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Weekly Review - June 19, 2017

Weekly Review - June 19, 2017

Guest Post - Monday, June 19, 2017


Economic news for the week centered on the Fed, which raised rates another quarter-percent. Other data included a drop in retail sales and disappointing housing metrics, continued low jobless claims, and strength in a variety of regional manufacturing surveys.

Equity markets were flattish in the U.S., but declined for the most part abroad. Bonds fared better, with lower long-term rates despite the Fed's raising of short-term rates. Commodities lost ground, with crude oil losing several percent on the week.

Economic Notes

(0) The FOMC meeting concluded with a +0.25% fed funds target rate hike, per our mid-week special note. Post-meeting statement and press conference analysis has been focused on the logistics and timing of the 'balance sheet normalization' program described in an addendum released by the committee. Due to the June timing, it's possible the program of slowing down treasury and MBS reinvestments could begin as early as September, although December is also possible—which could replace one of the assumed rate increase announcements. This would take the number of possible rate hikes this year from 4 to 3, although these also remain very data-dependent.

(-) Retail sales for May fell by -0.3% on a headline level, which under performed a flat reading expected. The core/control version of the index was flat, despite a median forecast calling for a +0.3% gain; however, April core sales were revised upward by a half-percent, which was sizable. Gains for May were focused on non-store/online retail, which rose almost +1%, and clothing, while gas stations, sporting goods/books/music and general merchandise declined.

(+) The Empire state manufacturing index broker a three-month losing streak by growing a substantial +20.8 points to +19.8 in June, far surpassing expectations that called for a +5.0 reading. Underlying segments in the index, new orders and shipments, gained ground strongly, while employment declined a bit but remained in positive territory.

(+) The Philadelphia Fed manufacturing survey, by contrast, fell -11.2 points, but to a still-very strong +27.6 level that outperformed the +24.9 expected reading. New orders gained slightly, which were offset by declines in employment, and especially in shipments.

(0) Import prices declined -0.3% in May on a headline basis, a bit more than the -0.1% decline expected. This was due to a -4% drop in petroleum prices, as the ex-fuels index ended the month flat, highlighted by no change in consumer goods prices a slight rise in auto prices and decline in industrial supplies. Overall, very little change based on this metric.

(0) The producer price index was flat for May, on par with expectations, on a headline level, as both energy and food prices declined for the period. On a core level without food and energy, PPI rose +0.3%, compared to only an expected tenth higher. After a few months of higher PPI, this month represents a reversion back toward a slower pace of inflation, particularly in some segments such as medical care interestingly enough (lower pharma prices were noted by Yellen in her post-FOMC meeting press conference as an idiosyncratic factor pushing inflation downward).

(0) The consumer price index for May fell -0.1% on a headline level and rose +0.1% for core, contrary to a flat result expected. A -6% decline in energy commodity prices was the primary driver of the headline CPI number, as food prices ticked a few tenths of a percent higher. While shelter costs rose, airfares, apparel, vehicle prices, car insurance and cost of medical care declined to partially offset the effect of the larger contribution. Year-over-year, headline and core CPI declined to rates of +1.9% and 1.7%, respectively. Interestingly, almost a quarter-percent of the recent CPI growth number can be attributed to a decline in the price of wireless phone plans and methodological adjustment pertaining to such services, which seems odd at first glance, but this does represent an increasingly sizable component of consumer budgets—akin to a basic fixed-cost utility in most households.

(-) The NAHB homebuilder index fell -2 points to 67, which disappointed compared to an expected 70 level; however, this level remains near its highs, which bodes well for homebuilding activity. Current sales, future sales expectations and prospective buyer traffic ended the month with declines similar to each other. Regionally, the West fell sharply, while the Northeast and South declined to a lesser degree.

(-) Housing starts for May fell -5.5% to a rate of 1,092k, far weaker than the expected increase of +3.9%. Multi-family starts fell -10% (and -23% on a year-over-year basis), almost a half-year straight of declines, leading the way, but single-family starts also fell by -4% (although up +9% year-over-year). Regionally, starts rose in the Western U.S. slightly, but fell significantly, by almost -10% in the South and Midwest for the month. Building permits similarly fell -4.9%, compared to an expected gain of +1.7%. Similarly, multi-family was the primary detractor, down -10%, while single-family permits declined -2%. Overall, these stats aren't positive, but the multi-family component reflects a slowdown in apartment construction due to higher supplies in recent quarters and accompanying increases in vacancies.

(0/-) Industrial production for May was unchanged, as expected. The manufacturing component of production, however, fell -0.4%, contrary to an expected +0.1% increase, with a decline in autos/auto parts being the significant negative component, while business equipment also fell close to -1% for the month. Capacity utilization fell a tenth of a percentage point to 76.6%.

(-) The preliminary June Univ. of Michigan consumer sentiment index fell -2.6 points to 94.5, below expectations of a nearly unchanged 97.0 reading. Assessments of current conditions fell -2 points, while expectations for the future declined -3. Inflation expectations for the coming year were flat at +2.6%, while 5-10 year forward inflation expectations rose two-tenths to their highest level in a year, at an identical +2.6%.

(0) Initial jobless claims for the Jun. 10 ending week fell -8k to 237k, below the forecasted level of 241k. Continuing claims for the Jun. 3 week rose +6k to 1,935k, a bit higher than the 1,920k expected. Per the DOL, no extraordinary items were noted. Initial claims remain at very low levels, as do continuing claims, despite a rise in recent week for the latter.

Market Notes

Period ending 6/16/2017

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YTD (%)




S&P 500



Russell 2000









BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks were generally flat for the week on the large-cap side, while small caps declined. Industrials and utilities led for the week, while technology suffered again while certain high-flying NASDAQ stocks sold off, as did materials. One of the larger news items was the announced Amazon acquisition of Whole Foods (not a small company in its own right at just under $15 bil. in market cap). Naturally, Amazon's entry into any market at this point creates concern for other participants, whether it be apparel retailers and, now, groceries.

Foreign equities under performed the U.S. in almost every key region, with Japan holding up slightly better and Europe, the U.K. and emerging markets under performing. In Japan, the BOJ voted to keep their current stimulus plan in place, with 10-year rates targeted at 0%, along with asset buying. Sentiment was soured in the U.K. by the first drop in consumer spending in several years, as well as uncertainty surrounding the fallout from recent elections and the impact on Brexit negotiations. In emerging markets, Chinese stocks declined as policy tightening appeared to have an effect on credit growth (a double-edged sword); Russia suffered as U.S. government issued additional sanctions in addition to a high revenue reliance on oil prices.

Fixed income experienced some mixed performance, with the point of change being the FOMC meeting mid-week. On net, the U.S. yield curve flattened, with slightly higher rates, coupled with the fed funds move higher on the short-end, and a decline in long-term rates, which appeared to follow in line with the weaker inflation readings. Bonds fared well from a total return standpoint, with corporate credit outperforming governments slightly in the U.S., with the exception of high yield, which was just up a bit. The dollar came in slightly weaker, which helped push international developed bonds into positive territory, while emerging market local debt fared far better, with gains of nearly a half-percent for the week.

Real estate experienced an exceptionally strong week with gains of almost +2% in the U.S., and around a percent in Europe and Asia. Lower interest rates based on the lower inflation readings were a likely catalyst, as this is seen as keeping borrowing costs at bay.

Commodities declined on the week, with negative returns in almost all subsectors, including metals and energy. Crude oil ended a mixed week down almost -2%, at just under $45/barrel. Oil has been in this trading range of $45-55/barrel for nearly a year now, following the lows of 2016, and no near-term catalysts appear on the horizon to create any change in this pattern.

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 12, 2017.

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