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Weekly Review - June 5, 2017

Weekly Review - June 5, 2017

Guest Post - Monday, June 05, 2017


Economic data for the week was generally flat to a bit weaker, with decent results from manufacturing surveys, continued mixed housing data, and a poorer-than-expected May employment situation report.

Equity markets gained both in the U.S. and overseas, as did bonds, with a decline in interest rates and falling dollar, which benefited foreign securities. Commodities declined along with crude oil due to high inventories and an increase in anticipated drilling activity.

Economic Notes

(+) The ISM manufacturing survey for May rose a tenth of a point to 54.9, slightly surpassing expectations of no change. The new orders, employment and inventory components all experienced increases, while production declined a bit but remained in the expansionary zone. Overall, this pointed to continued progress on the manufacturing front, despite some month-to-month volatility in the survey numbers. While this represents an increasingly smaller part of the economy (losing ground to services), manufacturing information is useful in tracking broader economic growth and changes in growth. The pace has slowed a bit from earlier in 2017, but remains moderately strong, as implied by the mid-50's number.

(+) The Chicago PMI rose by just over a point to 59.4 to the highest level since late 2014. Four of the five primary components rose, including production, employment and inventories. The exception was a decline in the pace of growth of new orders, which declined but remained in over-60 territory&signifying strong expansion. For the month's special question, firms were asked if they planned to ramp up hiring over the summer, with about half of firms responding in the affirmative.

(-) Construction spending for April declined -1.4%, which disappointed relative to the expected +0.5% gain; however, revisions for prior months helped temper the weakness. Both private residential and non-residential declined a bit for the month, but were surpassed by weakness in public spending (primarily in residential, which was down over -15%).

(0) For April, personal income and personal spending each rose +0.4%, in keeping with expectations, which kept the savings rate at an unchanged 5.3%. PCE price inflation rose +0.2% on a rounded basis on both a headline and core basis. This brought the year-over-year change to +1.7% for headline and +1.5% for core PCE. The difference between the PCE and regular CPI is a matter of composition, but as the Federal Reserve tends to track the PCE, inflation has run under their target for much of the past several years.

(+) The S&P/Case Shiller home price index for March experienced a gain of +0.9%, matching expectations, with gains led by Minneapolis, Detroit, Seattle and New York. Year-over-year, the increase amounted to +5.9%, which remains very strong.

(-) Pending home sales again fell, in April by -1.3%, compared to an expected gain of +0.5%. The bulk of the four key regions saw weakness, led by the Midwest which declined -5%, while the West experienced gains of +6%. Pending sales tend to lead 'existing' home sales by a few months, which is why they're even looked at, and a lackluster environment persists.

(-) The index of consumer confidence for May fell again, this time by -1.5 points to 117.9&below expectations calling for 119.5. The primary decline occurred in future expectations, while assessments of present conditions rose a bit, as did the labor differential which measures the ease or difficulty in finding employment.

(+) The ADP employment report for May showed a gain of +253k jobs, outperforming the +185k expected. Within the total, service jobs rose +205k, primarily in professional/business services, education/healthcare and trade/transports/utilities. Goods-providing jobs also grew, by +48k, led by construction. There isn't always a direct correlation between the ADP report and government jobs report later the same week, but lately these have been generally correlated with the ADP report outperforming.

(-) The employment situation report for May was a bit disappointing, compared to the lofty expectations set earlier in the week. However, it didn't appear weak enough to derail the high chances for another Fed rate hike in June.

Nonfarm payrolls rose +138k, falling short of the consensus estimate of +182k; additionally, there was a downward revision of -66k for several prior months, which was also a negative. On the positive side, education/health employment rose +47k, and leisure/hospitality gained +31k jobs. However, construction only gained +11k, manufacturing jobs fell by -1k, and government jobs declined by -9k, mostly on the state and local side.

The unemployment rate ticked down a tenth of a percent to 4.3%, which beat expectations calling for no change and represents the lowest level in 16 years. However, the labor force participation rate fell -0.2% to 62.7%, which was not as positive. The U-6 underemployment rate also declined, by -0.2% to 8.4% which is a low point for this recovery cycle. The household survey showed a -233k drop in jobs, which ran counter to recent months of relative strength. Average hourly earnings for May rose +0.2%, which was on par with expectations, and took the year-over-year change to +2.5%. Average weekly hours held steady at 34.4.

(0) Initial jobless claims for the May 27 ending week rose +10k to 248k, compared to an unchanged 238k expected. Continuing claims for the May 20 week ticked down by -9k to 1,915k, just below the 1,920k expected by consensus. There were no anomalies noted by the DOL but some auto plant shutdown activity in certain states may have been behind the slight rise.

(0) The Fed Beige Book of anecdotal economic activity showed continued modest-to-moderate growth across the nation, in keeping with recent trends. However, several districts reported a flattening or even slowing of growth, which was a change from prior reports. Consumer spending contributed to this softening, with auto sales down and flattish retail sales; at the same time, housing appeared decent in a variety of districts. Manufacturing continued to show moderate strength, including the energy sector, which has bounced back from low levels of activity a year ago. Employment conditions continued to improve, with tightening markets nationwide, particularly in areas needing skilled workers. Overall, this was a moderately good report, with some offsetting areas of strength and weakness.

Market Notes

Period ending 6/2/2017

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U.S. Treasury Yields

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In a Memorial Day-shortened week, U.S. large cap stocks rose about a percent, with a stronger recovery from small-caps, which have lagged over the last several weeks, while overall volumes remained low for a pre-summer week. In fact, the DJIA, S&P 500 and Nasdaq all reached new highs again. For the week, health care and telecom ended up with the biggest gains, while energy stocks fell over -2% along with another decline in oil prices. Per FactSet, 99% of S&P companies have now reported their 1st quarter earnings, at a combined growth rate of +14% year-over-year (a rate that has been ticking slowly higher as numbers have been coming in), which is the highest since the 3rd quarter of 2011, and quite a bit better than the +9% predicted at the beginning of the reporting season in March.

Developed market foreign stocks outperformed U.S., with stronger gains in both Japan and Europe. Europe has continued to experience a general improvement in sentiment, with very strong results year-to-date and ten straight weeks of investor inflows (which tend to follow performance). Japanese data was mixed, but signs emerged of some improvement in corporate results and PMI indexes. Emerging market stocks ended the week relatively flat, with results generally along the lines of developed markets except for Brazil and Russia, which lost significant ground, despite the former ending up with the first positive real GDP result in two years.

U.S. bonds fared well on the week, with a decline in bond yields across the curve, largely as a result of the disappointing jobs report on Friday. Credit outperformed governments, although investment-grade provided higher returns than high yield corporates. Foreign bonds fared well generally due to a falling dollar over the week of nearly a percent.

Real estate generally saw gains, with international REITs in Europe and Asia sharply outperforming those in the U.S., and helped by a weaker dollar. Domestically, industrial/office, residential and healthcare experienced strong gains on the order of +2%, while retail REITs suffered again.

Commodities declined again, led by weakness in crude oil, which fell over -4% to under $48/barrel. Last week, it was the Trump decision to withdraw from the Paris Climate Accord that buoyed hopes and fears of ramped-up U.S. oil drilling, which could exacerbate the already-existing oil inventory glut. Natural gas also lost nearly -10%. Industrial metals also lost some ground, while precious metals gained on the week with lower bond yields, bringing the gains in 2017 for the latter to +10%. Sugar prices declined sharply, due to fears of a continued surplus and lagging demand&the commodity is down -30% year-to-date already.

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 May 30, 2017.

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