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Weekly Review - June 6, 2016

Weekly Review - June 6, 2016

Guest Post - Thursday, June 09, 2016


Economic data for the short week was mixed, with slightly stronger manufacturing data relative to previous months, while non-manufacturing/services weakened. Housing prices continued in an upward trajectory. However, the big government employment report on Friday was a disappointment, and could be enough to keep the Fed on hold for another month at least.

U.S. and developed foreign stocks were little changed on the week, with the mixed bag of economic data. Bond prices moved higher with a drop in interest rates and Fed action becoming less likely in June. Energy prices were little changed on the week, although other commodities gained.

Economic Notes

(+) The ISM manufacturing index for May rose to 51.3, a point above expected, remaining in expansionary territory. The odd part was that the headline figure improved, while underlying components, such as production and new orders, fell a bit—however, both remained in the over-50 expansionary zone. Employment was generally unchanged, but remained slightly contractionary, as were inventories.

(-) The May ISM non-manufacturing index, by contrast, fell more than expected, from 55.7 the prior month to 52.9—contrary to a slight drop to 55.3 expected. Most sub-components were similarly weak, including new orders, employment and general business activity—although the bulk remained in expansionary territory as did the overall index.

(-) The Chicago PMI report for May showed a decline of -1.1 points to 49.3, which dropped the bogey again into contractionary territory for the second time in six months. Under the hood, production fell by almost -7 points, as did new orders to the lowest levels in several months. Inventories also fell by nearly -12 points, which was one of the more extreme readings. On the positive side, order backlogs and employment rose. Other responses indicated that over two-thirds of participants didn’t plan to increase business investment over the coming six months, which again gets to the crux of an ongoing problem about business confidence during this recovery.

(0) Personal income for April rose +0.4%, which was on target with forecast, while personal spending rose +1.0%, which outperformed expectations by a few tenths. Wages and salaries were the key catalyst behind the income gains, while spending experienced gains in both goods and services consumption. The headline and core PCE price indexes for April rose +0.3% and +0.2%, respectively, bringing the year-over-year gain to +1.1% for headline and +1.6% for core inflation—both well under the Fed’s mandate. For the month, goods prices rose along with higher embedded energy costs.

(+) The S&P/Case-Shiller home price index rose +0.9% for March on a seasonally-adjusted basis, which was a tenth better than expected. Of the 20 cities represented, 19 experienced a gain, led by Minneapolis, Detroit and Seattle, which each gained over a percent each. Year-over-year, the rate of change is a positive +5.4%, which is a healthy clip, especially on an inflation-adjusted basis. Price indexes appear to be positively impacted by higher demand in key urban areas meeting limited supply—boosting prices for residential real estate generally. There is talk again of a housing ‘bubble’, which even if premature, could coincide with what seems to be the renewal of pre-2007 interest in home 'quick-flip' programs and similar ventures. Though, a big difference in the recent cycle is an environment of tighter lending restrictions.

(-) Construction spending for April fell -1.8%, which ran in contrast to the expected gain of +0.6%; however, several prior months were revised a bit higher by roughly the same amount as the decline. Residential and non-residential both declined by similar amounts.

(0) Factory orders rose +1.9% in April, which was largely as expected. Core capital goods orders and shipments were revised upward by about a half-percent each, while non-durable factory inventories were unchanged for the month.

(-) The Conference Board’s consumer confidence index fell by about -2 points to 92.6, contrary to an expected +2 gain to 96.3. Consumer assessments of the present situation were primarily responsible for the drop, while forward-looking expectations were also weaker, but less dramatically so. The labor differential that measures how ‘hard jobs are to get’ also declined by over a point.

(0) The ADP employment report for May showed a gain of +173k, which was spot on with expectations. Additionally, the April figure was revised upward by +10k. While there usually isn’t a major adjustment needed for these figures relative to Friday’s government employment report, the Verizon strike didn’t affect the ADP like it did the government version (more below). Otherwise, service jobs rose by +175k, with professional/business services leading (with +43k), while that number implied a small loss in manufacturing jobs by a few thousand.

(0) Initial jobless claims for the May 28 ending week fell to 267k, about -3k below consensus expectations. Continuing claims for the May 21 week ticked a bit higher to 2,171k, compared to the 2,150k expected. Unlike the past few weeks, no unusual anomalies were reported and claims levels remain at very low levels.

(0) The Friday government employment situation report fell far short of expectations. The most significant ramification of the report is concerning the Fed. Despite high hopes for a rate move in June or July, probabilities have again fallen significantly, and timeframes have been possibly pushed out to July/September.

Nonfarm payrolls came in at a low +38k, compared to +160k expected. Earlier months were also revised downward by almost -60k, which is also significant. A big (and expected) part of the report was the negative impact of 35k striking Verizon workers during the survey period, although weakness persisted beyond that anomaly. Goods-producing jobs in mining, construction and manufacturing fell by -36k, which is the worst month of the recovery; service-providing jobs rose by +98k, which was down by a third from April. Winners here included employment in education and health care, as well positions in government. How can they get this so wrong? Well, it’s important to remember the margin for error is +/- 100k jobs each month, which widens the ‘confidence interval’ of possible outcomes significantly, and they’re also subject to large revisions in later months as better data becomes available. On the more pessimistic side, if these figures are close to accurate, this is the slowest pace of job growth in four years—that time was just preceded by another round of QE.

The unemployment rate declined by -0.2% to 4.7%, which was a positive at first glance, but was essentially due to a decline in labor force participation by a few tenths of a percent. The U-6 ‘underemployment’ rate was unchanged at 9.7%. The household survey measure gained only +26k, but was an improvement on a large decline from April. Average hourly earnings rose +0.2% for the month, which was on target with expectations, and up +2.5% from a year ago, so at a pace slightly higher than that of broader inflation. The average workweek was flat at 34.4 hours.

(0/-) The Fed Beige Book, which qualitatively summarizes activity at regional Fed banks around the nation, showed ‘modest growth’ around the nation, which was actually a bit weaker than language used in recent months. On the downside, the Midwest experienced some slowing, while the New York area was described as flattish. Consumer spending looked to rise, while manufacturing activity showed some slowing, which was not a surprise based on other data released. Employment showed improvement through tightening in the bulk of labor markets, especially for specialized positions, while jobs in energy/mining have continued to decline. Interestingly, while retail prices rose generally, it looked as if competition from online providers have kept this in check somewhat. Otherwise, inflation pressures were reported as slight, other than construction, where materials costs have inched up somewhat.

Read the "Question of the Week" for May 31, 2016:

What's the probability of the Fed taking action this summer?

Market Notes

Period ending 5/27/2016

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In a shortened week, U.S. large cap stocks ended up with flattish returns, with small caps faring better, up just over a percent. In the S&P 500, defensive utilities and health care gained the most ground on the week, while financials and energy lagged with negative returns over a percent.

Foreign developed market stocks ended up with nearly the same net result as domestic stocks, with greater Europe and Japan up slightly, and the U.K. losing ground. Emerging markets led the way, up several percent. The ECB announced no policy changes at their periodic meeting, but will commence planned corporate bond purchases this coming week. U.K. returns appeared related to a downgrade in economic growth down below 2%, in addition to continued last-minute concerns over the upcoming Brexit vote on June 23. Japanese economic data continued to show flatness, although sentiment has taken a negative turn. Unemployment remains low (at just over 3%), although there less more of an impact on deteriorating labor force participation than in other developed nations. On the emerging market side, Brazil and China led the way, with attempts by the acting president to cut government spending in the former, and the latter due to rumors that MSCI will add local ‘A shares’ to its emerging markets index in its next review in coming weeks.

U.S. bonds rose with interest rates falling across the curve, due to mixed economic data and, especially, the slow Friday jobs numbers. Accordingly, longer duration Treasuries performed best, while high yield earned small, but still positive results. Foreign bonds experienced a solid week in USD terms with the U.S. dollar declining by almost -2%, with both developed and emerging markets gaining ground in local currency terms as well.

Real estate generally rose globally with interest rates falling. In the U.S., more economically sensitive lodging, retail and healthcare REITs gained ground, while apartment/residential REITs fell by several percent, bringing the year-to-date returns in that segment into the negative. As traditional new single-family housing numbers pick up a bit, the natural loser would be apartment building projects.

Commodities earned positive returns on the week, even though energy fell backward a bit, with crude oil falling just over a dollar—but staying in the ~$49 range. Last week’s OPEC meeting in Vienna resulted in no limit on production output, despite a proposal calling for it. Agriculture was the largest contributor with large gains on the week from wheat and soybeans, while the precious metals group added a bit as well.

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 31, 2016.

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