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Weekly Review - June 19, 2015

Weekly Review - June 19, 2015

Guest Post - Monday, June 22, 2015


  • Economic data for the week was somewhat mixed in both the industrial and housing areas; this fell along the same theme leading to inaction by the Fed following the week’s FOMC meeting.
  • Equity markets rose in the U.S., while foreign equities fell back. Fixed income generally benefitted across the board from lower interest rates and, abroad, from a weaker dollar. Commodities were mixed to negative as crude oil prices remained contained with a recent tighter range.

Economic Notes

(0)) As we discussed in the mid-week Fed note, the FOMC did as expected by keeping interest rate policy unchanged, although the committee member ‘dot plot’ that visually lays out rate expectations for coming quarters/years showed a higher rate environment being not that far away. Debate continues about whether this means September or December 2015 or January 2016, but the reality is that conditions are data-dependent. Underlying conditions were acknowledged as ‘expanding moderately,’ language was generally tempered and little changed from the prior meeting.
It appears increasingly likely that the Fed will take an extremely cautious approach to rate increases—it wouldn’t be surprising to see a change in policy on the order of one minor raise (0.25% range), a pause, then perhaps another raise, followed by another pause, etc., assuming conditions don’t change radically from where they are today. Providing consistency in expectations to markets is no doubt a goal, while also acknowledging the reality that zero rates are no longer necessary (despite global pressure, such as from the IMF, to keep the current policy in place for global growth’s sake).

(-) The June Empire manufacturing index fell by -5 points into the negative, to -2.0, bucking expectations calling for a further rise to +6.0. New orders falling -6 points was the biggest underlying factor, while shipments and look-ahead capex plans also fell. However, employment and the average workweek length improved. Overall, this was relatively disappointing.

(+) By contrast, the Philly Fed manufacturing index for June rose more than expected, coming in at +15.2, compared to 6.7 in May and expectations of 8.0. On the positive side, new orders, shipments and the average workweek all improved, while employment and forward-looking capex plans weakened a bit.

(-) Industrial production for May fell -0.2% compared to a forecasted gain of +0.2%. The bulk of the change was due to a drop in manufacturing production—notably petroleum and coal—while auto production was a bright spot, showing a +2% gain. Capacity utilization was also softer than expected by -0.2%, coming in at 78.1%.

(-) Housing starts for May fell -11.1% to an annualized rate of 1,036k, which disappointed even compared to an expected decline of -4.0%. However, at the same time, revisions upward were included for the prior few months, tempering the effect. Within the report, single-family starts fell by -5%, while those in the multi-family segment (which tends to be much choppier), declined by -20% month-over-month. Building permits rose +11.8% to 1,275k, versus an expected drop of -3.5%. Here, multi-family outperformed, gaining +25% on the month, while single-family rose +3%. Amidst the month-to-month volatility in these series, housing has begun to perform better in recent months, and could provide extra needed juice to the 2nd quarter GDP report. In fact, this could end up being the strongest spring in about seven years.

(+) The NAHB housing market index rose to 59 for June, beating expectations by +3 points. The strength was broad-based, as present and future sales both improved, as did prospective buyer traffic. Due to the nature and timing of this report, it has tended to be traditionally correlated to future months’ housing starts.

(0) The consumer price index for May rose +0.4%, which was a tenth short of forecast; core CPI, on the other hand, rose +0.15%, a fraction short of expectations. The primary difference was a +4% increase in energy prices during the month, while prices in several core segments, such as medical care and lodging, softened. Real estate pricing, through both rent of primary residence and owners’ equivalent rent gained by over a quarter-percent, so in line with broader inflation metrics. Year-over-year, headline and core CPI are flat and up +1.7%, respectively—the core figure continues to be heavily affected by energy price declines of the past year, while core also remains tempered and under the Fed’s objective.

(+)The index of leading economic indicators provides us a nice snapshot of a variety of historically-relevant metrics in one shot. The May LEI rose +0.7%, which matched the increase over the previous month—led by gains in building permits, interest rate spreads, credit conditions and low jobless claims. In a similar direction, but in a lighter magnitude, the coincident and lagging indicators rose +0.1% and +0.2%, respectively, both on par with the prior month. Some examples of lagging indicator strength include installment credit-to-income ratios, duration of unemployment and manufacturing/trade inventories-to-sales.

(+) Initial jobless claims for the June 13 ending week fell to 267k, -12k below last week and -10k below expectations. Continuing claims for the June 6 week also fell to 2,222k, a drop of -50k from last week but about +12k more than expected. No unusual incidences were reported to affect the figures, which remain at encouragingly low levels

Market Notes

Period ending 5/19/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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U.S. stocks were higher on the week based on influences from dovish Fed commentary and hopes for a resolution between Greece and Europe. From a sector standpoint, traditionally defensive health care and consumer staples outperformed, gaining up to +2%, while energy and financials both lost ground. Small caps outperformed large-caps.

Foreign stocks lost ground on net, despite the tailwind of the dollar’s decline by about a percent on the week. European and Japanese stocks were both weak in local terms, while the dollar helped on the return side. The strongest returns on the originated from emerging markets India, Turkey, Russia and Brazil, all of which gained several percent on the week—some investor fear of a fast-tightening Fed would negatively affect fragile EM markets, so dovish tendencies may have provided a sentiment boost here.

We hate to keep bringing up the European situation, but the drama continues. Greece is still playing hardball with the EU and IMF in terms of insisting on outstanding debt reductions, while Europe wants longer-lasting structural reforms—both are difficult, making both sides unhappy, which is typical of negotiations. Over the weekend, it seemed both parties may have found some common ground, with rumors of a debt extension to avoid default, which, if true, means we’ll just have to deal with this again in December.

Local Chinese stocks experienced high volatility during the week, selling off on net, although the more globally-relevant but more limited-in-scope MSCI China index showed a much more tempered reaction. After a +40% run-up year-to-date, local worries about a market bubble seem to have resulted in the recent paring back.

As an interesting sidenote, there has been discussion within MSCI (the Morgan Stanley International people that maintain the variety of well-used global stock indices) about how to handle China within their family of indices. Hong Kong-listed H-shares, foreign-denominated B-shares, P-chips set up in tax-havens, as well as a handful other classes, remain the primary vehicles for global managers to obtain access to the Chinese equity market and have been the classes used in the MSCI index series. However, these combined elements represent only about a third of total free float market cap in China, with the much larger remaining two-thirds consisting of the locally-traded and renminbi-denominated A-shares. These are the variety allegedly being day-traded by the greater populace, although it’s been argued that the impact of this trend on their overall well-being from a net worth standpoint may be overblown somewhat.

A-shares, until recently, were available mostly to local buyers and now still only by allotted quota to foreigners (although these restrictions are gradually being loosened). The big issue is that, with a $10 tril. estimated free float A-share market cap would bring the Chinese equity market size up within the top five in the world. This has created discussions about how and when to handle this market; this has become more complicated in recent years with the greater popularity of ETFs, which translates any index adjustment into a major investor cash flow impact. Naturally, the less-liquid nature of the A-share market and continued quota system creates uncertainty on several fronts, so MSCI decided to push out the issue a bit and consider inclusion in 2017 (some thought it might have happened as early as next year). The FTSE index series, a competitor to MSCI and used in Vanguard’s ETF products, has already begun the inclusion process with expected investments beginning later this year, with expected allocations up to 5%. While the size of the Chinese A-share market warrants this review, these situations create obvious issues, especially in light of current possible bubble scenarios. The larger a bubble grows, so does the market cap and, as such, ‘demands’ inclusion into global indexes as a result of its growing size/importance (at least by that measure). This is another traditional criticism of market-cap weighted indexes—the more expensive the stocks get, the higher the weighting. Hopefully, the careful thought and waiting period will allow longer-term forces to reign, as opposed to raising shorter-term risks.

U.S. bonds moved higher on the week with a break in rates—which fell across the curve. Government and credit were both higher to roughly the same degree (long treasuries performing best, as expected), while high yield and bank loans hovered around zero on the week due to spread impacts. The weaker dollar gave foreign bonds a natural boost in USD terms, as local results were generally mixed. In Europe, where interest rates have been one of the most closely watched global economic items in recent weeks, German 10-year Bund yields are back down to 0.75%—far higher than a few months ago, but down from recent highs surpassing 1%.

U.S. real estate led on the week, with gains across the board—led by economically-sensitive lodging/resorts. Foreign REITs in Europe and developed Asia were generally negative on the week, in keeping with equities.

Commodities on average fell by several percent, with gains in precious metals offset by sharp declines in base metals like copper and zinc. Finishing over $1,000/oz., gold was a primary beneficiary of dovish Fed sentiment and a weaker dollar—due to lower real rates persisting for a longer period of time, benefitting the opportunity cost of being in a financial asset other than gold. West Texas intermediate crude ended the week about where it started—very near $60 a barrel—as volatility in this area has become quite range-bound over the last several months, in a band of $58-61 for those watching on a chart. Brent crude fell several percent with comments from the Saudis indicating possibilities for increased production, but there hasn’t been anything newsworthy enough to move oil prices significantly enough in one direction or another recently.

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 12, 2015.

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