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Weekly Review - May 26, 2015

Weekly Review - May 26, 2015

Guest Post - Tuesday, May 26, 2015

Summary

  • Economic results were again mixed, with some improvement in housing, tempered overall but higher core CPI inflation readings and stronger jobless claim data.
  • U.S. equity markets on average were slightly higher, while foreign equities ended up negative due to the influence of a stronger U.S. dollar that eroded the impact of a much better week in local terms. Higher interest rates generally pressured bonds and real estate, while commodities also lost some ground on average.

Economic Notes

(0) The April FOMC meeting minutes didn't shed a lot of additional color on the original press release, but underlying discussion appeared to be a bit more on the dovish side. Interestingly, members appeared to shy away from thoughts of a June rate hike, as more recent data from the later winter months had tempered—although the general committee consensus is that the softness originated from temporary weather-related factors and ad hoc events as opposed to more severe structural weakness. Another interesting tidbit was the suggestion of one committee member to consider raising the Fed's long-term inflation target above its current 2% level; this wasn't immediately tabled by the committee so could result in further discussion. Also, some conversation centered on the possible financial market ramifications around the timing of the initial rate hike, especially in bond markets due to popularity of fixed income in recent years and changes in liquidity conditions.

(-) The Philly Fed index fell -0.8 of a point in May to +6.7, which fell below the +8.0 consensus forecast. In the underlying data, employment fell by -5 points, while new orders and shipments both rose by a few ticks, as did cap spending plans for the coming six months. As all components are all solidly in the positive, conditions are not in terrible shape.

(0) The consumer price index for April rose +0.1%, which was on target with expectations. However, removing energy and food, core CPI gained +0.3%, which was about a tick higher than expected, and actually the highest monthly gain for the core in 5 years. Much of this was due to medical care services, which gained +1% (largest monthly gain in about 25 years) from a specific increase in hospital services. Shelter also gained +0.3%, which was less dramatic but a large portion of core CPI, used cars rose just over a half-percent, while other areas that gained ground in March fell off in April, including clothing and airline tickets. Year-over-year, the headline and core CPI figures changed -0.2% and +1.8%, respectively, as energy price declines still weigh down official numbers.

These inflation figures continue to fall below the Fed's target, which has been noted by the Fed as a factor in continued accommodative policy. As we've noted before, the risk of short-term higher inflation is a risk the Fed has been willing to take in return for avoiding deflation and stumbling into a 'false start' of economic growth. Those more negatively inclined, however, argue that consumer price inflation measurement methods prior to the mid-1990's when 'hedonic adjustments' (tweaks in the consumer basket for improvements in quality as well as replacing items no longer available or that have evolved over time) were added tells us that true Main Street inflation is different from official measures (likely higher). We also know that certain areas of the economy, such as college tuition and medical expenses, are rising at much faster rates than broader CPI—affecting different segments of the population uniquely—while laptop computers, cell phones and other technological components are generally falling in price, even with ongoing improvements built in to the equation. Lower inflation as measured by traditional CPI metrics does do one important thing—it keeps items pegged to formal government price indexes (like social security) rising at a more tempered rate than they perhaps would otherwise.

(-) The NAHB housing market index for May fell -2 points from the prior month to 54, which bucked expectations calling for an increase to 57. Current sales and prospective buyer traffic both worsened, whereas expectations for futures sales bumped up a bit. Regionally, the Midwest weakened, the West came in better than expected, while the remaining areas were flattish.

(-) Existing home sales fell by -3.3% for April to 5.04 mil. seasonally-adjusted annual rate, which disappointed relative to the median forecast calling for a gain of +0.8%. Single-family home sales dropped by -4%, while co-ops/condos were flat for the month—explaining the difference. On the positive side, March's figures were revised up by +6%, tempering the effect. Tight supply seems to be as much of a factor as demand, as new listings and inventories continue to be fall at low levels. The average days on the market measure is now below 40, which is several days below that of the last several years.

(+) Housing starts for April rose a dramatic +20.2% for April, which was more than twice the expected gain of +9.6%, to 1.135 mil. units on a seasonally-adjusted annualized basis, and a +9% gain from a year ago. This actually represented a high point for the recovery, and the first over-1.1 mil. reading since late 2013. The long-term average tends to run about 1.4 mil., so we remain below that line as well as expected long-term demographic demand. Building permits rose +10.1% on the month, which also dramatically outperformed expectations of a +2.1% increase—led by the multi-family group. Year-over-year, these have recovered to a 6.4% pace, which is in keeping of the trend over the past year.

These series are notoriously choppy from month-to-month, and even the year-over-year comparisons can be less smooth than seen in other series. For example, if one were to use the non-seasonally adjusted 'actual' month (rather than annualized equivalent figure), April housing starts came in at 103k—compared to 79k for March—so much less exciting, albeit still a large improvement. Economists have been hoping for signs of a recovery here for some time, and get their hopes up with any traces of it. Without delving further into the intricacies of seasonal adjustments (which especially affect areas like construction, where the bulk of activity naturally occurs in the warmer months, and drops off dramatically during the winter), in the case of the last few years, the winters were even more extreme than the seasonality tweaks could adjust for, which led to even more disappointment. Some at the San Francisco Fed were toying with a theoretical adjustment for 'residual seasonality,' which is the additional seasonality that isn't accounted for in the seasonal adjustments themselves, but this naturally gets trickier the more one takes the original results and adds in further smoothing calculations. So, we're stuck with these things as they are.

(+) Initial jobless claims for the May 16 ending week rose a bit to 274k, which was +4k over consensus estimates. Continuing claims for the May 9 week fell to 2,211k, which was -20k below expectations and represents a new low point for the recovery. No special factors appeared to color the results, per the Dept. of Labor. Interestingly, economists have been keeping watch on Texas, due to the energy industry sensitivity and corresponding impact from lower oil rig counts, but layoffs here appear to have stabilized somewhat from the higher levels earlier this year. Overall, claims data continues to look very strong, with the strongest readings in over a decade—other employment metrics aside.

Market Notes

Period ending 5/22/2015

1 Week (%)

YTD (%)

DJIA

-0.15

3.33

S&P 500

0.21

4.10

Russell 2000

0.69

4.42

MSCI-EAFE

-0.62

10.63

MSCI-EM

-0.55

8.50

BarCap U.S. Aggregate

-0.48

0.38

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

5/15/2015

0.02

0.55

1.46

2.14

2.93

5/22/2015

0.02

0.64

1.57

2.21

2.99

U.S. stocks ended the week just barely higher, with small-caps outperforming large-caps on the week. From a sector standpoint, growth sectors health care and technology, while consumer staples fell by a percent, lagging the pack. Reports from some larger retailers weren't received overly optimistically, nor were comments from airlines about more aggressive additions to capacity and possible fare wars. M&A activity and rumors continued to percolate, notably in health care and tech, although movements have been felt in other areas, such as retail, as well.

Foreign stocks weakened with a U.S. dollar that strengthened by about +3%. In local terms, both European and Japanese stocks gained over +2% on the week. In Europe, PMI came in lower than expected by half a point, but printed at 53.4, which showed improvement—such improvements this year have buoyed investor sentiments, whether or not ECB stimulus effects have been effective as a cause. Japanese GDP came in at a +2.4% annualized rate, better than expected, while the BOJ voted to maintain the current pace of asset purchases of 80 tril. yen/year, which naturally boosted sentiment there. The largest commodity-oriented countries, including Australia, Norway and Brazil, all lost significant ground on the week, although much of this was due to currency effects.

U.S. bonds ended up with negative returns as interest rose about 0.10% across the bulk of the yield curve—primarily in the 2 to 10 year area. On the positive side, high yield and floating rate were generally flat. With a stronger dollar, particularly vs. developed market currencies, foreign bonds came in negative.

Real estate in the U.S. lost ground, no doubt hindered by higher interest rates, while Japanese REITs fared far better with continued easing policy and European names lagged with a stronger dollar effect.

Commodity indexes fell several percent during the week, coinciding with rise in the dollar. WTI crude oil falling by several dollars mid-week before recovering to just under $60 by Friday. The chart over the previous month continues to show a gradual consolidation between $55 and $60 over the last month, with less volatility than we've been used to over the past year. On the week, wheat was the only positive performer, gaining almost a percent, while industrial metals saw the most extensive weakness. Continuing concerns over Chinese demand continue to weigh on this segment.

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 18, 2015.

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