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Weekly Review - March 30, 2015

Weekly Review - March 30, 2015

Guest Post - Monday, March 30, 2015

Summary

  • Last week's economic data was relatively lackluster, with sporadic results from durable goods, while housing came in similarly to slightly better than expected. Inflation remained slightly negative on a headline basis and below-average on a core level.
  • Equity markets generally lost ground on the week, with developed foreign indexes faring better than domestic. Bond prices and yields were generally flat on the week with minimal significant news spurring action in either direction. Commodities gained a bit on a weaker dollar and higher oil prices.

Economic Notes

(-) Durable goods orders for February came in a bit weaker than expected, falling -1.4% compared to an expected gain of +0.2%. A portion of this was due to weakness in non-defense aircraft orders (which are often volatile), but the ex-transport orders also declined by -0.4% compared to an expected small gain (representing the 6th straight decline). Weakness in the core segment was led by fabricated metal and machinery, which declined by -2%. Core capital goods shipments, however, rose +0.2%, which was a tick below expected, and durable goods inventories rose +0.3%. Overall, the most recent report continued to show a soft patch in economic growth, and was likely affected by reduced exports caused by the stronger dollar (the affected sectors, such as machinery, appear to follow this theme, at least based on historical sensitivities), the ramifications for which could keep the Fed from taking action until conditions look a bit more robust.

(0) The consumer price index for February rose +0.2% on both a headline and core level, generally on par with expectations. The primary drivers were increases in rent of primary residence and owners' equivalent rent, which both increased by about the same +0.2% rate, while core goods, such as used cars, apparel and medical goods rose at a bit stronger rate. Energy prices also rose +1.0% on the heels of higher gasoline prices. Year-over-year, this brought the headline inflation level to nearly flat (actually -0.03%, from -0.1% the prior month) and +1.7% for core. Again, this softness has a suppressing effect on interest rates and potential Fed action.

There is a bit of impact from a strong dollar here (as it depresses the prices of imported goods—perhaps the only benefit of a strong dollar) but that doesn't affect many large CPI components as much as others, such as housing. According to some 'real time' forecasts, core inflation doesn't look to have bottomed quite yet, but could at some point in 2015 assuming some normalization occurs with oil pricing, wages and some other inputs. Several components of CPI are already running at or above average levels, including food (meats are +8% year-over-year), housing (both shelter and its various forms and lodging), medical care and education. Other than energy, areas such as transportation (which contains some carry-through from energy prices), clothing/apparel, personal computers and communication (we've seen the 'cut your phone bill in half' commercials) have been in a deflation over the past year to varying degrees.

(0/-) The FHFA house price index rose +0.3% in January, which was just short of the +0.5% expected. The East South Central (Ky./Ala.) segment experienced gains of a few percent, while the Mid- and South-Atlantic region indexes fell by almost a half-percent—an area that covers the East Coast south of New York. Year-over-year, the total U.S. index rose +5%.

(-) Existing home sales rose +1.2% in February, which fell short of the forecasted +1.7%. Single-family residences gained +1.4%, while condo/co-op sales didn't budge from the prior month.

(+) New home sales gained +7.8% for February to 529k (on a seasonally-adjusted basis), which was far stronger than the decline of -3.5% expected. There was also a bit of a revision upward for January. However, a good portion of the gain was highlighted by a +153% gain in the Northeast, a +10% increase in the South and declines in the Midwest and West of -13% and -6%, respectively. The odd figure from the Northeast, especially with severe weather playing a role to the negative, could be due to seasonal distortions and a particularly severe winter last year, which caused the adjustment to look overly strange.

(+) The final edition of the Univ. of Michigan sentiment survey came in a bit stronger than expected, improving to 93.0, compared to an expected 92.0. Assessments of current conditions and future expectations both improved. Inflation expectations for the coming year remained at 3.0%, while 5-to-10 year assumptions remained at 2.8%—both near long-term experienced levels.

(+) Initial jobless claims for the Mar. 21 week came in at 282k, -8k lower than the expected 290k. Continuing claims for the Mar. 14 week came in close to flat at 2,416k, which was just above the consensus estimate of 2,400k. Per the government, no special factors played into the results.

(0/-) Lastly, the final estimate for Q4-2014 GDP was unchanged, at +2.2%, despite consensus expectations for an upward revision to +2.4%. Consumer spending was revised upward by two-tenths, and net exports by a tenth, while inventory accumulation and state/local government spending were revised down to offset the positive changes.

Estimates for Q1 GDP have been scaled back somewhat, from the mid-2's down to 1.5% or so, due to some challenging winter weather (like last year, accounting for what might be up to a -1% negative impact on overall GDP) and a general hiccup in conditions, including the impact of a strong dollar and which has reduced export activity and scaled back capex in the oil drilling sector. For all of 2015, and for 2016-2017 for that matter, estimates remain in the 3% area. By contrast, European growth is expected to improve into the 1.5-2.0% range, while Japan is hovering around a challenged 1% real GDP level. Globally, growth is still expected to be in the 3.5-4.0% range, with broad growth stories such as China's slowing, while India and Indonesia are picking up.

Market Notes

Period ending 3/27/2015

1 Week (%)

YTD (%)

DJIA

-2.29

-0.05

S&P 500

-2.20

0.60

Russell 2000

-1.99

3.27

MSCI-EAFE

-0.73

6.04

MSCI-EM

-1.18

0.19

BarCap U.S. Aggregate

0.01

1.49

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

3/20/2015

0.01

0.60

1.42

1.93

2.50

3/27/2015

0.04

0.58

1.42

1.95

2.53

U.S. stocks were down on the week with an absence of inspiring news and lackluster economic reports. Conditions toward the end of the week were helped by Janet Yellen's reassuring words during a speech that a gradual interest rate rise over the next few years is 'appropriate.' We get the message, but markets can't seem to hear enough of it. Consumer staples and energy lost the least, under a percent, while technology and financials lost the most ground. Staples stocks were helped somewhat by the $40 billion takeover of Kraft (which gained +35% on the news) by the partially Warren Buffet-owned Heinz—among the largest of a string of M & A transactions of the past year—in creating the world's fifth largest food/beverage company.

It was a mixed week for foreign equities, with segments of peripheral Europe ending up with positive returns, Japan flat, and core Europe just slightly negative. The U.K. lost several percent as inflation fell to zero, creating some concerns over growth conditions. Brazil continued to deteriorate, with sharp losses, dragging down emerging market indexes generally, although there were decent individual performances—again reminding us that it's difficult to categorize this as a homogeneous group. Over the past six months, foreign nations that have lagged most dramatically are those most sensitive to oil exports, such as Canada, Mexico, and of course, Russia, while non-energy sensitive nations haven't been harmed nearly as badly. Obviously, strong QE measures and hopes for improvement abroad have resulted in strong returns for Japanese and European equities—outperforming domestic names year-to-date, just when the point of frustration for foreign stocks seemed to reach an apex towards the end of last year. An interesting reminder about the fact that markets don't necessarily need 'great' news, but do react to news that's just a bit better than previously expected.

Core U.S. bonds were generally flat with minimal changes in interest rates, as weaker durable goods orders were offset by lukewarm demand for newer treasury auction issues later in the week. On the positive side, high yield and bank loans fared slightly better than the broader index, partially aided by improvement in energy prices. Foreign debt was mixed with developed market bonds showing minimal losses, which translated into small gains due to a stronger dollar. Anecdotally, concerns over a bond default for Brazilian oil firm Petrobras were lessened following regulatory action as well as S & P's maintenance of a BBB rating for the nation's sovereign debt, after last year's downgrade and recent moderate political turmoil.

Real estate in the U.S. fell in line with general equity markets, while Japan and Asia generally gained, bucking the trend

Commodities gained slightly with help from a falling dollar. Crude oil moved up +5% on the week, ending near $48.50 after extending beyond $50 temporarily, as events in Yemen raised a few geopolitical concerns. Gold also gained on the week with some lower dollar impact, while several agricultural commodities lost ground. Wheat in particular fell -5%, in line with improved weather in Russian growing areas and the possibility that increased supplies will spur the Russian government to lift grain export restrictions.

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 23, 2015.

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