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Weekly Review - June 12, 2015

Weekly Review - June 12, 2015

Guest Post - Monday, June 15, 2015

Summary

  • Economic data from last week looked a bit stronger, with some positive surprises from retail sales and a few sentiment surveys; the JOLTs and jobless claims reports, however, disappointed.
  • Despite some day-to-day volatility in equity markets and recent trends higher for interest rates, on net, U.S. stock and bond markets ended very little changed. However, a falling dollar helped foreign indexes inch higher. Commodities also gained, led by stronger pricing in energy.

Economic Notes

(0/+) Retail sales for May came in a bit stronger than some expected, rising +1.2% on a headline level and +0.7% on a ‘core’ basis (removing the more volatile components). The headline was in line with median expectations, while the core outperformed by +0.2%. Non-core items such as gasoline rose nearly +4% on higher prices, autos and building materials gained +2%, while core segments of apparel and online sales were higher by +1.5% or so each. This wasn’t a huge surprise versus expectations, but a positive number boosted hopes for stronger overall economic growth in the quarter.

(+) Wholesale inventories rose +0.4% in April, outpacing the consensus forecast of +0.2%. Nondurables rose by twice that pace, particularly in the clothing and pharma areas. Inventory-to-sales fell a bit to 1.29, but that remains high for the recovery period

(0) Import prices rose +1.3% in May, which surpassed the +0.8% gain expected. The majority of the move was due to +13% in petroleum pricing; other areas also gained, such as industrial supplies, while capital goods fell in price by a few tenths. Year-over-year, import prices are nearly -10% lower, much of which can be blamed on the combination of the plunge in oil and strong dollar.

(0) The producer price index (PPI) for May rose +0.5% on a headline level, a tenth higher than anticipated—mostly due to a +6% increase in energy prices. Core PPI rose a more tempered +0.1%, as expected, while removing trade services from the core took that down to a -0.1%. Year-over-year, the headline and core PPI figures fell -1.1% and rose +0.6%, respectively, demonstrating a continued impact from energy price declines and low levels of pipeline inflation.

(+) The NFIB small business optimism index for May bounced back to 98.3, beating forecasts expecting a flat result from last month at 97.2. Within the survey, gains were seen in earnings trends, the current environment being a good one in which to expand, higher economic expectations in general, as well as the percentage of firms planning to raise compensation.

(+) The preliminary Univ. of Michigan consumer sentiment survey for June rose a few points, +3.9, to 94.6, which outperformed expectations of a small gain to 91.2. Assessments of current conditions rose sharply, as did expectations for the future, to a more limited degree, as did changes in expected income. The 5-10 year ahead inflation expectations fell a tenth to 2.7%, but well within the usual ranges.

(+) The JOLTS job openings report for April showed a +5% gain of +267k jobs from the prior month to 5,376k, bucking expectations of 5,044k. On the other hand, the hiring rate fell by -0.1% to 3.5%, as did the quit rate, to 1.9%.

(+) Initial jobless claims for the June 6 ending week rose slightly, by +2k, to 279k, higher than consensus calling for 275k. Continuing claims for the May 30 week also moved upward by +61k to 2,265k—above consensus estimates of 2,190k. No unusual factors affected the data, per the Dept. of Labor, so we’ll see if this is a blip or bleeds into next week.

Market Notes

Period ending 5/29/2015

1 Week (%)

YTD (%)

DJIA

0.35

1.60

S&P 500

0.12

2.68

Russell 2000

0.36

5.58

MSCI-EAFE

1.38

8.22

MSCI-EM

-0.27

2.42

BarCap U.S. Aggregate

0.05

-0.32

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//5/2015

0.03

0.73

1.75

2.41

3.11

6/12/2015

0.02

0.74

1.75

2.39

3.10

U.S. stocks gained slightly, in a surprisingly flat week on net, despite some day-to-day volatility related to the Greece-IMF negotiations. From a sector standpoint, financials and consumer staples gained nearly a percent to lead, while energy and technology were the laggards on the week, down an equivalent amount.

Developed market foreign stocks outperformed U.S. issues on the week, while emerging market names fell back slightly on average. The commodity export nations, including Russia, Australia, South Africa and Brazil led, gaining strongly; Germany and Japan led the developed market group. Japan’s 1Q GDP came in at +3.9%, about a percent better than expected and the best quarter since 1990, although some distortions remains following last year’s sales tax hike; however, bank lending there has improved, which is perhaps a better real-time indicator

The biggest news abroad continued to focus on Europe—and the negotiations between Greece and the IMF—which started slow, appeared to show signs of positivity mid-week but broke down late in the week; apparently the weekend session ended after only 45 minutes. (We give the timetable, as market drama tended to follow it closely last week.) The late-June European Union leaders’ summit may the final stand for this issue, if a resolution can’t be found before then. Big sticking points appear to be labor market reform and pension cuts—both of which are political third rails in most nations, but especially in an economy as hard-hit as Greece. The late-June date is important, as the IMF packaged all of June’s payments into one bulk payment of €1.6 billion, so this could end up being one big default, instead of several smaller or a partial default. The result is the same.

S&P accordingly lowered Greece’s credit rating from CCC+ to CCC, which is a reflection of the already-present worries about an outright default or a policy mistake of some kind. The latter is probably a bigger worry than the former, since the goal of these negotiations all along has been to avoid a debt default, but both sides have a good deal riding on these negotiations and have domestic constituents to please.

Fixed income experienced a calm week for the first time in several, with interest rates rising then falling back to where they started the week across the yield curve. Core U.S. bonds were barely changed, with governments outperforming bank loans and other credit. Foreign bonds gained strongly on the week, however, with help from a weaker dollar, as local currency returns were slightly negative. European bond pressures persist as rates continue to be pressured upward from their extremely low levels. The biggest gains were in the U.K., Japan and Australia, while emerging markets also fared positively in USD terms.

Real estate in the U.S. gained a fraction of a percent, in keeping with other domestic equities; retail faring worst with mixed retail sales numbers. Domestic REITs were surpassed by much stronger gains in Europe, U.K. and Asia, all of which gained several percent.

Commodities gained slightly on the week, with energy the leading segment (natural gas being the biggest gainer upon hot weather demand, but also other areas), followed by precious metals. West Texas Intermediate Crude, the most closely-watched item in the basket, hovered within a few dollars of $60/barrel most of the week before settling right at that round number by Friday, gaining a few percent on the week. Agriculture and industrial metals ended up in the losing column for the week.

For those not able to attend the Monthly Advisor Call last week, we are enthused to announce the rollout of our new Tax-Efficient Model series. We can provide more information upon request, but we expect this could be a popular discussion item with clients, both those in higher tax-brackets and simply those interested in becoming more ‘tax-efficient’ generally.

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 8, 2015.

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