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Weekly Review - July 3, 2017

Weekly Review - July 3, 2017

Guest Post - Monday, July 03, 2017


Economic data for the week was led by weaker durable goods orders, pending home sales and jobless claims, while several consumer sentiment measures strengthened.

Equities were mixed for the week, with declines in the U.S. and foreign developed markets, while other groups were little changed. Investment-grade bonds suffered due to interest rates creeping higher. Commodities gained due to a rebound in the price of crude oil for the first time in weeks.

Economic Notes

(+) The 3rd and 'final' reading of Q1 GDP came in +0.2% higher at +1.4%, which was a little better than the expected unchanged reading. Personal consumption was revised higher by a half-percent to a +1.1% growth rate, while net exports and real final sales also improved. On the negative side, business fixed investment was revised down a percent. This is old news at this point, and represents a slight improvement on a generally weak quarter. Estimates for Q2 are higher, and fall in the range of 2.5-3.5%, with full-year estimates for 2017 falling in the 2.0-3.0% range.

(+) Personal income for May rose +0.4%, which was a tick higher than expected, which brought the year-over-year increase to +1.4%, a bit slower than broader GDP. Personal spending rose +0.1%, which was in line with expectations. This pushed the savings rate almost a half-percent higher to +5.5%. PCE inflation rose just under a rounded +0.1% on both a headline and core basis, bringing the year-over-year figure for each to an equally-similar +1.4%—below the Fed's target.

(-) Durable goods orders for May fell -1.1%, worse than the -0.6% decline expected on a headline level. Core capital goods orders, which are non-defense excluding aircraft, fell by a less severe -0.2%, but in contrast to an expected +0.4% gain. Core capital goods shipments also fell short of expected, down -0.2% for the month, compared to an expected +0.4% increase.

(-/0) The S&P/Case Shiller home price index for April experienced a rise of +0.3%, underperforming the expected +0.5% increase by a slight margin. For the single month, gains in Detroit and Seattle led the 20-city index; five cities experienced declines on the month, led by weakness in Cleveland and Boston where sub-indexes declined up to a percent. Year-over-year, the national index is up +5.7%, which remains significantly positive, albeit at a slower pace than prior months.

(-) Pending home sales for May fell -0.8%, in contrast to an expected gain of +1.0%; additionally, prior month sales were revised down by nearly a half-percent. While the Midwest experienced a flattish month, the other three key primary regions lost ground in roughly equivalent amounts. With the timing component of housing transactions, this tends to bode negatively for existing home sales over the next several months. Interestingly, on a non-seasonally adjusted basis, this was the third strongest May on record, and the best in 12 years, although only slightly better than last May. Debate continues about the impact of higher mortgage rates in recent months, although treasury rates have generally come down again as of late, which should reduce some of this pressure.

(0) The advance goods trade balance narrowed by -$1.2 bil. to -$65.9 bil., similar to the -$66.0 bil. level expected. Exports rose close to a half-percent, with gains in autos and consumer goods; while total imports fell by roughly an equivalent amount, led by a drop in autos and other consumer goods.

(+) The index of consumer confidence rose +1.3 points in June to 118.9, outperforming expectations calling for a drop to 116.0. Consumer perceptions of current conditions rose by +6 points; on the other hand, future expectations ticked downward by almost -2 points. The labor differential, which measures the ease in finding employment rose a few points to its highest level in 16 years.

(+) The final June Univ. of Michigan measure of consumer sentiment rose +0.6 of a point to 95.1, outperforming the expected unchanged 94.5 result. The index was driven by improvements in consumer assessments of current conditions, which rose several points, while future expectations deteriorated by almost a point. Expectations for inflation in the coming year were flat at +2.6%, while those for the coming 5-10 years declined a tenth from the original release to 2.5%.

(-) Initial jobless claims for the Jun. 24 ending week rose +2k to 244k, which was just a touch higher than the 240k expected. Continuing claims for the Jun. 17 week rose +6k to 1,948k, which was above the 1,935k expected. No unusual items were noted by the DOL. Claims levels risen from extremely low levels earlier in the year, but remain solid, which point to high overall employment.

Market Notes

Period ending 6/30/2017

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U.S. Treasury Yields

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U.S. stocks lost ground on the week on the large cap side, while small caps eked out a small gain. Financials led the way, gaining over +3% as U.S. banks completed their recent round of stress tests, essentially giving the firms the go-ahead to return more capital to shareholders. This was coupled with stronger central bank language alluding to the need for continued tightening of conditions. Tech, by contrast, lost nearly -3% on a continued round of apparent profit-taking for the sector (tech being up +17% year-to-date, beating all others) and Alphabet's substantial EU fine of nearly $3 billion for anti-trust violations.

Foreign stocks were mixed, coupled with a -2% decline in the dollar for the week, which affected net returns. The U.K. and Europe lost ground over the week in local terms, due to the hawkish central bank commentary which alluded to stronger growth; these losses were tempered by the weaker dollar. The opposite occurred in Japan as the yen weakened, turning a flat local result into a loss for U.S. terms. Emerging markets came in just slightly lower on net, with upward help from Brazil, China and Russia—several of which were aided by a sharp recovery in oil prices, being commodity-oriented nations. Brazil also seemed to be aided by concerns about the current political corruption probe appearing to stall a bit and inflation levels declining.

U.S. bonds generally fared poorly, as interest rates increased across the yield curve in keeping with global central bank comments surrounding a shifting sentiment toward monetary tightening. Investment-grade credit and government debt performed in similarly negative fashion; high yield experienced gains, however—no doubt helped by a recovery in energy prices. Foreign bonds were flattish to lower on the week, hampered by the more hawkish central bank commentary which pushed key rates higher. In EM, local currency bonds were helped by a weaker dollar, while USD-denominated debt lost ground in line with developed market debt.

In the world of munis, both Moody's and S&P have downgraded Illinois general obligation debt to just a tick above below-investment grade status, as the state legislature has been unable to pass a new budget, not to mention a pattern of ongoing pension funding concerns. A further downgrade to junk would be a first-time event for a U.S. state, and could create a host of carryover issues, including an inability for certain entities to hold the debt (as investment-grade ratings are required for certain institutional portfolios), in addition to higher borrowing costs for the state (as junk ratings imply higher required yields, just as with corporate high yield). Even if this dramatic step isn't reached, and odds of actual default don't increase in practical terms, the move is a reflection of the difficult position many states and municipalities find themselves in. Then again, these issues aren't new. While most muni defaults have been limited to higher-risk projects like hospitals, housing and other private/public partnership efforts, there have been nine G.O. technical defaults in the past 50 years, so it's not unheard of.

Real estate declined in both the U.S. and abroad, by over a percent, in keeping with higher rates. The year's losers so far, retail and regional malls, were the sole gainers on the week, while health care and residential lost the most ground.

Commodity indexes gained sharply on the week, led by a recovery in energy. Crude oil jumped each day of the week, netting +7% from $43 to just over $46/barrel, on reports of U.S. rig counts declining for the first time in 24 weeks. Other commodity sub-groups also experienced gains, seemingly aided by a weaker U.S. dollar, except for precious metals which lost ground, as expected with higher real interest rates for the 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.

Additional Reading

Read the previous Weekly Review for June 26, 2017.

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