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Weekly Review - July 6, 2015

Weekly Review - July 6, 2015

Guest Post - Monday, July 06, 2015

Summary

  • Economic results for the week were again mixed, with some manufacturing data showing up better than expected, housing results decent, confidence higher and a mediocre employment situation report at the end of the week. Most attention was outside of the U.S., on the Greek situation.
  • Equities fell on the week in line with disappointment about the lack of agreement between Greece and the rest of Europe on a bailout plan, while domestic bonds ended slightly above zero as rates fell slightly. Commodities were also mixed, as agricultural contracts rose dramatically but oil prices declined.

Economic Notes

(+) The ISM manufacturing report for June showed a stronger jump-up than expected, gaining +0.7 points to 53.5 (beating expectations by +0.3 points). Within the report, employment improved sharply, while new orders and prices paid were generally flat, and production and new export orders fell a bit. Anecdotal commentary in the release showed manufacturing at stable to slightly positive.

(-) The Chicago PMI for June rose +3.2 points from the previous month, but remained in a contractionary 49.4 and below the neutral 50 reading anticipated. Here, new orders rose +9% to key over-50 growth territory; production also gained by a similar percentage but remained slightly in contractionary mode. Employment was also down.

(+) Construction spending for May rose +0.8%, which was twice the gain expected. Spending for manufacturing structures represented one of the strongest areas, up +6%, but most groups were positive, including private residential (more due to improvements than building, however).

(-) The S&P/Case-Shiller home price index of 20 key American cities showed an April gain of +0.3%, which underperformed relative to an expected +0.8% increase. Prices rose in about half of the regions covered. Year-over-year, the index rose +4.9% as prices in all 20 cities gained, led by +10% performances from Denver and San Francisco; several East Coast cities, including Washington D.C., Boston and Cleveland, eked out gains of just over +1% on the lower end.

(0/-) Pending home sales for May rose +0.9%, which fell just short of the forecasted +1.0% increase. However, these reached a 9-year high. The Northeast U.S. experienced gains of over +6%, followed by the West, while the South and Midwest both lost just short of a percent on the month. Year-over-year, pending sales are up +8.3%.

(+) The Conference Board consumer confidence index for June rose +6.8 points (+7%) from the previous month to 101.4. Expectations were set for 97.4, so this was a positive surprise. Consumer assessments of current conditions and future expectations both improved, more for the latter than the former. The labor differential, describing how plentiful jobs are versus being hard to get, also improved by several points.

(+) The ADP employment report came in better about +20k than expected, at +237k. Professional/business services contributed +60k, while manufacturing added +7k. Per standard, the figures come out a few days prior to the official government report, and are typically fairly similar—even more once later revisions are factored in, but that's often too late for anyone to remember.

(-) Initial jobless claims for the Jun. 27 ending week rose by +10k to 281k, which was higher than the little-changed 270k expected. Continuing claims for the Jun. 20 week also came in a bit higher, at 2,264k (+28k above expected). No unusual factors appeared to be at play for either release, but overall levels remain low, which is positive. Claims levels remain at lows not seen since 2000, and, before that, the early 1970's. Claims may be an underappreciated series, perhaps due to their weekly frequency, but the results here have remained consistently strong.

(0/-) The June employment situation report came in just slightly weaker than anticipated, but not different enough from expectations to cause undue alarm. The nonfarm payroll figure rose +223k, which was -10k short of expected; additionally, upon revisions, about -30k jobs for April and May each were trimmed, which might be more significant. Looking through the details of a government jobs report can sometimes be an interesting exercise. The trends of recent months remained intact, with employment gains happening in professional/business services (+64k), health care (+40k), retail (+33k), and, interestingly, in financial activities (+20k, mostly in insurance). Other cyclical areas such as trade/transports and restaurant work gained as well. On the negative side, construction additions were a net zero, and some other housing-related segments lost some jobs. 'Mining,' which encompasses all types of natural resource extraction, such as oil drilling, lost a few jobs, but the losses have flattened out versus fears of deeper cuts due to lower oil prices (as prices themselves have recovered somewhat).

The unemployment rate was expected to fall a tenth to 5.4%, but instead dropped to 5.3%. However, a labor force participation rate decline of -0.2% to 62.6% was responsible for the result, which tempers the excitement. This is actually the lowest participation rate since the fall of 1977. The U-6 'underemployment' gauge also fell by -0.3% to 10.5%. Average hourly earnings were unchanged in June, despite expectations of a two-tenths increase. From a year ago, earnings are up +2.0%, which is not dissimilar from other core inflation measures recently. The average workweek was flat at 34.5 hours. Overall, this wasn't a great report, especially considering that labor force participation declined to cause the lower overall unemployment figure, but it wasn't disastrous, either.


Read the "Question for the Week" for July 6, 2015:

How are portfolios looking as of mid-year?


Market Notes

Period ending 7/3/2015

1 Week (%)

YTD (%)

DJIA

-0.84

0.71

S&P 500

-1.16

1.93

Russell 2000

-2.67

4.29

MSCI-EAFE

-2.77

6.34

MSCI-EM

-1.69

1.59

BarCap U.S. Aggregate

0.02

-0.31

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

6/26/2015

0.01

0.72

1.75

2.49

3.25

5/22/2015

0.01

0.64

1.64

2.40

3.19

U.S. stocks were down on the week, never recovering from a rough start on Monday (the -2% drop was the most severe in a year), although the technicians might notice that some support was provided by the S&P's 200-day moving average. By industry, defensive utilities gained to lead the way, as the only positively-performing sector, while materials and technology lagged by the largest amount.

Sentiment was largely driven by the Greece situation, which we discussed more fully in a separate note last week. One might have imagined that such a 'risk-off' week would have benefitted both the U.S. dollar and treasuries, which happened somewhat. Now, the Greek election over the weekend regarding the Eurozone's bailout terms (where the referendum was overwhelmingly rejected) will no doubt affect thoughts over the coming week as alternative solutions to the deepening banking crisis there are sought (we expected more of a reaction this morning than there was). Soon we'll have to change focus towards the 2nd quarter earnings season.

Foreign stocks came in a bit weaker than domestic stocks in local currency terms, but even more so when translated back to dollars. Emerging markets were the winners on the week, with gains from Indonesia, India and Brazil, while peripheral Europe struggled through losses of several percent (the Greek stock market was closed, however, so one could look at a U.S.-traded ETF proxy for that market to gain some price transparency—results were an -8% 1-week loss, the bulk of which was last Monday as a default looked imminent). Local Chinese stocks also continued to struggle, with the Shanghai market down again (MSCI China was down -4% and China small cap lost over 10% last week).

U.S. bonds were generally flat from a total return standpoint, although interest declined a bit on net across the yield curve. High yield ended up slightly in the negative on widened spreads. A stronger dollar on the week (being about a percent higher) resulted in negative results for most foreign fixed income indices.

Real estate in the U.S. bucked the trend of other equities by gaining on the week, led by apartments/residential and lodging. Foreign REITs struggled, not helped by a stronger dollar.

Commodities were mixed on the week, as agricultural commodities continued to drive higher, upon news of smaller stockpiles from last year, which points to stronger demand. Energy was the worst-performing group, as crude oil declined a few percent to just below the $57 range—U.S. drillers have boosted production to the highest levels since the 1970's.

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.

Additional Reading

Read the previous Weekly Review for June 26, 2015.

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