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Weekly Review - May 15, 2017

Weekly Review - May 15, 2017

Website Administrator - Monday, May 15, 2017

Summary

Economic data for the week was highlighted by a disappointing gain in retail sales, while consumer sentiment improved, jobless claims provided their best showing in almost 30 years, while inflation numbers were mixed but generally showed tempered gains.

U.S. equity markets lost ground, while foreign markets experienced a positive week. Bonds were up slightly with rates ticking downward, and commodity indexes rose due to an increase in energy prices.

Economic Notes

(-) Retail sales for April rose +0.4%, which was two-tenths below the median forecast; however, the prior month's results were revised upward by several tenths. Removing the volatile components, the 'core/control' version increased +0.2%, which lagged the anticipated +0.4%. Various segments were mixed, with non-store/online retailers gaining nearly +1.5%, along with health and personal care, and sporting goods, while furniture and clothing lagged with declines. As we've discussed, online sales are becoming an increasingly important part of this landscape, to the detriment of brick-and-mortar firms—notably in the news this week with poor earnings results for several such firms.

(0) The producer price index for April rose +0.5% on a headline basis and +0.4% for core (removing food and energy), each of which were about +0.2% above expectations. Energy and food prices were the largest movers for the month, while core prices also moved higher with several consumer service categories registering large price increases.

(0) The consumer price index for April rose +0.2% on a headline level and +0.1% for core, which was generally just short of consensus (with core boosted by a one-off tobacco tax increase). Energy prices rising over +1% represented a key driver for the month, affecting the headline figure, while core was generally held back by weaker prices in a number of areas—including new and used vehicle prices, medical care commodities and apparel. Shelter costs rose by +0.3% for the month, which was in keeping with recent trend. Year-over-year, headline and core inflation rose +2.2% and +1.9% respectively, with the core component dropping under +2% for the first time in nearly two years. While there is pressure upward in some areas, deflationary forces also persist in unique areas as of late, such as consumer products and communications, where unlimited cell phone data plans have created an unusual influence downward.

(0) Import prices for April rose +0.5%, outpacing the expected +0.1% increase. This was led by higher petroleum prices, as prices ex-fuels rose a more tempered +0.3%. The remainder was related to auto price gains of a half-percent, which happened to be the most significant one-month increase in five years. Non-fuel industrial supply prices also rose nearly a percent, similarly at their fastest pace year-over-year in a half decade at +7%. Economists are generally encouraged by rising prices to a certain degree, although the imported variety is less desirable than the domestically-generated.

(+) The Univ. of Michigan consumer sentiment index rose +0.7 of a point to 97.7, outperforming the unchanged reading expected. Consumer assessments of present conditions were unchanged, while future expectations ticked higher by just over a point. Inflation expectations for the forward-looking year ticked up a bit to +2.6%, while expected inflation for the next 5-10 years fell a tenth to +2.3%. Generally, consumer sentiment remains at a high level, along with a variety of other 'soft' economic data points. If these trends continue, hopes remain for a strong spurt of consumer spending that can be correlated to such positive sentiment about general economic conditions.

(0) The Fed's Senior Loan Officer Survey for the 2nd quarter showed that lending standards didn't change dramatically over the period, especially for commercial and industrial loans. Commercial real estate standards tightened a bit, especially for development and multi-family lending, along with perceptions of more uncertain prices and vacancy levels, while demand for such loans also slowed. Residential mortgage loan standards softened a bit on the agency side, but were otherwise unchanged. Bank willingness to make consumer installment (auto and credit card loans) rose, but demand fell. In the latter, one concern as of late has been slowing auto sales, which has carried over into a natural lower demand for auto loans.

(+) The JOLTs job openings release was up by +61k after revisions to 5,743k, outperforming expectations calling for 5,725k. Negative trends in retail openings have been offset by gains in manufacturing to some degree. This left the openings rate flat at 3.8%, as was the hiring rate at 3.6%, quits rate at 2.1% and layoff rate at 1.1%. There was little new information here, but this continues to run at a strong level.

(+) Initial jobless claims for the May 6 ending week ticked down by -2k to 236k, far below the expected 245k. This is actually the fewest jobless claims for any week since late 1988 (not to mention the smaller workforce size at that time compared to today—making this the best result in modern history on a percentage basis of the total workforce). Continuing claims for the Apr. 29 week declined even more dramatically, by -61k, to 1,918k, below forecasts calling for 1,980k. There were no special factors noted, and labor markets by this measure continue to look very strong.

Market Notes

Period ending 5/12/2017

1 Week (%)

YTD (%)

DJIA

-0.35

6.69

S&P 500

-0.26

7.58

Russell 2000

-0.98

2.34

MSCI-EAFE

0.32

12.34

MSCI-EM

2.46

16.25

BarCap U.S. Aggregate

0.20

1.56

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

5/5/2017

0.90

1.32

1.89

2.36

2.99

5/12/2017

0.88

1.29

1.85

2.33

2.98

U.S. stocks declined on the week on net with mixed economic data and decent earnings reports generally were coupled with the surprise firing of FBI Director Comey along with poor results from several retailers, including Macy's, Sears and J.C. Penney. Earnings results for the prior quarter for the broader S&P overall, however, have continued to come in positive. By sector, technology and energy both performed positively, while materials and financials lagged by the greatest degree during the week.

Foreign stocks outperformed U.S. equities on average, with strength in the U.K. with the central bank keeping rates unchanged but taking on a more hawkish tone, while Europe gained a bit in local terms but performed negatively in USD terms—most of the French election excitement had already played out the prior week before the election actually happened. Regardless, interest is now moving to parliamentary elections and other nations as the core concerns about the EU have been alleviated for now. Investor flow and interest are also moving toward European equities, due to lower valuations (which have been the case for a while now), but more immediately due to better relative performance versus domestic equities—this is often what it takes for investor sentiment to turn. Emerging markets gained the most ground, with Brazil and China were big winners for the week. In Brazil's case, the inflation fell to its lowest level in a decade, implying further rate cuts could be appropriate. For China, a rise in foreign exchange reserves buoyed sentiment.

U.S. bonds ended in the positive for the week with rates declining somewhat and flows moving away from stocks modestly. U.S. high yield and investment-grade credit were the best-performing groups, by only by a fraction of a percent. A stronger dollar acted as a headwind to developed market foreign bonds, which generally fell back by the amount of the currency differential; however, emerging market bonds fared well on the week with less of a dollar impact.

U.S. bonds ended in the positive for the week with rates declining somewhat and flows moving away from stocks modestly. U.S. high yield and investment-grade credit were the best-performing groups, by only by a fraction of a percent. A stronger dollar acted as a headwind to developed market foreign bonds, which generally fell back by the amount of the currency differential; however, emerging market bonds fared well on the week with less of a dollar impact.

Real estate declined on the week in the U.S., while European REITs experienced positive gains. Domestically, healthcare was the best-performing group, while lodging/resorts and retail/malls declined substantially—the latter based on poor retailing earnings results.

Commodity indexes generally experienced gains during the week, led by a rebound in energy prices. West Texas crude moved up +3.5% to $47.84 by Friday on some signs that domestic stockpiles were drawing down a bit, as well as possibly stronger than expected compliance with OPEC production cuts abroad. Of course, these remain week-to-week news events, especially as meetings are schedule in the next few weeks to potentially extend the OPEC agreement further. Precious metals were slightly higher on the week, and mirrored by industrial metals falling slightly.

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 8, 2017.

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