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Weekly Review - May 2, 2016

Weekly Review - May 2, 2016

Guest Post - Monday, May 02, 2016


  • As expected, the FOMC didn't take any interest rate policy moves following their April meeting, while 1st quarter GDP came in a bit lower than expected, manufacturing data continued to show some ongoing weakness, while housing reports were decent.
  • Stocks lost ground on the week globally, not helped by the Bank of Japan's lack of action on the accommodation front. With interest rates falling, bonds gained, led by credit, which was helped by continued recovery strength in energy.

Economic Notes

(0) As reported mid-week, the FOMC took no action as expected and offered one of the blander statements in some time. However, many watchers took this as a sign that the door for a June hike remains open. In reality, the door is never closed for any meeting, as these things remain 'data dependent'. A rebound in markets has helped global investor sentiment generally, and some bottoming conditions in China have appeared to help fears as well. Yet, the baseline case continues to be no action as opposed to premature action on their part.

(-) The advance (first) release of 1st Quarter GDP came in at +0.5%, which was the slowest pace in two years and slightly less than the +0.7% expected by consensus. Estimates have trailed off significantly over the last several weeks, making this weak figure no surprise. Personal consumption rose by +1.9% (a few tenths better than expected), while gross private domestic investment declined by -3.5% (mostly from non-residential investment, which is no doubt affected by energy sector contraction to some degree). Net exports shaved -0.3% off of the total GDP figure, with dollar strength over the past year carrying through. The typical quarter-to-quarter variable, inventories, looked to subtract -0.3% as well, as these accumulated at a slower pace.

There have been a string of poor 1st quarter results for several years, which some economists blame on some seasonal adjustment problems due to extreme weather events in recent years and other difficult-to-explain factors in models that attempt to temper seasonal fluctuations (there have been several Federal Reserve and other academic papers written on the topic, with inconclusive results). That aside, assumptions for the remainder of the year are slightly better, with estimated growth all over the map, from +1.5% to +2.5% for the full year. On net, more of the same—positive but lackluster growth—but still better than that seen in other key developed nations.

(0) Personal income for March rose +0.4%, which was a tenth higher than expectations, while personal spending rose +0.1%, a tick lower than expected. The income side was affected by a near-half-percent gain in wages/salaries, while spending was kept tempered by services expenditures growing at a slower pace.

The headline and core PCE price indexes (preferred by the Fed over CPI) both rose +0.05% on the month. Services prices didn't change dramatically, while some soft durable goods experienced increases. This result took year-over-year headline PCE to +0.8% and core to +1.6%—both below long-term targets. The quarterly employment cost index rose +0.6% for Q1, which considered a modest gain (as it translates to a 2.4% annualized increase—slightly above that of goods inflation—and higher than the actual trailing 12-month gain of +2%).

(-) Durable goods orders for March rose +0.8%, which fell below the +1.9% gain expected. The headline figure reflected gains in the more volatile transportation equipment segment of +3%, which can be volatile month-to-month. Core orders fell -0.2%, and core shipments rose +0.3%—both of which were below expectations. This report continues to reflect weakness in the manufacturing complex.

(-) The Chicago PMI for April fell -3.2 points, remaining in expansionary territory at 50.4, but disappointed relative to the 53.0 reading expected. The reading was led by a drop in new orders as well as order backlogs and employment; on the positive side, production and supplier deliveries posted increases. While not a terrible report, such data continues to show some vulnerability in the manufacturing complex.

(+) The Case-Shiller home price index rose +0.8% for February, which was a tenth of a percent stronger than forecast. Of the 20 cities in the urban index, all came in with gains, led by West Coast strength in San Francisco, Denver and Seattle—all of which gained close to 1.5% for the month. Year-over-year, the rate of change for the full index was +5.4%, which remains strong on both a nominal and after-inflation basis.

(-) New home sales for March declined -1.5% to 511k, which was a bit below the forecasted slight gain of +0.2% to 520k. However, several prior months were revised higher by +23k. Gains in the Midwest and South offset declines in the West, while the Northeast region was unchanged for the month. New home inventory rose by 7k to 242k, its highest level since Fall 2009, which may act as a catalyst for sales activity (which may have been partially held back at least by lower inventories).

(+) Pending home sales rose +1.4% for March, which surpassed the +0.5% increase expected. The Northeast and South led with gains of +3%, the Midwest gained just a few ticks, while the West fell by -2%. Year-over-year, the national index showed a gain of +2.9%. The strength here bodes well for new homes sales in coming months, based on the connection between the two.

(-) The Conference Board consumer confidence survey fell by almost -2 points in April to 94.2, below the expected minor decline to 95.8, although the overall number remained well within recent ranges. The decline was led by a decrease in forward-looking expectations, while assessments of present conditions improved a bit, as did the 'labor differential', which measures how easy jobs are to come by.

(-) The final April edition of the Univ. of Michigan consumer sentiment index came in at 89.0, which was -0.7 of a point below the preliminary release and -1 below the expected level. Consumer expectations for the future fell by two points, while assessment of current economic conditions improved by just over a point. Inflation expectations for the coming 5-10 years were unchanged at 2.5%. Interestingly, this represents a low point for that series as (lack of) inflation pressures have seeped from headline data to consumer impressions.

(-) The March advance trade balance (deficit) narrowed from -$62.9 bil. to -$56.9 bil., which is more substantial than the flattish result expected. Goods exports fell by just over -1% (-6% year-over-year), while goods imports fell -4.3% (-10% year-over-year). No doubt the strong dollar has continued to affect the year-over-year figures, though the impact has lessened a bit this year.

(0) Initial jobless claims for the Apr. 23 ticked up a bit to 257k, but still ended below consensus expectations calling for 259k. Continuing claims for the Apr. 16 week fell to 2,130k, which was -6k below expectations. The DOL reported no special factors for the week. These levels remain very low and near the trough of the recovery period.

Market Notes

Period ending 4/29/2016

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

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Stocks were lower on the week, with the bulk of sectors performing in flattish fashion with a few outliers—utilities sharply outperformed, while technology and health care lost several percent each. Technology performed especially poorly thanks to famed investor Carl Icahn's announcement of 'I sold Apple,' considering worries about consumer growth in China. In recent weeks, nearly 80% of firms have beaten earnings estimates for the quarter while well over half have outperformed revenue projections as well, so the season has been considered much better than expected (although expectations were quite poor to begin with, which makes that assessment less meaningful).

The dollar fell by -2% on the week, which also helped the relative returns of several foreign markets relative to U.S. stocks. Internationally, Japanese stocks were the worst-performing (down -12% in local terms, less in USD terms), as the Bank of Japan opted to not to conduct further easing measures, although investor consensus was on the side of wanting additional QE. Inflation fell into the negative again, but labor conditions continue to improve (unemployment in Japan is just over 3%) as did industrial production and housing starts—which may have led to the decision which disappointed markets. European losses were minimal for the week, with low volatility, as Eurozone GDP grew +0.6%, which was low as expected, but did outperform that of the U.S. Speaking of central banks, China fixed the yuan a half-percent higher, which was largest 1-day appreciation since it was revalued.

U.S. bonds generally gained with a risk-off tendency for the week and lower interest rates across most of the yield curve. Credit spreads also tightened, lending to outperformance from high yield debt, which has benefitted from stronger energy pricing. Foreign bonds were mixed, with USD-based indexes gaining a few percent due to a weaker dollar and local indexes were mainly flat.

U.S. real estate was generally little changed on the week, as strength in mortgage and health care REITs was offset by a pullback in apartments/residential. Real estate in Europe and the U.K. outperformed equities, being up several percent. Year-to-date, the best global REIT returns have been in commodity exporters Canada and Australia, which have gained +25% and +15% respectively, in line with recovery in the commodity complex. However, real estate valuations on both the commercial and residential side in those two nations continue to be concerning for many analysts.

Commodities again moved higher, driven by oil, gold and a weaker dollar, although all major sub-groups ended up in the positive. West Texas crude sprung higher from $43.80 to $45.90, close to another +5% gain. For the year-to-date, energy and precious metals remain in the lead, each earning recovery returns of over +22%. Oil prices have recovered sharply as of late; last week, a DOE report showed a decrease in domestic production, which spurred sentiment. This is a point in the year when crude/gasoline storage buildups begin to turn into drawdowns, not to mention higher gasoline use from increased summer driving as well as refinery outages for seasonal changeover/repair. Expectations vs. actual results in production numbers as well as any response from the Middle East could add continued week-to-week sentiment changes going forward. Long-term price assumptions from firms who specialize in commodities appear to remain in the $50-60 range—with 'long-term' being the operative word.

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 April 25, 2016.

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