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Weekly Review - June 12, 2017

Weekly Review - June 12, 2017

Guest Post - Monday, June 12, 2017

Summary

Economic data for the week was very light, and limited to a slight pareback in non-manufacturing growth and continued low readings for jobless claims.

Equities performed negatively around the world last week, especially in the U.S. technology sector, reversing recent strength. Bonds also suffered as interest rates ticked upward and foreign bonds were held back by a stronger dollar. Commodities declined as oil prices again fell due to oversupply concerns.

Economic Notes

(0) The non-manufacturing ISM index for May ticked down to 56.9, two-tenths below consensus; however, the mid-50’s reading is still reflective of strong services sector growth. New orders and business activity generally fell, while employment improved sharply to its level in a few years. Despite the decline for the month, the services story continues to be a strong one and signifies ongoing economic expansion.

(0) Factory orders fell -0.2% for April, which was on target with expectations; at the same time, the prior month orders data was revised slightly higher to offset the effect. Durable goods orders contributed to the decline, with nearly a -1% drop, while other factors were little changed.

(+) The government JOLTs job openings report showed a rise to 6,044k, which surpassed expectations calling for 5,750k and implied an increase in openings of +0.2% to 4.0%. The layoff rate was flat at 1.1%, while the hire and quit rate each ticked down by a tenth of a percent to, respectively, 3.5% and 2.1%. This is another indicator of labor market strength, on top of all the others, while it does appear that there could be some labor supply constraints in some segments (something the Fed’s Beige Book also alluded to).

(0) First quarter productivity growth was revised up by just over a half-percent, to flat, a fairly significant improvement on the ‘negative’ productivity first reported. Unit labor costs, however, were revised downward for the quarter to a +2.2% annualized rate, and an actual year-over-year increase of +1.1%, with the compensation component being revised downward to a +2.3% growth rate—similar to that of broader inflation. These statistics can be hazy, but wage growth, which is the key measure policymakers are watching for, remains contained. Productivity is extremely low compared to average levels of the past few decades, and thus will need to improve in order for higher GDP growth to occur. This would be in a manner similar to the cycle of the late 1990s, where, if labor markets continue to tighten, companies have been forced to operate more efficiently. This would also require greater capex spending, which has also been hoped for/anticipated for some time.

Productivity growth oover last five years
Source: BLS, Haver Analytics, Deutsche Bank

(0) Initial jobless claims for the Jun. 3 ending week fell by -10k to 245k, which was modestly higher than the 240k expected, in addition to a +7k upward revision in the prior week’s claims. Continuing claims for the May 27 week fell by -2k to 1,917k, just below the 1,920k level expected by consensus. However, while no anomalies were reported by the DOL, the timing of auto plant seasonal shutdowns as well as Memorial Day appeared to play a role. Despite the small week-to-week variations, overall claims levels continue to run at a very low rate, that reflect a strong job market with very light layoff activity.

Market Notes

Period ending 6/9/2017

1 Week (%)

YTD (%)

DJIA

0.33

8.89

S&P 500

-0.27

9.61

Russell 2000

1.18

5.33

MSCI-EAFE

0.31

9.97

MSCI-EM

1.68

13.42

BlmbgBarcl U.S. Aggregate

-0.16

1.59

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

6/2/2017

0.98

1.28

1.71

2.15

2.80

6/9/2017

1.01

1.35

1.77

2.21

2.86

U.S. stocks declined on net last week, at least for large cap indexes, as small caps rallied. There was some pent-up potential for volatility, with a triple-witching on Thursday (a big expiration day for a variety of equity options), the U.K. election, the ECB meeting and the Comey testimony, but the week was generally tame up until Friday, when a blow off in tech was led by commentary about valuations of certain firms (by short-sellers, no doubt a biased group), such as story stock Nvidia. By sector for the S&P, financials and energy led with strongly positive returns, while technology, the week’s leader up until Friday, fell off with the negative sentiment. Consumer cyclicals also lost ground, led by weakness in hotels, retail and car parts.

Foreign stocks fared worse than domestic, with the stronger U.S. dollar acting as a headwind globally, leaving stocks from the U.K., Europe and Japan all lower in local terms and when translated back to USD. Emerging markets gained to a small degree, with gains in China and periphery Far East—sentiment improved with gains in trade activity and trade reserves, considered to be important economic readings. Mexico experienced gains due to the victory of a ruling party candidate in an important local election, and loss of a populist candidate.

The U.K. election was a primary focus on that side of the world, with unexpected results (again). Instead of the early consensus view playing out that the conservative party (and PM May) would retain control, the voting results ended with a ‘hung parliament’, with the Conservative and Labour parties each gaining over 40% of the vote count—for only the third time since World War II. Generally, this means more political bickering and perhaps a softer stance with Brexit negotiations and trade concessions, which could cause higher degrees of market uncertainty. Interestingly, both stocks and bonds rallied, while the pound declined initially.

The ECB made no changes in policy, removing a reference in their statement to reducing rates further, but also announced no plans on pulling back stimulus—this resulted in a generally dovish tone. In fact, with ECB president Draghi stated that the ‘ECB will be in the market for a long time.’ Overall, the sentiment hampered bank stocks but helped fixed income.

U.S. bonds also lost ground for the week, with rates moving higher. Investment-grade credit outperformed governments by a slight amount, both of which outperformed high yield and floating rate bank loans. A stronger dollar negatively affected foreign bonds in developed markets especially, and emerging markets to a lesser degree.

Real estate indexes were mixed most groups, such as mortgage, regional malls and lodging outperforming health care and residential. The U.S. sharply outperformed foreign, with the dollar’s strength not helping for the latter.

Commodity indexes lost ground during the week, as continued weakness in the energy sector outweighed higher prices in agriculture (wheat and corn). Crude oil lost another -4%, settling at just under $46/barrel as oversupply worries continued, with notably from OPEC but production-cut exempt members Nigeria and Libya were bringing significant supply onboard.

Interestingly, the ‘crisis in Qatar,’ which has resulted from a variety of regional rifts has become more of a localized issue, particularly troublesome due to its only land neighbor being Saudi Arabia and a reliance on that border for imports of food and other essential goods. Years of tensions burst to the surface last week as Saudi Arabia, the UAE, Bahrain and Egypt all severed ties with the small but extremely wealthy nation, accusing it of supporting terrorism in the region and undermining political stability by backing antagonistic political groups—not to mention maintaining friendly relations with Iran. Qatar is the world’s largest producer of liquefied natural gas, which has continued to flow despite the disagreement—as LNG from Qatar remains an extremely important import for neighbors. While politics create extreme divisions in this part of the world, it’s important to remember that keeping petroleum and its byproducts flowing remains their common link. Interestingly, this crisis hasn’t resulted in the energy price spikes that it could have in years past.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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 5, 2017.

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