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Weekly Review - July 28, 2014

Weekly Review - July 28, 2014

Guest Post - Monday, July 28, 2014

Summary

  • Economic data was mostly focused on inflation and housing: CPI was up marginally, while housing stats were mixed—remaining below trend for an economic recovery.
  • Stock markets were a mixed bag, with larger-cap stocks performing a bit better than small cap, although very sector-dependent. Bonds were mixed as well, due to a flattening of the yield curve on the week.

Economic Notes

(+) Durable goods orders for June increased +0.7%, which outperformed the expected gain of +0.5%. Removing cyclical defense items and aircraft, core goods orders were expected to gain a similar +0.5% range, but rose a stronger +1.4% for the month. However, a revision downward for May offset a bit of this. Core shipments, however, fell -1.0% on the month, bucking expectations of a positive +1.3%, along with a half-percent downward revision for May as well (the shipments versus orders distinction is somewhat important as the former is included in the Commerce Department's GDP calculation). Machinery and motor vehicle shipments fell -2% in June, which contributed in large part to the decline. Although not as significant, computers/electronics orders and shipments were also down.

(0) The consumer price index for June rose as anticipated, up +0.3% and on par with forecast. The headline portion contained a +1.6% rise in energy prices, while food prices flattened after several months of gains, as improved weather and expected harvest conditions appeared to filter through. Removing food and energy impacts, core CPI rose +0.13%, which was slightly below the expected +0.2%. The pace of inflation in shelter (mostly in hotel, as rents were on pace with prior months and higher than headline inflation at +2.6% over last year). Medical care services also slowed a bit last month relative to trend. Year-over year, headline and core CPI increased +2.1% and +1.9%, respectively, which is just below the Fed's target due to construction differences between CPI and the PCE deflator index they prefer. Interestingly, measured deflation probabilities remained at zero, where they've been since mid-2013 after 'spiking' at 12%.

(+) The FHFA house price index for May gained +0.4%, which outperformed expectations by two-tenths of a percent and brought the year-over-year increase to +5.5%. The most significant regions were West South Central (TX/LA) and Mid-Atlantic, each gaining just over +1%.

(+) Existing home sales for June gained +2.6% to just over 5 million seasonally-adjusted annualized units, which outperformed consensus calling for a gain of +1.9%, and was coupled with an upward revision for May. All four key regions saw gains, and the average sales price for an existing sale was $223,300. All-cash sales, a metric that roughly tracks non-owner-occupied investor activity, remained at about a third of all buys, which was close to where it was a year ago but foreclosure activity has also decreased, removing some of the quick-gain speculative element. While an improvement, these levels are roughly ¾ of 'normal' housing market pace, so this remains a lagging component of the current recovery.

(-) New home sales for June lost some prior month momentum, coming in lower than forecast with a drop of -8.1% (to 406k, seasonally-adjusted annualized) compared to an expected decline of only -5.8%; additionally, sales were revised downward for several prior months. The June declines were widespread, in all four national regions, although the West fell a mere -2%, while sales dropped -20% in the East. Accordingly, the months' supply of homes rose six-tenths to 5.8 months and the median sales price rose 5% from a year ago to $273,500. Builder inventory also rose +8k to 197k (the biggest piece being in the 'not started' category), the highest in almost four years, which could be a promising sign for coming months.

(+) Initial jobless claims for the July 19 ending week fell more than expected to 284k, compared to 307k expected, representing a new post-recession low. Continuing claims for the July 12 week came also lower, to 2,500k—10k lower than expected. This is only one week, granted, so future-week conformation is important, but the sub-300k is what many economists have been expecting/hoping for. Claims are an important real-time economic indicator.


Read the "Question for the Week" for July 28, 2014:

What's Going On With Argentinian Bonds? How will the recently released changes for money market funds affect clients?


Market Notes

Period ending 7/25/2014

1 Week (%)

YTD (%)

DJIA

-0.82

3.62

S&P 500

0.01

8.24

Russell 2000

-0.59

-0.94

MSCI-EAFE

0.43

4.17

MSCI-EM

1.45

7.58

BarCap U.S. Aggregate

0.09

4.03

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2013

0.07

0.38

1.75

3.04

3.96

7/18/2014

0.02

0.51

1.69

2.50

3.29

7/25/2014

0.03

0.53

1.69

2.48

3.24

Stocks were mixed on the week, with inflation coming in at a tempered rate, earnings season continuing. Large-caps generally outperformed small-caps, which are negative year-to-date. Sectors leading the way were energy and tech, up nearly a percent, while consumer staples and discretionary stocks lagged with negative results.

Developed market stocks in the U.K., Europe and Japan were little changed on net during the week, but peripheral Europe proved to be the winners. Emerging markets experienced a solid week, with China leading the way—Chinese flash PMI from HSBC was stronger than expected, at 52, a 18-month high.

Indonesian markets have experienced a double-digit month with the election of a pro-reform advocate. Hopes are similar to those of India, in that business-minded leadership will result in better ties to developed markets and more certainty in policy (as opposed to arbitrary, short-term political agenda-driven decisions emerging market nations are sometimes notorious for). On the negative side, Russian stocks suffered on additional questions and tension with Ukraine, as well as a central bank 0.50% interest rate hike designed to bring some currency stability and reduce inflation risks amidst international sanctions.

Bonds gained on the long end of the yield curve, with rates down a few basis points, while the middle and shorter ends were little changed. Accordingly, long treasuries gained a percent on the week, bringing year-to-date returns again to over +10%. It was also a positive week for munis, high yield and floating rate. Shorter indexes were generally flat to slightly negative on rates ticking up a few basis points. Foreign bonds generally gained on the week, as did emerging market debt, with Italy and Europe in general higher, Japan flat, and Australia down a bit.

Mortgage REITs were the best and only positively-performing real estate segment, while U.S. industrial/office and European brought up the rear with negative returns. While not technically part of the real estate sector, homebuilding stocks have fallen off in the last several weeks with poor sentiment around earnings and uninspiring new home sales numbers and a lack of household formation.

Commodities were flat on average, looking at the Bloomberg index, despite a half-percent gain in the dollar. On the rising side were coffee, cocoa, nickel and copper, so the softs and industrial metals sub-indexes generally rose—the latter no doubt helped by Chinese PMI. On the losing side, natural gas, cotton and corn fell back by several percent on the week.

Have a good week.

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.

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