite the headline good news that helped stocks, weaker commodity prices, a stronger dollar and lackluster economic data likely helped. Long treasuries and higher-quality corporates gained the most, while shorter-term debt was flattish to slightly negative, as would be expected. The dollar rose about 2% on the week, which was a headwind for foreign debt, although some issues were able to overcome that hurdle, notably in emerging markets as spreads tightened along with a general risk-on sentiment. While commentary in the U.K. was somewhat hawkish in terms of the likelihood of rising rate sentiment, rates were actually cut by a quarter-percent in Canada—who’s economy is much more commodity-sensitive.

Real estate was positive globally, with returns in developed Asia and Europe up several percent, in keeping with other equities, while U.S. REITs gained to a lesser degree. Domestically, more cyclical lodging and industrial real estate led the way, while health care and residential lagged.

Commodities fell on average during the week, as crude oil prices declined -4% to just under $51—the lowest level since early April and the range-bound swings of February-March. Industrial metals and natural gas gained, on improved China sentiment and hot weather, respectively, while gold reached a 5-year low by the end of the week as several global crises dissipated. The yet-to-be-finalized Iran deal offers the potential for sharply increased oil production, including a doubling of exports (Iran exports limited amounts of crude now through various exemptions) coupled with an already potentially-oversupplied dynamic with U.S. shale becoming the world’s swing producer. This will take time to play out, but with low-to-moderate global growth the current normal condition, keeping demand tempered, there could be more headwinds than tailwinds to crude pricing.

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 13, 2015.

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