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Weekly Review - March 20, 2017

Weekly Review - March 20, 2017

Website Administrator - Monday, March 20, 2017

Summary

It was a busy week for economic data, as the FOMC raised interest rates by a quarter-percent, manufacturing data came in decently, inflation ticked a bit higher, and housing results and labor data came in stronger.

U.S. equity markets ticked modestly higher on the week, but were outpaced by foreign stocks, and especially so by emerging markets. Bonds also experienced a decent week, as interest rates declined somewhat. Commodity prices rose with strength in metals, a weaker dollar and slight recovery in crude oil.

Economic Notes

(0) As we noted earlier in the week, the FOMC decided to raise the target funds rate by +0.25% to a range of 0.75-1.00%. Markets reacted positively following the action, due to the somewhat 'dovish'/accommodative tone taken by Yellen. The summary of economic projections and 'dot plot' didn't change radically, with growth, unemployment and inflation estimates just a tick stronger than the last meeting. Economic conditions and risks continued to be described as 'roughly balanced', which, by default, could lead to a pace of continued 'normalization' increases this year.

When such increases are driven by stronger economic growth results and labor markets as opposed to inflation fears, equity markets have been better behaved historically. Worries are surfacing that the Fed is 'behind the curve' in terms of getting ahead of higher growth and subsequent inflation, as implied by appropriate fed funds rate implied by the oft-referenced Taylor Rule (now up around 3%). However, other models point to a much lower appropriate rate, due to fundamental slow structural growth and demographics, as we've often discussed. The next topic of interest is the 'normalization' of the Fed's balance sheet, which refers to what to do with maturing Treasuries—these can continued to be reinvested as they have been in a subtle form of QE (purchases push down rates, which is stimulative) or rolled off (which removes some demand from the system so could push rates higher). Expect this process to be carefully communicated and managed as a secondary part of the Fed's rate normalization process this year to prevent any bond market surprises.

(0) Retail sales in February rose +0.1%, which was on target with general consensus estimates. On the core/control side, removing the volatile components of food, gasoline and building materials from the measure, the results were the same +0.1%, despite hopes for a tick higher. However, on the positive side, sales for prior months like January were revised higher. Gaining segments during February included non-store/online retail, which gained over +1%, while furniture and health/personal care also increased. Gasoline station sales declined over a half-percent in keeping with lower energy prices.

(+) The NY Fed Empire manufacturing survey fell by over -2 points in March to +16.4, but remained strong and came in better than the expected +15 reading. New orders and the employment component both gained sharply, while shipments and prices paid fell, but still remained positive.

(+) The Philadelphia Fed survey fell for March by over -10 points to a still-strong +32.8, and outperforming the expected +30 reading. Interestingly, while the broader index declined, the individual components gained, including inventories, prices paid, new orders and shipments—several of which to multi-decade highs. This and the NY survey continue to point to stronger manufacturing sentiment.

(0) The Producer Price Index for February rose +0.3%, which beat expectations. Higher energy and food prices helped buoy the index higher, but ex-food and energy, PPI also rose +0.3%, as trade services prices rose by +0.4, albeit being a volatile series. Higher commodity prices have trickled into producer prices and that appears to be a catalyst for the uptick in recent months.

(0) The Consumer Price Index for February showed a gain of +0.1%, which was the smallest gain in close to a year, while core CPI rose +0.2%, generally on par with expectations. Energy commodities falling nearly -3% for the month was the strongest influence on the headline number, higher prices for shelter, transportation, airfares and apparel were also significant. Over the trailing 12 months, headline and core CPI were +2.7% and +2.2% higher, respectively. These higher numbers reflect several areas of strength including commodity prices, housing and medical care/items.

(0) Industrial production for Feb. was flat, which ran contrary to an expected +0.2% increase. While manufacturing production was +0.5% higher, due to motor vehicles and mining, beating expectations, the overall figure was brought down by a -6% decline in utilities productions—for the second month in a row due to warmer weather. Capacity utilization dropped a tenth of a point to 75.4%, again due to a drop in utilities.

(+) Housing starts for February rose +3.0%, which was far stronger than the expected +1.1% gain; additionally, starts for January were revised nearly a half-percent higher. Single-family starts rose +7% to the highest level in nearly a decade, while multi-family starts declined by -4%, but are typically volatile on a month-to-month basis anyway. Building permits for the same month declined -6.2%, underperforming forecast calling for -2.6% drop. Single-family permits were stronger here as well, up +3%, while multi-family fell -22% (again, a volatile and lumpy series for the latter, due to the idiosyncrasies of apartment construction). Overall, housing metrics have picked up somewhat.

(+) The NAHB index of homebuilder sentiment rose by +6 points to 71, beating expectations for no change, and representing the highest level seen since June 2005—near the peak of the last housing bubble. All three categories experienced strong improvement, led by prospective buyer traffic, up +8 points, although current sales and future sales expectations were almost as good. Regionally, all four areas were higher, led by the Northeast, which gained sharply. Historically, this indicator has been somewhat predictive of housing starts in months looking forward.

(+) The Conference Board's Index of Leading Economic Indicators gained sharply again in Feb., by +0.6%. For the month, key positive factors included ISM new orders, interest rate spread and low jobless claims, as well as stock prices. This brought the annualized rate for the past six months to +4.6%, far surpassing the +1.6% annualized rate for the prior six month period. The indexes of coincident indicators and lagging indicators also rose, by +0.3% and +0.2%, respectively. While it's important to keep in mind that these indexes comprise data we already know, the composite and weightings have tended to be useful in reviewing economic cycles, and turning points in particular (no downturn appears to be in sight at this time).

Index of Leading Economic Indicators graph

(+) The preliminary March Univ. of Michigan index of consumer sentiment gained +1.3 points to 97.6, above expectations calling for 97.0. Assessments of current conditions led the way, up several points, while expectations were the future moved up just slightly. Inflation expectations for the coming 12 months fell by -0.3% to 2.4%, the same level of decline for the coming 5-10 years to 2.2% (in fact, a new record low). As we've noted in the past, the inflation component can be occasionally pegged to gasoline prices, which can be volatile in the near-term, so shorter term fluctuations should be discounted. However, the overall improvement in sentiment is a positive.

(+) The government JOLTs survey for January showed an increase of almost 100k to 5,626k; this is in addition to a substantial revision higher for Q4 of 2016. The hiring rate and quit rates each rose +0.1%, respectively, to 3.7% and 2.2%, while the layoff rate was flat at 1.1%. The quits rate was the highest reading in 10 years, on a seasonal basis. Interestingly, the overall JOLTs openings number is lower than it was a year ago, which could indicate some peaking pressures.

(0/+) Initial jobless claims for the Mar. 11 ending week ticked down -2k to 241k, near the 240k expected. Continuing claims for the Mar. 4 week fell by -30k to 2,030k, below the 2,050k expected. There didn't appear to be any unusual factors, per the DOL, but larger states NY and Calif. appeared to account for the bulk of the change, as is often the case. Claims continue to run at an extremely low level, which is indicative of a strong labor market.

Market Notes

Period ending 3/17/2017

1 Week (%)

YTD (%)

DJIA

0.08

6.47

 

S&P 500

0.28

6.72

Russell 2000

1.97

2.79

MSCI-EAFE

2.07

7.29

MSCI-EM

4.26

11.98

BarCap U.S. Aggregate

0.50

0.15

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

3/10/2017

0.75

1.36

2.11

2.58

3.16

3/17/2017

0.73

1.33

2.03

2.50

3.11

U.S. stocks bounced around zero, before ending up with a small gain for the week. More defensive utilities and telecom led the way, oddly followed by materials and consumer cyclicals, while health care and financials ended up as the losing sectors. Healthcare has been bogged down with legislative bickering concerning the future and economics of Obamacare fixes and/or repeals, more specifically last week by a proposed cut to the NIH. With so many scenarios possible, the uncertainty is focused on the nature of reimbursements to pharma/biotech companies, not to mention the size of the insured/uninsured universe.

Foreign stocks outperformed U.S. issues, with emerging markets experiencing sharp gains for the week, followed by the U.K. and Europe. The dollar declining by nearly -1% also contributed to enhancing already-better local returns. In Europe, strongly positive sentiment emerged due to election results in The Netherlands, where a center-right party (affiliated with the current prime minister) emerged victorious, effectively rejecting more nationalistic candidates and reducing fears of a continued populist groundswell across the continent. The elections in France during the next two months prove to be the next key test, as nationalistic rhetoric there has been much more vocal, and potentially damaging, due to France's key role as a cornerstone of the Eurozone. Expect that any poll shifts or outright wins by 'status quo' or centrist candidates could result in a positive market reaction.

U.S. bonds experienced a positive week, as interest rates declined. Credit, including both investment-grade and high yield, outperformed government issues and floating rate bank loans. Foreign bonds generally fared well, with percent or more gains in line with a weaker dollar.

Real estate fared well globally last week, in unison with interest rates falling across the yield curve in the U.S. However, European REITs outperformed, in keeping with stronger results from European equities broadly. Domestically, residential/apartments and hotels/lodging outperformed, up over +3% on the week, while malls came in last place, up just a fraction.

Commodities generally ended up with positive results on the week, led by strength in both industrial and precious metals and help from a decline in the U.S. dollar. Agriculture was generally flat, while energy ended up with a minor gain. Crude oil declined by a dollar earlier in the week, before recovering by Friday to $49.30.

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 13, 2017.

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