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Weekly Review - May 16, 2016

Weekly Review - May 16, 2016

Guest Post - Monday, May 16, 2016

Summary

  • In a slow week for economic data, retail sales gained more than expected, while consumer sentiment also came in showing strength. Jobless claims were the sole weak spot, but this may have been the result of one-off seasonal adjustments.
  • Stock markets fell across the globe along with poor retail earnings, while bonds gained with interest rates ticking downward. Due to a variety of cross-currents, crude oil prices rose again, into the upper $40's/barrel.

Economic Notes

(+) Retail sales for April rose +1.3%, which outperformed expectations of a +0.8% increase. Higher energy prices accounted for some of this increase (through the impact on gasoline station sales). Removing the more volatile components (gasoline, food, building products), trimmed the 'core' measure gain to +0.9% for the month, but a pace that was about twice as strong as the expected +0.4%. Results in the core group were led by 'non-store retailers' (i.e. online shopping mostly, which is discussed more below), which grew by just over +2%. Additionally, a few prior months' results were revised upwards by several tenths of a percent. Separately, in late April, the Census Bureau released its annual benchmark revisions to retail sales. The revisions were positive on net, raising the level of nominal core retail sales growth by 0.5-1.0% percent in recent years.

(0) The producer price index for April rose +0.2% which was a tenth lower than forecast. Removing food and energy, the core PPI measure rose just +0.1%, on target with expectations. The bulk of the difference was due to an increase in energy prices of +0.2% on the month, while food prices fell nearly a half-percent. Year-over-year, headline PPI was flat and core rose by +0.9%, reflecting the fact that these readings continue to be affected by the environment of low commodity prices.

(0) Import prices rose +0.3% for April, which was about half of that expected. However, excluding the fuels portion (which saw a sharp recovery during the month of over +4%), the gain was reduced to +0.1% as consumer goods prices declined by -0.3% during the month.

(0) Wholesale inventories moved upward in March by +0.1%, as expected, but this was largely offset by a revision lower for February and was essentially a flat result with the impact of petroleum excluded. Business inventories rose by +0.4%, while retail inventories rose by +1.0%'—largely due to motor vehicles.

(+) The preliminary May Univ. of Michigan consumer sentiment index rose from 89.0 the prior month to 95.8, exceeding expectations calling for a reading of 89.5. It appeared the increase was largely affected by a +10 point rise in forward-looking consumer expectations, while the assessment of current conditions ticked up by just a few points. Inflation expectations for the coming 5-10 years also rose a tenth to 2.6%.

(+) The government JOLTs job openings report for March showed an increase to 5,757k, above the forecasted 5,450k level. The openings rate ticked up to 3.9%, which matched a high from last summer, while the hiring rate edged down a tenth to 3.7% and the quit rate remained steady at 2.1%.

(-) Initial jobless claims for the May 7 ending week came in higher at 294k, larger than the expected 270k. Continuing claims for the Apr. 30 week also rose to 2,161k, above the forecasted 2,120k. Interestingly, it appeared that the entirety of the increase was oddly attributable to seasonal factors in New York, where claims rose by +23k on a seasonally-adjusted basis. However, economists continue to watch this factor for further detonation, which could mean labor improvements have peaked for the cycle.


Read the "Question of the Week" for May 16, 2016:

What happened to retail stocks last week?


Market Notes

Period ending 5/13/2016

1 Week (%)

YTD (%)

DJIA

-1.04

1.66

S&P 500

-0.44

0.96

Russell 2000

-1.06

-2.42

MSCI-EAFE

-0.28

-3.50

MSCI-EM

-1.15

0.24

BarCap U.S. Aggregate

0.28

3.89

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

5/6/2016

0.19

0.74

1.23

1.79

2.62

5/13/2016

0.29

0.76

1.22

1.71

2.55

U.S. stocks lost ground on the week on net, as weak earnings for a variety of large-cap retail stocks led sentiment downward. Defensive utilities were the leading sector on the week, as consumer cyclicals, industrials and financials suffered the most.

Foreign stocks in Europe and Japan gained ground in local terms, but a stronger dollar converted the week into a loss for both. Italian banks were another negative catalyst in the former, as they have been all year as another round of write-downs occurred. On the opposite side, Greece gained sharply (and up nearly +30% over the past month) as there appears to be political willingness to keep the fiscal austerity in place as the next upcoming bond payment to the ECB is looming in July'—and preventing a re-escalation of tensions seen in several prior occasions.

Emerging markets suffered the worst declines, led by losses in China in the -3% range. Over the prior weekend, China's trade data showed stagnant export growth (down -2% year-over-year) and tempered growth in imports (-11% year-over-year), so both were a disappointment. Imports weren't quite as bad from a volume standpoint, but lower pricing affects nominal calculated values).

U.S. bonds pushed upward with minor gains as poor risk asset returns pushed down interest rates. Government bonds and credit performed roughly in line. Foreign bonds were challenged by a stronger dollar on the week, largely ending up in the negative. Interestingly, Spain issued the first 50-year bond in several years, raising €3 bil. at a yield of 3.5% (although investor demand was over 3 times that amount). France and Belgium both issued bonds of similar maturities last month, while Belgium and Ireland issued 100-year debt at rates around the 2.3% range. In keeping with our discussion about government bond yields and duration during last week's monthly advisor meeting, 50-year and 100-year bonds at those yields offer durations of 23 and 40 years, respectively. Talk about interest rate risk.

Commodities rose again, with the energy sub-sector leading the way, up +5% for the week. West Texas crude rose from $44.60 to $46.90 as a flurry of news including Canadian wildfires and pipeline bombings in Nigeria, which, combined, knocked 1.5 mil. barrels/day offline. These events are in addition to an International Energy Administration report showing higher oil demand from emerging markets and a narrowing of the current oil surplus. Agriculture also rose on the week by a few percent and industrial metals declined by roughly the same amount, with copper and nickel both down significantly.

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 9, 2016.

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