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Weekly Review - May 11, 2015

Weekly Review - May 11, 2015

Guest Post - Monday, May 11, 2015


  • Economic reports last week were led by a decent ISM non-manufacturing report, low levels of jobless claims and a decent but unexceptional employment situation release—uninspiring enough to keep markets hoping for continued easy Fed policy beyond June.
  • Stocks generally gained in developed markets last week, and many emerging markets as well, although a sharply negative week in China weighed on overall index numbers. Bonds were flat in the U.S. but sold off sharply in Europe upon better economic data and accompanying rising interest rates. Commodities were generally flat as well, as oil prices were stable on the week.

Economic Notes

(+) The ISM Non-manufacturing report for April came in slightly stronger than expected, rising from 56.5 to 57.8 (compared to an expected 56.2). Business activity and new orders both came in stronger by several points, while employment was flat and new export orders fell off by -11 points into sub-50 contractionary territory (although this component wasn't seasonally adjusted). Anecdotal comments in the report allude to more positivity than in recent months, with better spending patterns and decent carryover from lower fuel prices.

(+) Factory orders for March rose +2.1%, which bested estimates by a tenth. The key component was a substantial gain in transportation equipment as non-durable goods orders fell by a few tenths of a percent on the month. Overall, core goods were generally unchanged, which is significant since this is used in GDP calculations. Non-durable manufacturing inventories fell by about a half-percent.

(0) The non-farm productivity report for the first quarter showed a drop of -1.9%, which was in line with consensus expectations. It included a rise in hourly compensation of +3%, which translated to unit labor costs rising +5% (a bit more than expected). For the full year, productivity and unit labor costs rose +0.6% and +1.1%, respectively. Total unit labor costs, measuring compensation relative to output per hour, rose +5.0% in the first quarter, which outpaced expectations of +4.5%, as compensation per hour rose +3%.

(0) The trade deficit for March widened to -$51.4 bil., significantly wider than the forecasted -$41.7 bil. expected. Exports rose about a percent, while imports provided a dramatic offset—rising nearly +8% for the month. While striking on the surface, the big drops in imports over the prior few months appear to have been due to the West Coast port strikes, so a bounceback wasn't entirely unexpected. Consumer goods were the biggest culprit, which again points to that as a factor (as opposed to oil shipments, which are typically the most-traded good and biggest swing factor in the trade report).

(-) The April ADP employment report, which traditionally precedes the official government report by two days, showed a gain of +169k, which fell short of the +200k expected. The previous month's report was also downgraded a bit by -14k to +175k. Job weakness was seen in manufacturing, which lost -10k, while construction, trade/transports/utilities and professional/business services showed job growth in the +20-40k area, but disappointed relative to expectations. As noted before, there is a relationship between this report and the 'big' report on Friday, but they aren't correlated closely enough to be extremely useful. But it is another data point and adds color to labor conditions.

(+) Initial jobless claims for the May 2 ending week came in at 265k, which just +3k above the figure from last week but far below the 278k expected. Continuing claims for the Apr. 25 week fell by -28k to a new post-recession low of 2,228k, below the 2,270k expected. No special factors appeared to color the numbers this week. This series continues to move in a very positive direction.

(0) The government employment situation report for April wasn't terrible, but not exceptional, either. Non-farm payrolls rose +223k, which slightly disappointed relative to an expected +228k. In looking at underlying industry results, construction jobs rose +45k and leisure/hospitality gained +17k, which show a good chance of being weather-related recoveries. Additionally, service positions showed a gain of over +180k, with professional/business services and education/health leading the way. Manufacturing barely rose, which was disappointing. On the negative side, oil/gas jobs fell by -13k, which wasn't entirely surprising. Also negative was a revision downward of almost -40k jobs over the past two months.

The unemployment rate fell by just under a tenth (rounded upward), down to 5.4%, which was in line with consensus. Labor force participation gained a tenth to 62.8%. The U-6 measure of 'underemployment' also fell a tenth to 10.8% (and the lowest level since mid-2008). Average hourly earnings rose +0.1% for the month, about half of the gain expected, however. The average workweek length was unchanged at 34.5 hours. Year-over-year, earnings are +2.2% higher, which is in line with general inflation measures over the period, but economists would like to see higher—even if that stokes inflation fears. All-in-all, the number wasn't strong enough to worry markets, that have a close watch on every piece of economic data that could sway Fed sentiment toward raising rates sooner than forecast.

Market Notes

Period ending 5/8/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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U.S. stocks experienced some weaker days earlier last week, due in no small part to Janet Yellen's comments regarding equity valuations looking somewhat extended. She's made these comments before, about other asset classes, so the uproar usually passes. By Friday, however, the mixed employment report helped investors feel better about a slower pace for Fed action. There has been a bit of profit-taking lately, and that's also weighed on market returns in risk assets. From a sector standpoint, financials experienced the strongest week, followed by health care; energy, telecom and utilities were the worst performers.

Developed market foreign equities gained on the week, while emerging market lost ground. A weaker dollar helped Europe and Japan slightly, while emerging markets were little affected. Europe overall performed well, as inflation figures released showed progress (and alleviated fears of deflation, with a 0% reading as opposed to negative as per the prior four months). In a bit of a surprise, the U.K. election resulted in the re-election of PM David Cameron and a solidification of a conservative/tory majority in parliament. Voters appear happy with the improvement in the British economy, with stronger employment and GDP growth at a rate in the mid-2's, dramatically outpacing the rest of Europe.

Chinese trade data looked weak, with volumes falling by 10% year-over-year—although part of the change was currency-related. Regardless, fears from this and other examples of lukewarm economic data ended the two-month run in Chinese equity indexes, as well as those of Australia and South Africa, which tend to be export dependent. This points to additional likely stimulus to keep economic growth afloat. Due to China's large profile in total global GDP, the possibility of such action had generally been bullish for equity investors worldwide. Alas, by late Sunday, the Chinese cut interest rates again, for the third time in six months, by a quarter percent down to 5.1% on the benchmark one-year loan rate and to 2.25% on the one-year deposit rate. The rapid expansion of credit over the last several years has created a significant debt load, and officials are cognizant in keeping the interest service on these debts manageable.

U.S. bonds experienced their least volatile week in several, with minimal yield changes across the curve, resulting in flattish to slightly negative results for most domestic bond indexes. Floating rate loans and high yield corporate debt fared a bit better than governments.

While emerging market bonds rallied decently in line with other risk assets, European bond rates shot higher, causing prices to weaken as investors continued to unload European debt. Technical factors appear to be at play somewhat, and, in last week's case, were prompted by higher inflation data that helped to alleviate fears of a continued deflationary spiral and, therefore, remove part of the rationale for the one scenario that negative yields actually make sense. Although there is a natural base of owners for practically every sovereign bond (that we've discussed before, such as governments, pensions, etc.), a negative yield doesn't offer a lot of upside—especially if economic prospects look to improve. The deflation 'trade' may have come to an end for those with that worldview.

Real estate returned positively in the U.S. in line with equities, but was outshined by stronger results in Europe and the U.K., fed by better anecdotal economic data and the British election outcome.

Commodities were generally flat on average, but at a more tempered pace than recent weeks—a weaker dollar likely also contributed. After a bump in price mid-week, crude oil settled back down just under $60 by Friday. Although still very high, crude oil inventories appear to have fallen a bit for the first time in several months, which has spurred a rebuilding in long positions from traders. Precious metals and agriculture were the winners, gaining a few percent, while industrial metals experienced the sharpest declines, led by copper, which tends to be news-sensitive to Chinese economic data.

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 May 4, 2015.

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