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Weekly Review - July 31, 2017

Weekly Review - July 31, 2017

Guest Post - Monday, July 31, 2017


In a busy week for economic data releases, the Fed meeting resulted in no action and GDP for Q2 came in largely as expected. Durable goods orders and consumer confidence metrics came in more positively than expected, while a variety of housing data came in weaker than expected.

Equity markets were generally flattish in the U.S. last week, while foreign equities continued their string of gains, helped at least in small part by a weaker U.S. dollar. Bonds were mixed but generally lower on the investment-grade side as interest rates rose. Commodities gained along with sharply higher oil prices to end the week.

Economic Notes

(0) As mentioned earlier in the week, the FOMC outcome was no change, as expected, keeping the target fed funds rate at 1.00-1.25%. The key component investors took following the meeting was the timing of balance sheet reductions, which 'relatively soon' could be at the Sept. meeting, to be implemented soon afterward. The most important moves the Fed conducts have been only done lately at the 'major' meetings, where additional economic releases and a press conference is hosted to allow for Chair Yellen to provide additional color on policy moves and craft expectations.

(0) The advance report for 2nd quarter GDP came in at +2.6%, which was stronger than the first quarter, but a bit weaker than the consensus estimate calling for around +2.7%. There were some revisions for prior quarters to the downside, including Q1 down to +1.2%, which took year-over-year GDP growth down to +2.1%. Within the report for the quarter, strength originated from consumer spending, which gained nearly +3%, notably in food and health care, while auto sales declined. Business fixed investment increased by +5%, with equipment rising +8%. Residential investment declined by -7%, which was the largest quarterly decline in seven years and reversed a prior trend of improving homebuilding investment. Exports rose +4%, besting the +2% gain of imports, which was an economic positive, and was likely aided by the weakening dollar this year. Core PCE inflation rose +0.9% for the quarter, which was a few ticks above forecast (bringing the year-over-year rate to a below-target +1.5%); the employment cost index rose +0.5% for Q2, running a few ticks under expectations (with the year-over-year total compensation rate growing by +2.4%).

There weren't many surprises in the report, Estimates for Q3 GDP are coming in at a similar ~+2.5%, give or take a half-percent in either direction. These numbers are neither glacial or overly robust, but continue to be better than in other parts of the developed world like Europe and Japan. It may also provide the FOMC the confidence to continue on their rate hiking/balance sheet lightening path.

(+) Durable goods orders for June rose +6.5%, beating forecasts calling for +3.9%. Core capital goods orders, on the other hand, declined -0.1%, compared to a median forecast calling for a +0.3% gain. The key differentiating item was a +130% gain in aircraft orders, which tend to be extremely lumpy, so throw off the month-to-month measures. Core capital goods shipments increased +0.2%, which was just a tick below forecast. Durable goods inventories also rose +0.4%, better than expected, and the largest gain in over a year.

(+/0) The advance goods trade balance for June narrowed by -$2.5 bil. to -$63.9 bil., which was a bit narrower than the -$65.5 bil. expected. Imports fell -0.4% for the month, due to weakness in industrial supplies and consumer goods, while exports rose +1.4% on the back of foods and autos.

(-) The S&P/Case-Shiller home price index for May rose +0.1%, which disappointed relative to an expected +0.3% increase. Gains were seen in nearly three-quarters of the 20 cities covered by the index, led by Seattle, Las Vegas and Portland, which all experienced gains of +0.5% or more; on the other hand, New York, Chicago and Boston all lost about a half-percent each. Year-over-year, the pace of growth fell a bit to +5.7%, although that level remains far above historical averages.

(0) The FHFA house price index gained a stronger +0.4% in May, but still fell below expectations of +0.5%. Leading regions included the southern plains (OK through LA), south (KY through MS) and West coast, all of which were up nearly a percent. Year-over-year, the index has gained +6.9%, which is exceptionally strong.

(-) Existing home sales for June fell by -1.8% to a seasonally-adjusted annualized rate of 5.52 mil., underperforming the -0.9% expected decline, and reaching a four-month low. Single-family units fell by -2%, leading the change, as condos/co-ops were flat for the month. Regionally, sales fell by several percent in the South and Northeast, while the Midwest gained a few. Year-over-year sales were up a light +0.7% on a seasonally-adjusted basis, but +3.3% non-adjusted from last June. Low inventories have been a catalyst for the decreased sales numbers, with economists noting that levels of 'homes for sale' today are equivalent to those over twenty years ago, yet the U.S. population has grown by nearly a quarter during that time. With higher demand and lower supply, the national median sales price has climbed +6.5% over the past year to $263,800.

Debate continues about the causes of weaker new and existing home sales. While some economists continue to cast blame on demographic trends, such as slow Millennial generation household formation, other factors, such as interest rate pressures (which have now largely dissipated on the 10-year Treasury end in recent months, although average mortgage rates are about a half-percent higher than last year at around 4%) and a continued oversupply of existing housing stock overall, few conclusive answers have surfaced. Despite early hopes that a new housing boom would take the current business cycle recovery to new heights, expectations have been tempered more recently in this assessment.

(-) New home sales rose +0.8% in June to a seasonally-adjusted annualized rate of 610k units, which was a bit below expectations calling for a +1.7% increase and slower than the +5% rate of increase from May, with some downward revisions. Regionally, the West and Midwest experienced gains in sales, the Northeast was flat, while the South declined. Inventory rose to 5.4 months supply. While it's easy to get mired in the month-to-month data, the trend is steadily higher from the end of 2010; however, the pace of building remains far below that of need in terms of replacements and demographic change.

June New Home Sales Chart

(+) The index of consumer confidence for July bucked expectations and rose nearly +4 points to 121.1, beating a forecasted 116.5 figure. Household perceptions of present economic conditions as well as future expectations both rose in line with the broader index, as did the labor differential that measures the ease of finding jobs, to the widest level since 2001. In fact, the overall confidence index has reached a cycle high not seen since the early 2000's. A possible concern is that confidence will become 'too good', although momentum can be persistent and self-perpetuating, as it can in other economic statistics.

(0) The final July Univ. of Michigan consumer sentiment index reading ticked slightly higher by +0.2 points to 93.4, compared to expectations of no change. Both assessments of current conditions and expectations for the future rose by roughly equal amounts. Expectations for inflation in the coming year dropped a tenth to +2.6%, while 5-10 year-ahead inflation guesses came in at this same level. There were no surprises here, but consumer confidence continues to appear robust.

(-) Initial jobless claims for the Jul. 22 ending week rose +10k to 244k, which was a bit above the 240k expected. Continuing claims for the Jul. 15 week, on the other hand, fell -13k to 1,964k, also just above the expected 1,960k level. It continues to appear that summer factory re-tooling, such as with auto plants, could be playing a factor in claims activity, but otherwise, levels remain very low, which is a positive for labor markets.

Market Notes

Period ending 7/28/2017

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U.S. stocks were flattish on the week after an array of mixed economic news, mixed earnings results, the apparent death of the Obamacare repeal effort for the time being, and no action by the FOMC. In the U.S., large-caps outperformed small-caps, which lost ground. Sector results were unsurprisingly led by sharp gains in telecom and energy stocks, led by higher oil prices noted below, while health care stocks declined, related to uncertain political news surrounding healthcare reform efforts in Congress and stock-specific losses following poor results for a promising lung cancer treatment. Tech also took a bit of a breather last week, as did industrials and utilities.

Aside from the usual headline beats and misses, S&P earnings for the most part for Q2 are coming in as expected. Nearly 60% of index firms have reported so far, and revenue and profit results are continuing to come in stronger than expected at a greater degree than the trailing 5-year average, with overall revenue growth of 5% and EPS growth of just over 9%.

Foreign stocks lagged a bit in local terms with earnings results that were a bit weaker than expected, but were again helped by a dollar that fell by over a half-percent. Europe led with positive returns, along with emerging markets, while the U.K. was flattish and Japan declined slightly. Interestingly, as Brexit plans are being discussed, the U.K. pound has already recovered by 8% from lows reached during the height of concerns last year.

U.S. bonds lost ground as interest rates ticked upward at the longer end of the yield curve, although they fell a bit on the shorter end. With a bit more of a yield cushion, investment-grade credit lost a bit less than treasuries by a few basis points. High yield, however, earned positive returns for the week in keeping with corporate earnings and higher oil prices, as did bank loans. International developed market bonds declined in local terms in line with domestic bonds, but experienced a decent week overall with help from a weaker dollar, and outperformed emerging market debt, both USD and local. Greece re-entered the global bond market for the first time in three years, offering 5-year debt at just over 4.6%, which generally straddles the yield level between developed and emerging markets.

Real estate gained slightly despite higher interest rates, led by lodging and industrial, although mortgage and residential both declined. International real estate was aided by the weaker dollar.

Commodities gained several percent to end up as the winning asset class for the week. Energy ended up by far as the leading group once again, with gains in metals and losses in agriculture largely offsetting each other. West Texas crude oil rose sharply higher, up almost 9% to $49.71, experiencing its best week of the year thus far, upon lower U.S. inventory numbers and promises from Saudi Arabia to cut exports in August in another attempt to boost prices. There have been struggles with compliance among OPEC members, who, on one hand, are incented to 'cheat' by boosting production volume for their own benefit and raising much needed revenue for their depleted coffers, while, on the other hand, withholding supply could boost prices and rendering higher volumes less necessary. In a sense, it's become a 'prisoner's dilemma' among oil producing nations. Considering the low levels of stock and bond market volatility over recent months, oil markets have represented the most excitement of any asset as of late (for those looking for excitement).

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 24, 2017.

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