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Weekly Review - June 20, 2016

Weekly Review - June 20, 2016

Guest Post - Monday, June 20, 2016


The week was highlighted by the FOMC meeting, at which no interest rate policy changes were made. In other data, retail sales surprised on the upside, manufacturing and production data were mixed, and inflation came in little changed as expected.

Markets suffered through a week of negativity generally due to the mixed economic data, digesting of Fed communications and heightened 'Brexit’ concerns. Bonds fared better with lower rates, especially abroad, while commodities fell slightly as oil production and inventories appeared to pick up.

Economic Notes

(0/-) As we noted mid-week, the FOMC did not raise rates. That outcome had largely been priced in to futures markets beforehand, so was no surprise to anyone. In the statement and press conference held afterward, though, the tone was more dovish and downcast than expected, reflecting uncertain economic prospects and a slowing of labor improvement that had been an area of strength the committee was hanging its hat on in recent meetings. Even the hawkish FOMC member Esther George from Kansas City refrained from dissenting, contrary to her recent votes as the sole member wanting to raise rates. The dot plot flattened, implying that members again don’t expect any jumping off to higher rates anytime soon, which is telling, but these opinions are also very data-dependent, so this can be difficult to forecast too far into the future. For now, though, further rate increases in 2016 look less likely than they did a few weeks ago.

(+) Retail sales for May increased by +0.5%, which surpassed the forecasted gain of +0.3%. Much of this was due to higher gasoline prices and motor vehicle sales, but removing the volatile components of gasoline, autos and building materials, the gain remained decent at +0.4%. However, the composition was mixed, with declines in general merchandise and furniture, while non-store retail (online, mostly), restaurants and clothing all gained. It’s interesting to see how the trend toward internet buying is not only affecting longer-term retail trends but has become more obvious in the month-to-month results as well. Consumer spending is one bright spot that the FOMC noted in their statement and other policy-related discussions.

(+) The New York Empire manufacturing survey improved in June by +15 points to an expansionary +6.0, contrary to an expected continued contractionary -4.9. Underlying components new orders and shipments also improved, while employment ticked down a bit to a neutral level of zero.

(0) The Philly Fed index similarly rose several points from a contractionary -1.8 in May to +4.7 in June, which outperformed the expected +1.0 level. Interestingly, though, underlying components weren’t quite as strong, with new orders, shipments and employment all falling off somewhat to more negative levels during the month.

(-) Industrial production for May declined by -0.4%, which was twice the -0.2% drop expected. Motor vehicle and parts manufacturing was the primary culprit, falling -4%, but other areas also experienced lesser degrees of weakness, including business equipment and consumer goods manufacturing. Manufacturing in general has been challenged, so weak data here has not been a surprise. Business inventories, in a separate report, rose +0.1%, which was a bit less than expectations. Capacity utilization fell a half-percent in May to 74.9%, which disappointed relative to a forecast of little change. Interestingly, it appears utilization at peak levels in this cycle would be among the lowest peaks on record, although business cycle peaks have steadily fallen since the beginning of this series in the late 1960’s.

(0) Import prices for May rose +1.4%, which was twice the forecast +0.7% increase. The primary driver was petroleum prices, which rose sharply during the month. Prices outside of food and fuel also rose +0.4%, with consumer goods prices up +0.2%, but these areas were much less impactful.

(0) The consumer price index for May rose by +0.2% on both a headline and core basis, generally in keeping with expectations. Energy prices (which gained +1%) were a primary catalyst that drove headline prices, while rent inflation moved +0.4% higher (actually the fastest month for that category in a decade) and resulted in about half of the total core inflation movement on the month, while transportation and health care were also additive. On a year-over-year basis, headline CPI rose a meager +1.0%, with a continued impact from drop-off in oil prices, and core CPI gained +2.2%, on par with recent trend. Overall, there were no real surprises, but core inflation has shown more firmness due to services and rental price gains.

(0) The producer price index rose +0.4% on a headline level and +0.3% on a core basis for May, showing similar results to CPI. Energy prices showed a +3% gain in this measure, which accounted for the differential. Otherwise, trade services also increased, and without this impact, PPI actually fell during the month with deflationary impacts elsewhere. The year-over-year headline PPI number was flat, which points to continued lack of inflationary pressure.

(0) Housing starts for May fell by -0.3%, but this was less than the -1.9% decline expected. Multi-family starts were the problem, as these fell by -1% in a partial reversal of sharp gains the prior month, while single-family starts rose a fraction of a percent for the month. Building permits, on the other hand, gained +0.7%, which was lower than the +1.3% expected. These were led by multi-family permits, which rose +6%, while single-family permits fell by -2%. The trend in either series hasn’t changed much over the past year, but do remain near recovery peak levels.

(+) The NAHB homebuilder sentiment index for June rose +2 points to 60, which was a point higher than forecast. Current sales, prospective sales and prospective buyer traffic all improved on the month. Regionally, the Midwest experienced a decline, but the Northeast, West and South sub-indexes all rose. However, the index has been flat on a year-over-year basis.

(-) Initial jobless claims for the June 11 ending week rose to 277k, +2k higher than expected. Continuing claims for the June 4 week also rose to 2,157k, higher than the 2,140k expected. Neither change was dramatically higher, but the rise in initial claims was caused by a +16k of claims from California, so a state-specific issue. Overall, claims numbers continue to remain at cycle lows with no apparent increases in layoff activity.

Read the "Question of the Week" for June 20, 2016:

What are the primary concerns with a 'Brexit'?

Market Notes

Period ending 6/10/2016

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BarCap U.S. Aggregate



U.S. Treasury Yields

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2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks were generally negative on the week as 'Brexit’ fears led sentiment; the Fed decision was largely anticipated, so did not appear to play as large of a role. Defensive utilities led with gains on the week, followed by a flat result for energy, while health care and financials lagged with losses in the -2% range. The corporate news of the week was that Microsoft agreed to pay $26 bil. to acquire social media firm LinkedIn (representing a large premium to the market share price); apparently the price got that high due to the reported presence of other bidders.

Foreign stocks were generally lower in developed Europe and Japan as well, although losses in the U.K. were minimal, with poor returns related to Brexit concerns early in the week followed by a recovery towards the end. Emerging markets also lost ground, but tended to outperform the bulk of developed regions.

In an update to what we mentioned last week in regard to MSCI’s potential inclusion of Chinese A-shares, the firm decided to again hold off. Despite some pressure to include this large and growing market, it was liquidity that resulted in the postponement. The Chinese government’s monthly limit on repatriation of capital remains a hurdle—mostly due to the inflows of capital that would result from index funds, ETFs and other managers that track the MSCI EM benchmark. A key consideration for any benchmark index is that it needs to be liquid enough for widespread use by a variety of market participants around the world; restrictions of any kind are a problem. Chinese officials obviously were hoping for the index’s inclusion for further global legitimacy, as well as to boost returns for the A share market, which is one of the worst-performing (-40%) over the past 12 months.

U.S. bonds gained slightly as yields ticked slightly lower on the week with the Fed’s non-action, with treasuries leading credit. High yield lost ground during the week, coming in at the bottom in terms of performance, losing nearly a percent. Foreign developed market bonds experienced a strong week due to a weaker dollar and as yields moved sharply lower in Europe—the German 10-Year Bund hit a negative yield for the first time, alongside Brexit concerns. Emerging market bonds were mixed, but generally lost ground.

U.S. real estate bucked the negative equity trend by coming in positively for the week, no doubt helped by the Fed’s non-action and cautious language, which removes a key risk for REITs of rising rates. Year-to-date, domestic real estate has continued to be one of the better-performing segments in asset allocation portfolios. Foreign real estate, on the other hand, lost several percent on the week, in keeping with challenged sentiment of foreign equities in general.

Commodities lost ground on the week, as positive results from precious and industrial metals, as well as the agriculture sector, were offset by price declines in crude oil, which vacillated by a few dollars in the upper $40’s to end at $46.60. Production is being restored to several areas of recent outages, such as Canada and Nigeria, which led to concerns over the boost in new supply.

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 13, 2016.

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