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Weekly Review - March 2, 2015

Weekly Review - March 2, 2015

Guest Post - Monday, March 02, 2015


  • Economic data was mixed on the week, with housing figures relatively flat on net, inflation coming in weaker on a headline level due to the impact of lower energy prices, and tempered results in other areas. Adjusted GDP results for Q4 of 2014 notched downward a bit, which reflects this slower patch.
  • Equities gained on the week, with foreign stocks outperforming domestic. Bonds generally experienced a positive week upon a retraction in longer-term interest rates. Although oil prices were mixed to lower, commodity indexes gained upon the heels of higher gasoline prices.

Economic Notes

(+) Durable goods orders for January rose +2.8%, which bested the forecasted gain of +1.6%. Removing volatile transportation data from the equation (higher civilian aircraft orders, which tend to be bunchy) lowered the gain to +0.3%, which is in line with the tempered trend of recent months. Durable manufacturing inventories rose at a similar +0.4% rate, and core capital goods orders rose +0.6% for the month, which was a few tenths better than forecast.

(-) The Chicago PMI index fell -13.6 pts. to 45.8 for February, the first contraction in two years and lowest reading in five years. The segments of production, new orders, order backlogs and employment all suffered double digit losses. The narrative surrounding the report referenced harsh winter weather and the impact of the West Coast port strike as potential catalysts, so it may take another month's report to gauge if a trend has developed.

(0) The January Consumer Price Index fell -0.7%, a tick lower than forecast. The energy- and food-free core CPI rose +0.2%, which was a tick higher than expected. The implied difference takes into account an almost -20% drop in gasoline prices over the month, while the core includes higher pricing in shelter (both rent of primary residence and owners' equivalent rent) which gained +0.3%. Transport services also rose. Year-over-year, which includes the extreme decline in energy prices, headline CPI is actually a negative -0.1% (below zero for the first time in 5 years), while core is a more 'normal' +1.6%. The core remains below the Fed's target and obviously the headline number is deflationary—even if it doesn't last more than a month. While crude oil has stabilized over the last few weeks, gasoline prices have undergone a much wilder ride (noted in more detail below under the commodities discussion), retracing dramatically upward in February, so this headline impact is likely to reverse for the February release.

(+) The Case-Shiller home price index for December showed gains of +0.9%, beating forecast by three-tenths of a percent. All 20 cities in the index showed gains, with the largest occurring in Denver, San Francisco and Seattle—all rising over +1%. Year-over-year, the index is up +4.5%.

(-) Existing home sales for January came in below expected, falling -4.9% to a seasonally-adjusted 4.82 mil., compared to a median forecasted decline of -1.8%. Single-family homes and co-ops/condos both fell, and the drop was experienced in all four national regions. At the same time, there appears to be a steadily increasing number of owner-occupier buyers as opposed to investors as the time progresses (non-occupier investors falling from 20% a year ago to 17% last month), as well as more first-time buyers and fewer all-cash buyers—again, signifying less investment participation in favor of the more desirable trend of those buying their homes to live in. Distressed sales have also been steadily declining, as one would expect with stronger employment.

(+) New home sales for January fell just a bit, by -0.2% to 481k, which was a decent result compared to the expected -2.3% decline. Sales improved in the Midwest and South, were flat in the Western region and fell in the Northeast (perhaps due to more extreme weather effects that can be difficult to adjust for).

(-/0) Pending home sales, which measure pre-close contract signings, for January rose +1.7%, which were positive but fell a bit shy of the forecasted +2.0%. Sales figures came in higher in the South and West regions, were little changed in the Northeast, and fell in the Midwest.

(-) The Conference Board index of consumer confidence fell over -7 pts. in February to 96.4, disappointing to expectations calling for a reading of 99.5. Assessments of the present situation and labor differential (jobs being plentiful versus hard-to-get) fell, and forward-looking expectations declined even more so. Gasoline prices have also reversed higher in recent weeks, which may have played a role in this touchy survey.

(+) The final U. Michigan consumer sentiment survey for February showed some improvement from the initial estimate, ending at 95.4 compared to a forecasted 94.0. Consumer feelings about current conditions represented the primary piece of improvement, up +4 points, while future expectations moved up a partial point. Inflation expectations for the 1- and 5-10 year-ahead periods were generally unaltered at 2.7-2.8%, which is just below the long-term average for this and in keeping with weaker headline inflation that consumer opinions are often anchored to.

(-) Initial jobless claims for the Feb. 21 ending week rose by +31k to 313k, which disappointed relative to the 290k estimate. Continuing claims for the Feb. 14 week rose to 2,401k, which was just above consensus of 2,394k. The DOL reported no special factors, even despite weather effects. We are curious about the claims process and how this has been impacted over time by modernization effects, such as electronic reporting online (vs. mail or showing up in person), which could naturally serve to lessen the impact of weather events, but have seen scarce research on the topic.

(+/0) The second estimate of fourth quarter GDP was revised downward by -0.4% to +2.2%, which was actually less than consensus, where a cut to +2.0% was expected. The changes were spread throughout the report, as consumer spending was revised down a bit and government and business investment were revised upward (the latter being a positive surprise). Estimates for the current quarter remain in the 2.5-3.0% range, with improvement expected in later quarters of this year.

Janet Yellen provided her semi-annual monetary policy ('Humphrey-Hawkins') testimony mid-week to the Senate Banking and House Financial Services Committees. There weren't really any surprises, as much of the words were similar to the normal Fed narrative we've become accustomed to. What the market's been looking for are additional 'hints' about hidden dovishness or hawkishness that could be wrapped in an off-the-cuff comment or answer to a legislative question, but there didn't seem to be much of that. There is a precedent for the close watch of language, though, as previous comments put a false sense of timeliness into the assumptions—which were later tempered into more of a dovish tone. On the contrary side of this testimony, St. Louis Fed President James Bullard came out with comments stating the strong dollar was having only a marginal impact on monetary policy and the economy, and the Fed should drop its reference to 'patience,' which may already be in the cards. Interestingly, Congress has expressed a moderate degree of interest in tightening the reins of the Fed, which could threaten its independence and tilt decisions towards political aims—although such a change in legislation remains unlikely. Independence of a central bank is a critical tenet, and legislative oversight could threaten this by injecting subtle or blatant biases.

For interest rates, the reality has been, and continues to be, data-dependent, with the struggle between a need to remove emergency low rate conditions and fears of strangling a relatively slow/moderate recovery by raising rates and (mostly) instigating rate hike fears too soon, that could choke off things like loan demand. Unfortunately, they've become somewhat boxed into a corner with their overly precise language (consider this almost the opposite of the frustrating vagaries of the Greenspan administration years ago).

Market Notes

Period ending 2/13/2015

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BarCap U.S. Aggregate



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U.S. stocks ended up mixed on the week with low volatility and few newsworthy events to move the needle dramatically in either direction, other than assumptions about Janet Yellen's interest rate 'patience' pushing things in a dovish direction. From a sector standpoint, consumer staples and discretionary stocks outperformed, while energy and industrials lagged with negative returns—energy due to lower oil prices as inventories rose.

Foreign stocks generally gained, and outperformed U.S. issues, with developed markets leading the way (both Europe and Japan, although the U.K. also gained). The start of the ECB's quantitative easing program perhaps boosted sentiment, while the Japanese economy has experienced stronger industrial production and export reports. In emerging markets, Latin America led while Russia and Turkey again served as the laggards. China performed decently as additional stimulus in the form of lower interest rates was announced.

Bonds declined on the week with a dovish tone set from Janet Yellen during her testimony, causing bond investors to breathe a sign of relief for another week. Long bonds fared best, with rates much lower on the long end of the curve, but most fixed income ended up in positive territory. Developed European bonds were higher as investors prepared for the ECB's quantitative easing to begin, while 5-year German bond yields ended up in the negative with deflationary concerns and hopes for further easing. The dollar was about a percent stronger against developed market currencies, but flat on net versus emerging markets. In EM, further Russian downgrades as well as a major downgrade of two notches for Petrobras in Brazil raised spreads although the inflows to EM debt were the largest in a year last week.

Real estate markets performed in line with equities, with REITs from the U.K. and developed Europe gaining ground by up to several percent, while U.S. REITs fell by just over a percent. European REITs are naturally tied to business activity, so it's hoped that fundamentals—like tenant demand and rents—will improve with additional stimulus. On lower interest rates, mortgage REITs actually ended up in the positive, while apartment and health care REITs lost the most ground.

Commodity indexes gained just over a percent on the week, despite dollar strength. Unleaded gasoline gained over +5% (making the year-to-date reversal upward over +35%)—first quarter spikes in price are typical as production falls towards early spring in anticipation of routine maintenance and changeovers to summer blend gasoline, but a recent explosion in a California refinery didn't help. The price of West Texas crude bounced around within just a few dollars during the week, before finishing just below $50/barrel.

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 February 23, 2015.

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