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Weekly Review - March 13, 2017

Weekly Review - March 13, 2017

Guest Post - Monday, March 13, 2017


Economic data for the week was highlighted by strong employment reports from both ADP and the official government report on Friday, which raised or solidified the likelihood of a FOMC interest rate increase next week. Other peripheral manufacturing reports were generally neutral.

Equity markets in the U.S. fell back for the first time in a while, while European stocks gained due to stronger results and ECB language. Bonds suffered due to higher interest rates, as did real estate. Commodities experienced a poor week from a sharp decline in oil prices due to higher inventories.

Economic Notes

(+) The final release of factory orders for January rose +1.2%, which beat forecasts calling for a +1.0% gain. Durable goods rising +2% in an upward revision played a role, as did a smaller decline in core capital goods orders.

(-/0) Wholesale inventories fell -0.2% for January, which was a tenth worse than expected, but December was revised higher a bit to offset things, resulting in little change on net. Inventory-to-sales ratios were flattish at 1.29, which is down from 1.37 a year ago.

(-) The trade balance for January widened by over -$4 bil., a fair amount, to -$48.5 bil., but this was largely expected by consensus. Real goods exports rose +0.4% for the month, while real goods imports rose +2.0%. Interestingly, it seemed that the timing of the Chinese New Year may have played a role in the quicker imports and delay in exports seen in the report; consequently, that means the effects are transitory and shouldn't be as extreme as they look.

(-) Import prices for February rose +0.3%, which surpassed the +0.1% increase expected; additionally, prices for January were revised upward by +0.2%. Imported petroleum prices fell by -0.7% for the month in a reversal of the prior months, while ex-petroleum prices (including consumer goods and industrial supplies/materials) gained +0.3%, accounting for all of the increase. Year-over-year, consumer prices are lower than they were a year ago, while industrial supplies/materials are substantially higher, on the order of over +20%.

(+) The ADP employment report of private payrolls came in at an exceptionally strong +298k for February, far surpassing the forecast +187k expected, and the strongest gain in three years. This is in addition to some positive revisions for the prior month. Service-providing jobs gained by the usual overwhelming majority, up +193k, with strength in professional/business services, education/health and leisure/hospitality. Goods-producing sectors provided the strongest improvement, however, up +106k, with construction and manufacturing leading the way.

(-) Initial jobless claims for the Mar. 4 ending week rose from multi-decade lows the prior week by +20k to 243k, higher than the expected 238k. Continuing claims for the Feb. 25 week came in -6k lower at 2,058k, which was just below the expected 2,062k. Due to some unique state by state activity such as auto plant shutdowns, etc., last week's results may have been lower than 'normal', so a bounceback higher isn't too surprising. Levels overall remain reflective of a strong labor market.

(+) The February employment situation report was a decent one, and certainly solidified expectations of the Fed taking interest rate action next week. While a good report on the surface, the details weren't outstanding, based on which economist is being asked, with either seasonal adjustments (which Feb. is notorious for, mainly due to hit-or-miss weather events) or other anomalies with a wide room for error.

Nonfarm payrolls rose by +235k, which was higher than expectations calling for a +200k gain. Additionally, the prior few months were positively revised by +9k. Jobs in the production of goods rose by +95k, which was the fastest pace seen since 2000. Construction was a big part of this, gaining +58k, in addition to mining/logging, which rose +9k (significant for such a small segment). Private services provided the bulk of employment, per typical, up +132k, with business services, healthcare, education and leisure/hospitality leading the way; retail, however, lost significant ground, which was a negative surprise but in keeping with challenging prospects for that industry. It turns out, according to the NOAA, that last month was the 2nd warmest February on record (since 1895), which helps explain quite a bit of the construction bounce-back, and likely also helped leisure and other industries as well. Federal government jobs inched slightly higher, despite a hiring freeze.

The unemployment rate fell a fraction of a percent to 4.7% for the month, compared to a level of 4.9% a year ago—so this metric has continued to improve, albeit at a slower rate as the cycle has drawn on. The U-6 underemployment rate also declined -0.2% to 9.2%, to a new low point for the recovery. The labor force participation rate came in at 63.0%, which was just a tenth higher and continues to show the impact of demographics. The household survey measure of employment came in at +493k, which was also quite strong.

Average hourly earnings rose +0.2% for the month, which fell short of the +0.3% increase expected, with the year-over-year rate moving higher to +2.8%. Earlier in the week, nonfarm productivity was kept unchanged for Q4 at +1.3%, despite hopes for some improvement. Unit labor costs were revised higher to an annualized rate of +1.7%. There continues to be mixed results for wage growth, although there has been some firming apparent.

Read the "Question of the Week" for March 13, 2017

Is the bull market really 8 years old?

Market Notes

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BarCap U.S. Aggregate



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U.S. stocks suffered their first losing week in several months, ending up down about a half-percent, while small-caps fared far worse, down -2%. Investors generally digested what appears to be a longer timetable for some of Trump's fiscal policies as well as the impact of a Fed that could be moving interest rates upward sooner than expected—next week, as opposed to June. From an industry standpoint, 'growth' sectors technology and healthcare ended the week with rare positive returns, while energy lagged by the largest degree due to sharp declines in oil prices during the week.

Foreign stocks outperformed U.S. issues, with positive results in Europe enhanced by a weaker dollar, and even better local results in Japan pulled down by a stronger dollar. The ECB kept rates on hold during their meeting last week, with a nod to stronger economic and inflation data emerging out of Europe, which kept the tone on the more bullish side with an implied continued removal of stimulus; this was all despite continued concerns over upcoming elections. Emerging markets generally lost ground, with sharp losses in commodity-sensitive Brazil and Russia, especially as economic growth for the former contracted a bit more than expected.

U.S. bonds suffered on the week, with losses across the board as investors anticipated higher interest rates brought about by a faster-moving Fed. The longest-duration bonds, as usual, suffered most, while credit underperformed governments for the first time in a while. High yield, in particular, suffered more than investment grade as spreads widened. The dollar was little changed for the week, with foreign issues in developed markets largely down similar to U.S. investment grade as rates ticked higher following hawkish ECB comments and a bit poorer of a result for emerging market bonds in USD-terms (local fared decently).

Real estate fell back sharply on the week on the heels of higher interest rates, which is a common shorter-term response, with losses centered on retail assets. REITs overseas fared a bit better, albeit still negative.

Commodities indexes fell dramatically last week, with the GSCI down over -5%. All sectors were down to varying degrees, but energy fared the worst as oil prices fell dramatically, by -9% to just over $49/barrel, the first sub-$50 reading since mid-December and the largest three-day decline in a year since the bottoming of prices in Feb. 2016. Larger inventories were the primary culprit, as well as a higher Baker Hughes rig count, which implied more production in the pipeline. The primary concern is focused on how OPEC production cuts will factor in versus the new force of North American shale output.

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 6, 2017.

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