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Weekly Review - June 1, 2015

Weekly Review - June 1, 2015

Guest Post - Monday, June 01, 2015

Summary

  • Economic data from last week was lackluster on the manufacturing front, with poor durable goods and PMI figures, as well as a negative shot to sentiment with a negative 1st quarter GDP growth revision, while housing and consumer confidence improved.
  • Equity markets experienced a negative week globally, with the mixed economic news and uncertainty over European negotiations with Greece. Being a risk-off week, bonds were the sole positive group, with U.S. debt faring better than foreign with the dollar coming off stronger. Commodities were down slightly, although oil experienced little volatility.

Economic Notes

(0) Durable goods orders for April fell -0.5% on a month-over-month basis, which was on par with expectations. Core orders, which exclude the more volatile components, actually rose +1.0%, which surprised positively. In the detail, machinery and fabricated metal product orders rose a few percent and core shipments rose +0.8% (compared to much more tempered expectations).

(-) The Chicago PMI weakened by -6.1 points in May, falling back below 50 into contractionary territory at 46.2. New orders fell by -14% to 47.5 (although the 3rd time in contraction this year—so not a new development), as did production and employment metrics. The report was a bit more pessimistic than last month's, with implications of weak spots beyond last quarter's pervasive port strike and cold weather, but anecdotal commentary alluded to spotty problems as opposed to a broader downturn.

(+) The S&P/Case-Shiller home price index for March gained +1.0%, which was a tick better than expected (actually a bit less due to rounding). The good news is that all 20 cities in the index rose in price, led by Detroit that gained almost +3%. Year-over-year, the Case-Shiller is up +5%, which doesn't seem dramatic compared to the not-too-distant 'boom' years, but remains relatively robust compared to long-term history.

(-) Conversely, the FHFA house price index for March rose +0.3%, which was just under half of the +0.7% gain expected. This group has a slightly different composition, using inputs from beyond the 20 key American cities of the Case-Shiller and limiting the scope to certain conventional government mortgages. Regionally, the Ky./Tenn./Miss./Ala. region, Great Lakes states and N.Y./N.J./Penn. groups all gained about a percent while other key areas weakened a bit on the month, especially in the energy-producing lower Midwest states and New England. Year-over-year, the FHFA rose +5.2%, so very similar to the Case-Shiller on net.

(+) New home sales in April rose +6.8% to a seasonally-adjusted annualized 517k, which outperformed the forecasted gain of +5.6%. Then again, part of this was a reflection of a large drop in March, that was subsequently revised higher, so we don’t always take a lot of stock in month-to-month housing changes. The South and Midwest witnessed the strongest gains, while the Northeast and West were much less affected. Year-over-year, though, this represents a +26% change. As you can see in the chart below, this choppy series has shown recovery since the depths of the financial crisis—however, the most obvious element is the exceptional run-up in sales from 1990 to mid-2005 that we’re still paying the price for.

(+) Pending home sales for April also rose more than anticipated, up +3.4% compared to a forecasted gain of +0.9%. The increase was most pronounced in the Northeast, but all four key regions experienced a gain for the month. Year-over-year, pending sales are up +13%.

(+) The Conference Board consumer confidence survey rose +1.1 points in May to 95.4, beating expectations calling for 95.0. Consumer assessments of current conditions rose +3 points, while future expectations were little changed. The labor measure of jobs being 'plentiful' or 'hard to get' rose slightly, but remained in negative territory.

(+) The final University of Michigan sentiment survey for May rose +2.1 pts. to 90.7, which outperformed expectations by just over a point. Consumer assessments of present conditions improved by about that same +1 point, and future expectations even more so, by almost +3 points. As usual, more tempered gasoline prices and continued low jobless claims may have tipped the scales. Inflation expectations didn’t change markedly, falling a fraction to 2.8% for the coming year—matching long-term expectations which have hovered just under 3% for a very long time.

(-) Initial jobless claims for the May 23 ending week rose a bit to 282k, up +7k from last week and +12k above consensus expectations. Continuing claims for the May 16 week rose +11k to 2,222k, which was +22k higher than expected. No unusual effects were pointed out by the DOL.

(0/-) In its revised second release, 1st quarter GDP was taken down from +0.2% to -0.7%—which, surprisingly, was a few ticks better than expected. It was widely assumed that growth would be downgraded into the negative, with a significant component being weaker net exports. Weaker exports actually removed almost -2% outright from GDP growth in the quarter (2/3 of which was a decline in goods exports; service exports actually rose). Interestingly, this was the biggest drag to growth from net exports in 30 years. We can blame the dollar’s strength again for this, as has been oft repeated during the last few months. Personal consumption was the bright spot, adding +1.2% to GDP outright—mostly from services than goods. Estimates for Q2 remain in the 2.0-2.5% range, with a mainstream view that conditions have improved, if for no other reason than fewer weather impediments, lack of major port strikes and some stabilization in the dollar.


Read the "Question of the Week" for June 1, 2015:

There hasn't been much votality for a while. What's 'out there' over the summer to keep an eye on?


Market Notes

Period ending 5/29/2015

1 Week (%)

YTD (%)

DJIA

-1.15

2.14

S&P 500

-0.84

3.23

Russell 2000

-0.43

3.98

MSCI-EAFE

-1.83

8.60

MSCI-EM

-3.22

5.01

BarCap U.S. Aggregate

0.62

1.00

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

5/15/2015

0.02

0.64

1.57

2.21

2.99

5/22/2015

0.01

0.61

1.49

2.12

2.88

U.S. stocks fell on the week, with lackluster economic data resulting in lessened confidence. Health care and utilities came in strongest, with barely a loss registered, while energy and industrials lost up to -2% on the week.

Foreign stocks performed a bit better than domestic in local terms, but lost about a percent of that back due to a stronger U.S. dollar. A boatload of economic data from Japan came out last week, and on net, growth wasn't exceptional, but progress is better than some expected. Retail sales rose, +5% year-over-year, bucking the trend of several consecutive months of declines although the sales tax increase remains a drag. Labor conditions are also robust, with the unemployment rate falling to 3.3%, which was the best result in about 8 years (although labor force supply there is much tighter than in the U.S. for demographic reasons). CPI disappointed somewhat, at +0.6%, but came in above zero, which is always a psychological tipping point for economics and bankers. Worst performers included Brazil and Russia, as well as South Africa, which all have a tendency of trading with commodity sentiment. Chinese equities experienced more volatility as yet tighter trading restrictions were implemented.

U.S. bonds gained on the week, with flight to quality away from equities benefitted the general group—resulting in lower rates on the order of 10 b.p.'s across the yield curve. Consequently, long treasuries gained several percent in that environment, and the intermediate/core group all performing in line, whether government or credit. Foreign bonds fared strongly in local terms, but this translated to negative returns when adjusted for the dollar’s impact.

Real estate in the U.S. generally fared as negatively as broader equities, however, there was more dispersion on the week than normal, with mortgage REITs gaining a bit upon lower interest rates, residential/apartments barely losing ground, while industrial/office suffered a bit more than the general index. Foreign REITs in all areas fared significantly worse, with the dollar effect removing an extra percent from returns on the week.

Commodities, as measured by the GSCI, lost just over a half-percent on the week—odd in that returns were driven by the more extreme performances of individual commodities rather than crude oil, which fell mid-week upon further cuts in rig counts, but regained ground back to where it started, around $60. The big negative contributors were wheat, corn and sugar, in reaction to stronger crop estimates (not uncommon for this time of year—if they happen), and industrial metals, which are sensitive to Chinese slowdown concerns. Despite a still-terrible trailing 12-month return figure, the GSCI is essentially flat year-to-date, after all the ups and downs in between.

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 May 26, 2015.

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