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Weekly Review - March 6, 2017

Weekly Review - March 6, 2017

Guest Post - Monday, March 06, 2017


Economic data for the week was led by strength in both manufacturing and non-manufacturing indexes, strong consumer confidence and jobless claims, and mixed housing results.

Equity markets gained in the U.S. and abroad in foreign markets, while emerging markets fell back for the week. Bonds lost ground as interest rates rose in response to Fed rate hike comments. Commodities lost ground, mostly due to oil and precious metals.

Economic Notes

(+) The ISM manufacturing index for February rose +1.7 points to 57.7, beating forecasts calling for a flattish 56.2. This was the sixth consecutive month of gains, resulting in a new 2-year high point. New orders and production led the way, while inventories also gained, and employment ticked downward, although remaining in expansionary territory. This metric remains in solid growth mode.

(+) The February ISM non-manufacturing index rose +1.1 points to 57.6, which beat expectations calling for 56.5. New orders, business activity and employment all rose solidly to a range in the upper-50's to lower-60's, while prices paid fell a bit. Similar to the manufacturing index, current levels are indicative of service industry strength broadly.

(+) The Chicago PMI rose by a solid +7.1 points to 57.4 for February, its highest reading in two years. The report was led by 4 of the 5 segments reporting higher results, led by production, while employment moved into expansion for the first time in a few months. The anecdotal question asked of respondents had to do with the impact of oil prices, to which half commented that it had no to little impact, while the rest were split between negative and positive impacts, interestingly. Prices paid also rose a bit, pointing to some materials inflation in the system.

(0) Durable goods orders for January rose +1.8%, which outperformed forecasts calling for +1.6%. The core portion of this report (non-defense, excluding aircraft), however declined by -0.4%, versus an expected half-percent gain, but was coupled with an equivalent revision upward for the prior month. Core shipments fell by -0.6%, which also underperformed compared to an expected gain of +0.2%.

(0) Construction spending fell -1.0% in January, which disappointed relative to an expected +0.6% gain, but some prior revisions helped the prior month December number, evening things out. Private residential gained a half-percent, while non-residential fell -5% and public residential dropped -15% for the month. Interestingly, public construction spending is nearly -10% year-over-year, with infrastructure spending down by much more than that in several areas—which has highlighted the need for some type of national infrastructure plan.

(+) The 20-city S&P/Case Shiller home price index for December rose +0.9%, which beat the consensus forecast calling for a +0.7% gain. From a regional standpoint, every city experienced gains in prices, with Chicago, Seattle and Tampa leading the way, each at around +1.5%. Year-over-year, the national pace ticked up a few tenths of a percent to +5.6%, which continues to be quite strong compared to history.

(-) The advance goods trade balance report showed a much wider -$69.2 bil. deficit than expected, compared to -$66.0 bil. assumed by consensus. Imports rose +3% for the month, mostly in the area of consumer goods other than cars; while exports rose by +1%, due to cars and industrial supplies. Inventories also fell a bit, except for vehicles. While a negative number overall, in terms of export declines, it appears some may have had to do with the timing of the Chinese New Year.

(-) Pending home sales for January fell -2.8%, disappointing relative to the +0.6% gain expected; in addition, a good portion of the December sales increases were revised down. The West and Midwest fell -10% and -5%, respectively, while the Northeast and South gained a bit. There is some talk about higher mortgage rates (which are tied to 10-year treasury interest rate levels) putting a damper on home sales activity somewhat, but seasonal issues could also be at play.

(+) The February index of consumer confidence rose +3.2 points to 114.8, which surpassed forecasts calling for 111.0. Both segments of consumer assessments of present and expected future economic conditions increased, while the labor differential of job availability ticked down just barely. As this achieved a new peak for this recovery cycle, and, in fact, the highest level since mid-2001, this index is obviously in solid shape, the value of which is related to potential positive consumer activity based on this optimism. Interestingly, some also start to look at when confidence becomes excessive and cycles are vulnerable to a reversal—this doesn't look to be the case at this point, based on historical patterns.

(0) The next update of 4th quarter GDP was unchanged at +1.9%, despite expectations for an upward revision of a few tenths. The only real changes were stronger personal consumption stats (which came in at +3.0%, better than the expected +2.5%), but a decrease in residential fixed investment, business capex and government spending. Interestingly, PCE inflation was also revised down a bit to a pace of +1.2% for the quarter.

(0/-) For January, personal income rose +0.4%, which was a tick higher than expectations, while personal spending grew at a tenth of a percent lower, at +0.2%. This pushed the savings rate a bit higher, to 5.5%. The PCE price indexes for headline and core rose at rates of +0.4% and +0.3%, respectively, within range of expectations, while the year-over-year figures for the two adjusted to +1.9% and +1.7%, respectively.

(+) Initial jobless claims for the Feb. 25 ending week fell -19k to 223k, far lower than the expected 245k. In fact, this was the lowest level of jobless claims since 1973. Continuing claims for the Feb. 18 week ticked up +3k to 2,066k, a bit higher than the expected 2,060k, but remaining low overall. It appears there were a few temporary factors like auto plant shutdowns and some school holidays in larger states, but overall, the low level of claims is significant and points to continued labor market strength (translated through to lack of layoffs), even in areas of weakness of prior years, which included the oil patch states that suffered due to oil price declines and have benefitted from the subsequent price recovery.

This is another data metric that could prompt the Fed to boost rates higher sooner, as there's reason to imply that additional labor 'slack' still exists. The issue hasn't been so much the volume of jobs created and/or lack of jobs lost but the quality and pay of the jobs being less than ideal in this cycle, which has worried Yellen.

(+) The Fed Beige Book of anecdotal economic conditions around the country, from January through mid-February, reported continued expansion among the various Fed districts. There has been some improvement in metrics since the last release, notably in manufacturing and energy, although real estate/construction and auto sales appeared stronger. Labor markets showed continued strength, in keeping with trends seen in the past several books, including some shortages in certain more cyclical industries. On the negative side, there appeared to be some uncertainty about new administration's policy initiatives.

Read the "Question of the Week" for March 6, 2017

Is the economy running 'hot' yet?

Market Notes

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U.S. stocks gained for another week. Early in the week, speeches from several member of the FOMC alluded to the fact that March a march rate hike was 'still in play', then later, 'would likely be appropriate', which raised the odds significantly for a rate hike this month, but not necessarily the number of hikes in 2017 in total. President Trump's state of the union address was largely taken positively by the market on Wednesday, as rhetoric was toned down from prior commentary, and took on a more positive and conciliatory tone than did one delivered at the inauguration. From a sector standpoint, financials, energy and healthcare led the way, with sharp gains, while more defensive utilities and consumer staples lagged with minor losses. Foreign stocks in Europe experienced decent gains, along with more positive sentiment and business activity readings, yet mixed earnings results, while Japan and the emerging markets group lagged, when translated to U.S. dollar terms. China was a detractor on the EM side, despite several manufacturing and service indicators showing better-than-expected expansionary readings. Expect election polling and rhetoric to continue to play a role in developed Europe market results in the weeks moving forward, notably the numbers for populist candidates like Marine Le Pen in France. The implications here are obviously significant, with an increased chance for a eurozone breakdown, that could lead to a subsequent messy financial and political unwinding. Markets care because it threatens trade linkages and growth, as well as inflation influences if the euro currency is removed—essentially the same reasons markets were and are concerned about Brexit.

U.S. bonds lost significant ground on the week, as Fed comments about interest rates pushed yields up across the yield curve, notably at the short end, but longer bonds suffered as well. As expected, long treasuries lost the most ground, while high yield and floating rate debt actually end the week positively. Foreign bonds in both developed and emerging markets were off slightly in local terms, due to higher inflation readings in Europe mostly, but a stronger dollar resulted in worse results in USD terms.

The interesting story in foreign, notably European bond markets is the divergence in yield between what are considered 'low risk' issues (Germany) and 'higher risk' (France and the periphery), due to back-and-forth polling uncertainty in regard to the upcoming French election. Basically, investors had been buying German bonds, pushing yields lower and back toward zero, while selling off riskier bonds and driving yields higher. The result is real yields moving further into the negative for desired bonds in Europe. The ECB is also beginning to pare back on QE purchases by 25% beginning this month, which could adjust the demand component for bonds overall and removing some of the depressant that's kept yields low. This has not been a problem while inflation's remained tempered, but it has ticked higher, and if it continues to move, bond investors may demand more yield to lock up longer maturities.

Real estate lost a bit of ground on the week, in coordination with higher rates, as is to be expected. Healthcare and industrials held up a bit better, while retail and Asian REITs declined most dramatically.

Commodities fell back on the week, due to declines in energy and especially precious metals, which reacted negatively to interest rates rising. Agriculture was the sole positive group for the week, led by higher corn and wheat prices. Crude oil prices continued to bounce around in the low 50's range, ending off just over a percent to $53.30—with the driving news being the Saudis cutting oil price per barrel by $0.75 for Asian consumers in an effort to retain market share. A large amount of world supply continues to be problematic for producers hoping for higher prices beyond the current tight range.

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 27, 2017.

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