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Weekly Review - March 21, 2016

Weekly Review - March 21, 2016

Guest Post - Monday, March 21, 2016

Summary

  • Economic news was led by the Fed's decision to hold back on any rate changes, while sounding a bit more dovish than in recent meetings. Manufacturing activity has bounced back somewhat, seen through better survey results. Inflation remains muted, although signs of some increases are apparent at the core level, while housing results were mixed.
  • Equity markets gained on the week with interest rate pressures lessened and an improvement in manufacturing data, which had been weak as of late. Bonds also performed well upon the move lower in interest rates. Oil continued to recover with a decent gain on the week, pushing commodity indexes higher.

Economic Notes

(0) The FOMC meeting, as discussed mid-week, ended in no action with a nod towards global economic and financial risks. In the statement and subsequent press conference, the Fed appeared a bit more cautious than some expected, noting continued risks from global economic and financial factors. However, their assessment of domestic conditions is of moderate progress, including that in labor specifically. Perhaps most importantly, the forecasted number of rate increases this year has fallen from four to two, with a variety of analyst opinions ranging from zero to three at this point—noting the Fed has been perpetually optimistic about the recovery of economic conditions. A more nuanced look at their policy includes a consideration of the tighter financial conditions in credit markets, coupled with effects of the strong dollar of recent years, in creating a 'tighter' environment automatically—which they argue, reduces the need for as much Fed tightening action as might normally be warranted.

(0) The producer price index fell -0.2% in February, which was on par with expectations, while the core measure excluding food and energy was flat on the month—a tenth below consensus. Energy prices falling over -3% was a primary catalyst for weakness in the headline figure. Food prices fell slightly as well, while health care inflation ticked just slightly higher. Year-over-year, headline PPI was flat while core rose a meager +0.9%.

(0) The consumer price index for February also fell -0.2% on a headline level, but core rose +0.3% with food and energy excluded—these were generally on par with expectations. There were several areas displaying higher prices on the core side, including apparel up +1.6% and medical services rising a half-percent overall, with prescription drugs rising nearly +1% on the month, and insurance. Year-over-year, headline CPI is up +1.0% (with energy commodities down -20% year-over-year), while core CPI was up +2.3%—a much stronger showing and well into the zone of the Fed's target range. While it didn't affect the outcome of the March FOMC meeting, it certainly could play a role in policy decisions going forward should this trend persist. Headline inflation is also likely to rise assuming the trajectory of oil price declines slows, which appears to be occurring.

(0/-) Retail sales for February dropped by -0.1%, which was slightly better than the expected -0.2% decline. Additionally, several prior months were revised downward by -0.3%, on the negative side. 'Core'/control retail sales, which excludes more volatile prices for autos, gasoline and building materials, rose +0.1%, reflecting a decline of -4.4% in gasoline sales from lowered nominal values per gallon. Vehicle sales also fell -0.2%. There has been recent discussion among economists as to the causes of lower retail sales reports, a trend that has been pervasive over the past two years. The 'real' (after-inflation) growth of retail sales doesn't appear as weak as the nominal figures. Part of this is due to the impact of gasoline sales, which, depending on the amount of seasonal adjustments or not, account for 5-10% of total retail sales. From a nominal reporting standpoint, much cheaper gas leads to far lower sales in than can be made up for in higher volumes (we can only drive so much).

(+) The NY Fed Empire manufacturing index improved sharply from -16.6 in February to an expansionary +0.6 in March, surpassing expectations calling for another negative month at -10.5. New orders and shipments both rose sharply into strongly positive territory (+10 or so), while employment and inventories lost some ground, moving a bit more negative, so there was a bit of divergence behind the scenes.

(+) Similar to the NY index, the Philly Fed survey also improved to +12.4, the first positive result in over six months, and sharply outperforming expectations of a contractionary -1.5 reading. In the report's details, new orders and shipments gained strongly. Improvement in these two regional surveys is promising for manufacturing results overall, which have been under scrutiny as of late for their weak showings.

(-) Industrial production in February fell by -0.5%, which was two-tenths of a percent below expectations. Some of this was explained by warmer weather, which caused utilities production to decline by -4% (it's easy to forget that utilities/power generation is included a component of 'industrial' production), as well as continued slowdowns in the energy space. Other than these areas, manufacturing production rose +0.2%, in machinery as well as computers/electronics, which is more encouraging. Capacity utilization fell a bit to 76.7%, below the 76.9% level expected and remains a few percentage points below the long-term average for this measure.

(0) Housing starts for February rose +5.2%, outperforming expectations of a +4.6% increase. Single-family starts rose +7%, resulting in the bulk of the gain, while multi-family increased by +1%. Building permits, by contrast, fell by -3.1%, which underperformed the consensus estimate of a -0.2% decline, led by an -8% decline in multi-family permits. Multi-family permits and starts are much choppier than single-family on a month-to-month basis so these short-term changes have to be discounted somewhat.

(0) The NAHB homebuilder index for March came in flat from the previous month at 58, a point below expectations of 59. Expectations for current sales was similarly flat, while future expectations fell a few points and prospective buyer traffic gained +4 points. Regionally, the Northeast and South outperformed the flat readings of the West and Midwest.

(-) The preliminary Univ. of Michigan index of consumer sentiment for March ticked down to 90.0 from 91.7 last month, underperforming expectations calling for 92.2. Consumer expectations for the future fell by -2 points, while assessments of current economic conditions fell by just over a point. Inflation expectations also fell within recent bands, with estimates for both the year ahead and 5-10 years ahead gauges rising +0.2% from a recovery low point to 2.7%.

(+/0) The Department of Labor's JOLTS report showed a rise in job openings to 5.54 mil. for January, up from 5.28 in December, outperforming a forecasted 5.50 mil. Total hires, though, fell by -400k as the hiring rate declined from 3.8% to 3.5%. The quits rate fell from 2.2% to 2.0%, which is the opposite of the direction the Fed would like, but isn't too dramatic of a change.

(0) Initial jobless claims for the Mar. 12 ending week rose by about +7k to 265k, but still came in below expectations of 268k. Continuing claims for the Mar. 5 week also ticked a bit higher to 2,235k, which was spot on with expectations. No special factors were reported from the Dept. of Labor. Claims continue to tick along at very low levels.

Market Notes

Period ending 3/18/2015

1 Week (%)

YTD (%)

DJIA

2.26

1.72

S&P 500

1.37

0.80

Russell 2000

1.34

-2.71

MSCI-EAFE

1.01

-2.76

MSCI-EM

3.23

4.11

BarCap U.S. Aggregate

0.77

2.43

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

3/18/2016

0.30

0.84

1.34

1.88

2.68

3/18/2016

0.30

0.84

1.34

1.88

2.68

U.S. stocks gained for the week, with returns led by rebounds in industrials, materials and energy, which followed along with stronger commodity prices. Health care was the weakest sector for the week, led by the pharma group losing a few percent. The S&P is now up +12% or so from lows in mid-February, back to nearly flat for the year-to-date period.

European equities performed positively but trailed the outcome of U.S. stocks, as sentiment about growth was less favorable. The impact of a falling (again) dollar no doubt was helped by the Fed's dovish interest rate talk. The Bank of Japan met and didn't increase stimulus, keeping key rates at -0.1%, which disappointed markets a bit. This and poor export numbers, particularly from Asian trading partners, left Japan in the negative for the week. The winners again were the emerging markets, which benefitted from additional commodity stabilization, higher oil prices and a political showdown in Brazil. It seems several negative influences here have perhaps flattened out somewhat—we dare not say bottomed, due to the several false bottoms experienced in the past—but sentiment has been so poor in this area, an eventual change was inevitable. Change always is.

U.S. bond yields fell in response to the Fed's dovish sentiment, and apparent slowing of potential interest rate hikes this year. This downward push on rates was a positive for bond returns, as long duration debt outperformed, while corporate bonds—including high yield—ended up performing positively. A falling dollar on the week aided the performance for foreign debt, adding over a percent to returns, while several long bond rates fell deeper into the negative—including Japan's 10-year, which reached an all-time low of -0.135%. Year-to-date, long treasuries in the U.S. and developed market sovereign debt have led bond returns with gains in the upper single-digits as yields have fallen sharply worldwide. Interestingly, emerging market bonds have also shown decent gains as well, which could likely be due to the positive carryover effects of expected slower rate hikes by the Fed.

Real estate performed well again, solidly positive and outperforming many other equity groups. Industrial/office and residential/apartments led all sectors in the U.S., although developed Europe outperformed globally, as sentiment from ECB easing has carried through.

Commodities continued to bounce back a bit with oil moving again higher, from $38.50 to just over $41.00, an increase of +6.5%, as news of reduced Saudi production filtered through markets. Non-energy commodity groups were less dramatic, with agriculture gaining slightly, while precious and industrial metals lost a bit of ground.

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 March 14, 2016.

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