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Weekly Review - March 12, 2018

Weekly Review - March 12, 2018

Guest Post - Monday, March 12, 2018


Economic news for the week included a slight decline in the still-strong non-manufacturing ISM index, and a deterioration in the trade deficit, while the employment numbers for February showed strong labor growth yet a tempering in wage growth pressures that have worried markets.

Equity markets gained in the U.S. and Europe with positive economic data and hopes that tariff talk will be tempered somewhat. Bonds were mixed, with interest rates ticking slightly higher and the U.S. dollar little changed. Commodities gained slightly along with a slight rise in oil prices.

Economic Notes

(0) The non-manufacturing ISM index for February declined by -0.4 of a point to 59.5, a less severe drop than the 59.0 expected. New orders and business activity both increased by several points during the month, ending in the low 60's; employment fell more sharply by nearly -7 points to the lowest level in several months, but remained expansionary in the mid-50's. Supplier deliveries were little changed and remained expansionary; prices paid also pulled back a bit. Despite the decline for the month, this measure—at the cusp of 60—continues to show a strongly expansionary path.

(0) Factory orders in January fell -1.4%, which was in line with expectations. Core capital goods shipments were revised down slightly for the prior month; however, orders were revised higher. Durable goods orders were revised up a tenth to a decline of -3.6%, while manufacturing goods inventories gained +0.3%.

(-) The trade balance for January rose to -$56.6 bil., larger than the expected -$55.0 bil., and reaching the largest deficit size of this business cycle. As the level of imports didn't change for the first time in several months, exports fell by over -1%, due to a sharp decline in goods exports. This is, of course, prior to recent tariff announcements, which, depending on the follow-through and severity, could certainly play a role in future trade numbers.

(0) Initial jobless claims for the Mar. 3 ending week ticked back up by +21k to 231k, surpassing the 220k level expected, but remaining at a historically very low level. Continuing claims for the Feb. 24 week, however, declined dramatically by -64k to 1,870k—far below the 1,920k expected. No special conditions were reported, with the largest activity in the largest states, as is normally the case. Conditions remain very favorable through the lens of this measure.

(+) The February ADP employment report showed an increase of +235k jobs, which surpassed the consensus expectations of +200k. January jobs were also revised higher by +11k, adding to the strength of the report. Services jobs rose by +198k, with leading areas including leisure/hospitality, professional/business services and trade/transports/utilities. Goods-producing jobs rose by +37k, with gains in construction and manufacturing. Recent months have shown some correlation between this measure and the government employment report released a few days later each month, but the relationship is not precise enough to be completely predictive.

(+) The employment report for February was another strong showing, although some inflationary pressures from prior months were revised downward to more tempered levels.

Nonfarm payrolls rose by +313k jobs, besting the +205k expected by consensus and the fastest pace in almost two years. It appeared weather-affected jobs experienced the sharpest gains, as construction and retail gained sharply, along with the segments of business services, financial and local government; on the negative side, technology and federal government employment declined. Despite the strong headline figure, removing the seasonally-affected segments (prone to choppiness and potential reversal) results in a less dramatic increase.

The unemployment rate was unchanged at 4.1%, with the labor force participation rate shooting up by three-tenths to 63.0%—on pace with household employment rising by +785k. Similarly, the U-6 underemployment rate was flat at 8.2%.

An especially-watched metric this month, due to last month's inflation scare, average hourly earnings rose +0.1%, half of the growth expected. Ironically, data that led to the previously-sharp year-over-year gain from last month has been revised down, resulting in a drop of nearly a half-percent to +2.6%. Many have questioned the potential for 'embedded' wage gain pressures in the system, as is typical for later stages of the business cycle and such low unemployment rates; however, it's also been noted that, as wages did not as fall as far as they could have during the Great Recession years a decade ago, there was a lower trajectory of recovery required, and less of an overall imbalance. Time will tell how this unfolds in coming quarters.

The length of the average workweek ticked back up a tenth to 34.5 hours, following a few months of weather-related changes. Earlier in the week, the final report on nonfarm productivity for Q4 was revised up a tenth to an unchanged level. Unit labor costs for Q4 gained at a +2.5% annualized rate, which represents a half-percent revision from the original release, and is similar to other measures in terms of pace.

(0/+) The Fed Beige book covering the period of January through February showed a fairly consistent story from prior editions in 2017—modest to moderate growth across the country. Consumer spending was affected by weather in several regions during the period, with auto sales results looking a bit spottier, at flat to weaker. Housing activity appeared to grow modestly, with some wrinkles due to difficulty in labor availability and materials price inputs; on the other hand, commercial real estate activity looked to pick up since last year. Manufacturing looked to grow nationwide, as did employment, despite the presence of labor shortages in a few areas and industries. Despite concern in a few areas about trade treaties, growth appeared to be on a similar pace to that of recent months.

Market Notes

Period ending 3/9/2018

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BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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U.S. stocks continued their see-saw pattern, with prices ending positively for the week, with help from discussions of some possible paring back and/or exemptions for key countries affected by recent tariff talk, as well as a strong employment report for February on Friday—which also dialed back inflation fears. From a sector standpoint, industrials, financials and technology led the way, with +4% gains, while utilities lagged with gains under a percent.

Foreign stocks experienced a positive a week as well, with European and U.K. equities performing just under those of U.S. stocks, and Japanese stocks coming in behind. Sentiment again followed that in the U.S., with areas of more uncertainty focused on—to no surprise—potential areas affected by the President's recent tariff talk. The ECB meeting last week resulted in no policy changes, but did include an increase of growth estimates and removal of the language indicating that QE would be expanded if necessary. Some concerns continue about the removal of the ECB's 'easing bias' as the first step in stopping quantitative easing altogether as the European economy improves, toward eventual policy tightening—although the continent remains at an earlier point in the business cycle than the United States. The BOJ also left rates unchanged, but hinted that the policy could be tightened before their 2% inflation goal is reached. Other Asian regions gained upon hopes of a U.S.-North Korean meeting to defuse geopolitical tensions in the region, which has been a significant wildcard, aside from the well-discussed fears of trade restrictions.

U.S. bonds ticked down slightly on the week, as interest rates moved further upward as the employment report rendered a March Fed rate hike highly likely. Investment-grade credit and government performed similarly, while high yield and floating rate bucked the trend with slightly positive returns. Foreign bonds experienced a similar week, with flattish local returns pulled down a bit by a stronger dollar in developed markets. Emerging market bonds fared a bit better along with most risk assets.

Commodity indexes ticked up for the week, as energy and precious metals gains outweighed declines in industrial metals and agriculture. In the energy sector, West Texas crude oil bounced around a bit before rising just over a percent on the week to just over $62, with little news to move the needle dramatically. However, it seems short selling pressures could be returning to oil markets, with higher production upcoming, which would boost supplies and lower prices, all else equal.

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 March 5, 2018.

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