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Weekly Review - March 7, 2016

Weekly Review - March 7, 2016

Guest Post - Monday, March 07, 2016


  • Economic data was mixed to better on the week, with manufacturing ISM a bit stronger, yet several measures remained in contractionary territory. Services looked stronger, including construction, as did Friday's employment report.
  • Equity markets experienced positive results as oil pushed higher, and decent economic numbers resulted in interest rates also moving upward, punishing fixed income markets.

Economic Notes

(+) The ISM manufacturing index rose to 49.5 for February, which was a point above expectations of 48.5, and just barely in contractionary territory. Production improved to deeper into the low 50's, indicating expansion, while employment became a bit less negative in the upper 40's. New orders were unchanged, but remained in expansionary territory. On the positive side, anecdotal narrative pointed to indications that the inventory correction in manufacturing may be slowing, which could be a tailwind for manufacturing in coming months.

(0/+) The ISM non-manufacturing index for February was just down a tenth from the prior month, to 53.4, but actually stronger than the 53.1 predicted. Details under the surface were a bit mixed, with general business activity rising a few points to near 58, new orders fell a point while remaining in the expansionary mid-50's, while employment fell just over -2 points to a barely-contractionary 49.7.

(-) The February Chicago PMI fell -8 points to 47.6, weaker than the expected 52.6, after last month's rebound and continuing the streak of volatility in manufacturing results. While supplier deliveries gained, the other key segments of the index declined, led by much lower readings for new orders and order backlogs, while employment also fell off. Prices paid also fell, at a faster pace than in recent months, in keeping with weak commodity prices—interestingly, almost half of firms noted that lower oil prices were helping business (through lower transportation cost impact), another quarter felt they were hurting (no doubt these were oil and oil equipment related activities) and other quarter were agnostic. However, despite the recent weakness, anecdotal narratives pointed to optimism for Q1.

(+) Construction spending for January rose +1.5%, above expectations of a meager +0.1% increase; additionally, a few earlier months were revised higher by just over a half percent. Non-residential construction led, gaining +5% for public sector work and +1% for the private sector, while private residential came in flat for the month.

(+) Estimated total vehicle sales for February came in at 17.7 mil. units, which is up about +8% from a year ago. No doubt, trucks and SUVs have been leading items, helped by dramatically lower gasoline prices that tend to spur consumers into larger and less fuel-efficient vehicles.

(0) Factory orders for January rose +1.6%, which was below forecast of +2.1%. Core durable goods orders and shipments were revised down a bit, and non-durable inventories barely fell (when excluding petroleum inventories, which, when included caused the measure to fall a percent).

(-/0) The trade deficit came in at -$45.7 bil. for January, wider than the expected -$44.0 bil. and the -$44.7 bil. from December. The largest impact originated from exports, which fell -2.1%, compared to imports, which fell by -1.3%. Overall, though, this wasn't that significant.

(-) Pending home sales fell -2.5% in January, which was a negative surprise relative to the +0.5% increase expected. Sales fell in all areas except the South, which experienced slight gains. On the positive side, some revisions to this series pushed up levels for the last several months, while the overall year-over-year rate has fallen to +0.9%. The pending sales figures tend to lead existing home sales data by a few months, so can be an early predictor.

(+) The ADP employment report for February showed a gain of +214k, which exceeded expectations calling for +190k. However, January's report was revised downward by -15k. Additions were seen in services, where +208k jobs were added, including almost +60k in professional/business services, while goods-producing sectors added +5k and construction rose +27k. On the negative side, manufacturing jobs fell by -9k and another weak performance in mining (-13k) no doubt reflected the difficult oil environment.

(-/0) Initial jobless claims for the Feb. 27 ending week rose to 278k, about +8k more than expected. Continuing claims for the Feb. 20 week also rose to 2,257k, +7k higher than expectations. No special factors were reported for the week, and results remained in the desired sub-300k area.

(+) The closely-watched February employment situation report ended up better than expected, showing continued positive growth trends. Nonfarm payrolls rose +242k, which outperformed expectations calling for +195k. Leading job additions were seen in health care (+38k), retail trade (+55k), food services and private education, the latter of which could have been affected by some seasonal adjustments. Construction was also a contributor. Mining activity (which includes energy) shed -19k jobs, which was not a complete surprise. On another positive note, December and January payroll numbers were revised upward by a total of +30k.

The unemployment rate was unchanged at 4.9%, with an increase to the participation rate to 62.9%, while the broader U-6 reading of 'underemployment' ticked down another two tenths of a percent to 9.7%—the lowest level since May 2008. Average hourly earnings fell by -0.1% on the month, after a substantial increase the prior month (January being a typical time for seeing wage increases). Most watched, earnings are up +2.2% over the past year, which is in line with other inflation tracking measures but down from a +2.5% the prior month.

(0/+) The periodic Fed Beige Book that outlines regional economic and business conditions showed modest/moderate growth for the first part of 2016 across the bulk of the nation; the exceptions were NY and Dallas, where conditions were noted as 'flat', while Kansas City experienced a modest decline in activity. Broader highlights nationally included consumer spending; however, manufacturing activity was mixed, as has been seen in other headline surveys. Challenged areas continued to involve weaker demand from the energy sector, a strong dollar and concerns over dicey global conditions. Construction activity looked stronger in both residential and non-residential segments. Labor markets continued to look strong, while wage pressures looked to be increasing—particularly in certain high-demand high-skill segments—as opposed to more subdued, as noted in prior reports. However, overall inflation continued to look contained, per other official releases.

Market Notes

Period ending 3/4/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks ended the week higher, led by a rebound in energy stocks and financials, while defensive sectors healthcare and consumer staples experienced marginal gains. Higher-beta small caps outperformed larger companies.

Foreign equities generally experienced the strongest gains, particularly with the dollar weakening, led by a recovery in commodity-sensitive emerging markets. Additionally, some analyst upgrades in the peripheral European banking sector appeared to help sentiment, as did ECB commentary pointing to ways to help the banking system better deal with negative interest rates. Chinese shares gained, with central bank cutting reserve requirements to enhance liquidity, although Moody's downgraded the rating of their sovereign debt. Oddly, Brazilian stocks gained +25% on the week as hopes for political regime changed again looked increasingly likely.

U.S. government bonds lost ground, with yields rising across the yield curve by over 0.10% in some segments (doesn't seem like a lot, but can be a percent or more of capital loss for a long bond). However, credit—especially high yield—rose several percent along with positive sentiment in the energy segment. In keeping with the 'risk-on' week, emerging market debt also fared well. Japanese bonds sold at a negative yield for the first time last week at auction, as secondary market issues have experienced sub-zero yields already—ironically, as yields fell, the bonds performed well.

Commodities gained several percent in a variety of segments, with help from a weaker dollar, but mostly due to boost received from higher oil prices, which moved from $33 to close near-$36 levels for the first since early January. At that low price level, a few dollars can represent big percentage points, which carried over to energy equities and peripheral holdings. This was despite more sporadic news during the week, including reports of American Petroleum Institute and Dept. of Energy reports of large inventory build-ups in the Cushing, OK delivery port.

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 29, 2016.

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