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Weekly Review - June 8, 2015

Weekly Review - June 8, 2015

Guest Post - Monday, June 08, 2015

Summary

  • Economic data last week was mixed to decent, with the headline ISM manufacturing figures, construction spending and vehicle sales coming in better than expected. The employment situation report was also stronger than anticipated.
  • Equities experienced a more difficult week, with negative returns throughout the globe. Rising interest rates were a concern, affecting bond prices dramatically. Commodity index returns were down on net, with crude oil down slightly.

Economic Notes

(+)The ISM Manufacturing report for May came in a bit better than expected, rising +1.3 points from April to 52.8—and beating consensus expectations calling for 52.0. Underneath the headline figure, production fell by almost -2 pts., as did new export orders, but new orders overall and employment gained. More importantly, all sub-components remained above the 50 mark, noting continued expansion compared to April. Anecdotal comments in the survey were optimistic, with hints of improvement in demand. Prices paid also rose to a near-neutral 50, which is a bit of a change from recent months.

(-) The ISM non-manufacturing index for May fell -2.1 pts. on the month, to 55.7, to its lowest level in a year. Business activity, new orders and employment all fell by several points on the month. Anecdotally, however, comments were more positive.

(0) Personal income for April rose +0.4%, outperforming expectations by a tenth of a percent. For the most part, gains in interest/dividend income were the primary catalyst as wages/salaries grew at about half that rate. Therefore, the report was considered a bit weaker than it could have been. Personal spending was flat versus an expected growth rate of +0.2% for the month; apparently, lower spending for utilities was the culprit, which isn’t necessarily a bad thing on the consumer wealth side. Net-net, these impacts brought the overall savings rate up almost a half-percent to 5.6%. Some have been surprised by the lack of spending in recent months, and concerns get back to several key points: energy price declines take time to filter through, consumers are worried that declines won’t last (so don’t act upon them in buying other discretionary items), we remain in a macro ‘deleveraging’ where consumers remain emotionally and financially scarred from the Great Recession—causing a hesitancy in exuberant buying, and, the more difficult to measure facet, secular demographic changes are affecting generational buying behavior.

(0) The PCE price index was unchanged, contrary to expectations of a +0.1% increase; the core version did show a slight gain of +0.1%. Year-over-year, the headline and core gained +0.1% and +1.2%, respectively, so in a similar pattern to CPI, albeit in a tighter range. Some of this is due to calculation differences and compositional weightings, as we have about 3-4 different official metrics to measure inflation at this point. The important thing about the PCE price index is that that it’s a favorite of the Fed in their inflation assessments.

(+) Construction spending for April gained +2.2%, beating forecasts calling for +0.8%. Residential only gained a half-percent, while the non-residential segment rose +3%, driving the overall growth figure. Strength was especially seen in the in the highway/street construction segment, which rose by +9% in its first positive showing in months.

(-) Factory Orders for April fell -0.4%, relative to expectations for a slight -0.1% decline. This was mostly due to lower durable goods order revisions lower, while non-durables gained slightly. Core capital goods shipments were revised down from +0.8% to +0.5% as well.

(+) Total vehicle sales in May bounced up +7% from last month to 17.7 mil. seasonally-adjusted annualized units, beating expectations by 400k or so. This happened to be the strongest monthly figure in a decade, although a GM discount campaign seemed to have spurred things a bit higher than normal. Interestingly, vehicle sales are an area that has experienced a good deal of improvement, following several years of pent-up demand for vehicles being turned over at below-replacement rate pace and the average vehicle age bumping up incrementally (some of this is improved quality, no doubt, which has to be discounted). Gasoline prices tempering also plays a role typically, and we’re always intrigued by how quickly this phenomenon translates to buying of larger SUVs and other gas-thirsty vehicles.

(+) The trade deficit narrowed in April, by a larger amount than expected, from March’s wide -$50.6 bil. to -$40.9 bil. Overall, exports rose +1%, while imports fell -3%. Some of this effect appears to be due to the resolution of the West Coast port strike issue that allowed higher volumes of trade activity to register.

(0/+) The ADP employment report for May showed a gain of +201k, which was just over forecast of +200k. Trade/transports/utilities jobs gained (by +56k), while professional/business services pace slowed a bit (losing -7k to +28k). As we’ve noted so many times, this is an interesting and partially-useful input, but offers sporadic tracking versus the actual government report out Friday—although, when later revisions are included, it matches a little better.

(+) Initial jobless claims for the May 30 ending week fell to 276k, which was -2k below expectations. Continuing claims for the May 23 week fell as well, to 2,196k (vs. 2,207 expected) to hit a new recovery low point. No unusual factors were reported, so these relatively ‘clean’ figures continue to show labor market improvement.

(+) The big employment report for May came in a little better than expected. Nonfarm payrolls rose +280k, outperforming expectations calling for +226k. Key increases took place in leisure/hospitality, up +57k, as well as retail (gaining over +30k) and health/education, up by +74k. On the negative side, mining (which includes oil/gas) fell by -18k, which was largely expected. The unemployment rate rose a tenth to 5.5%, based on the labor force participation rate rising a tenth to 62.9%. The U-6 rate of ‘underemployment’ was flat at 10.8%.

Average hourly earnings rose +0.3% for the month, which outperformed forecasts by a tick. Year-over-year, earnings have gained +2.3%, which is slightly higher than core inflation, but within reasonable bounds. Another area that’s being watched for signs of wage inflation shows that production/non-supervisory earnings rose +2.0% year-over-year, which implies weakness compared to supervisory employees. Average weekly hours were flat at 34.5.

(-) Lastly, the Fed beige book prepared for the June meeting, which contains regional economic anecdotes, didn’t change much from the April edition. Just over half of the 12 Fed districts described an expansion at a ‘modest’ to ‘moderate’ rate. The key notations alluded to additional weakness in oil/gas activity, which is always especially pronounced in the Dallas district, but has grown into other Northern areas tied in with the shale boom. On the more positive side, retail sales, specifically in vehicles, has improved nationwide, and manufacturing (ex-energy) was flat to slightly higher. A strong dollar was also mentioned as an export headwind, however. Housing and commercial real estate appeared to improve in many areas. Interestingly, while weather isn’t always notated other than cold snaps, rain was mentioned as a positive for several growing areas other than California, where drought conditions remain severe. There were also some bird flu concerns with poultry farmers, which was mentioned in a few other reports during the last week or two and is wreaking havoc on the chicken, turkey and egg industries, which also can bleed over into food processing/baking.

Market Notes

Period ending 5/29/2015

1 Week (%)

YTD (%)

DJIA

-0.87

1.25

S&P 500

-0.65

2.56

Russell 2000

1.18

5.20

MSCI-EAFE

-1.71

6.74

MSCI-EM

-2.20

2.70

BarCap U.S. Aggregate

-1.35

-0.37

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

5/29/2015

0.01

0.61

1.49

2.12

2.88

6/5/2015

0.03

0.73

1.75

2.41

3.11

U.S. equities lost ground on the week as higher interest rates and Eurozone/Greece discussions drove sentiment, although some of the economic data releases weren’t bad. By sector, financials gained with higher rates signifying improved prospects for the banking group, followed by consumer discretionary stocks, which also performed positively; higher-yield utilities lost over -4% on the week.

Foreign stock returns were largely region specific, although the bulk were in the negative, and more so than U.S. equities. In the developed markets group, core Europe held up a bit better, with stronger retail and labor data, as did Japan, while Greece and the commodity exporters such as Russia, Australia and Chile continued to struggle along with commodity prices. Brazilian stocks bucked the trend of a bad week and their own spiral downward as better-than-expected industrial production numbers resulted in positive returns.

The euro has been recovering, which is likely due to several factors—lack of deflation and economic improvement overall (compared to recent history and low expectations). The Greek debt issue remains in the forefront, however, as a potential stumbling block, as European leaders have expressed frustration about the lack of progress in negotiations between Greek and European leadership. Expect these headlines to continue in coming weeks, unless a solution of some sort is hammered out.

Interest rates have been shooting higher in the U.S., although at a more tempered rate than some yield curves overseas. Last week, rates moved by 0.25% or more across the treasury curve, which was quite significant. Core domestic bonds suffered across the board, with losses over a percent—bringing year-to-date returns into negative territory. Floating rate bank loans and high yield help up significantly better; long (20+ year) treasuries lost -5% on the week alone, and served as a reminder about how much volatility can be hidden in certain parts of fixed income.

Foreign bonds lost ground as well, regardless of whether USD- or locally-denominated, as rates globally edged higher. German yields ticked up to 0.84%, which was 0.25% higher than a month ago (and dramatically higher than the 0.05% levels just a few months ago), dwarfed only by even sharper rises in yields in the European periphery. While the rates for 10-year Spanish and Italian debt have been hovering in the lower 2’s, not largely different from U.S. debt, Greek yields actually fell a bit over the month to 10.7%. Naturally, these issues are trading with quite a degree of credit spread. There didn’t appear to be a single catalyst to boost rates, other than the continued perception of continental economic improvement and perhaps the shorter-term investors narrowing their timelines of how attractive negative or very low interest rate-based trades happened to look.

Real estate lost ground on the week in keeping with but slightly more extreme than other equities. U.S. industrial/office experienced the best results, while foreign REITs lagged by losing several percent.

Commodities suffered another down week—with the GSCI falling a percent and a half. OPEC met late in the week, with eyes watching production target levels. But, as it turned out, no changes were made, as it appeared OPEC (led by the Saudis) is continuing a plan of hoped-for attrition in keeping prices low enough to pressure non-OPEC member producers, as well as keep players such as Iran in check through contained revenues. (The other option would be to cut production, providing immediate supply constraints and thereby likely raising prices.) West Texas Intermediate crude inched downward by almost -2% to end the week just under $60—in its range of the past several weeks. Wheat was one of the biggest gainers on the week, as excessive rainfall raised concern about crop yields, while precious metals lost the most ground. Gold and silver have flattened out in recent weeks, as higher U.S. real interest rates (the counter-weight to gold’s relative value) have kept buyers at bay. Industrial metals have continued to look spotty with China’s deleveraging, as opposed to years of build-up that boosted metals prices.

Have a good week.

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 1, 2015.

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