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Weekly Review - May 9, 2016

Weekly Review - May 9, 2016

Guest Post - Monday, May 09, 2016

Summary

  • Economic data for the week was highlighted by continued mixed results in manufacturing, but stronger non-manufacturing/services data. The employment situation report for April was a bit of a disappointment, mostly due to the doubt it casts on Fed action in the near future.
  • Equity markets declined on the week, but domestic high-quality bonds performed positively as interest rates declined. On the other hand, U.S. high yield and emerging market bonds weakened in line with lower oil prices.

Economic Notes

(-) The ISM manufacturing index ticked down in April, to 50.8, about a half-point lower than the expected 51.4 but remained in expansionary territory. In the details of the report, production and new orders ticked down a few points (but remained expansionary), while employment and new export orders gained a bit of ground and inventories fell. However, the split consisted of strength in the automobile segment while oil/gas remained weak, which offset each other somewhat. Prices paid also increased sharply, which is aligned with recent increases in commodity prices across the board.

(-) Non-manufacturing ISM, on the other hand, rose in April to 55.7, higher than the expected 54.8. The details of the report showed strength in a variety of components, including new orders (which rose to almost 60) and employment, while prices paid also moved higher. Prices paid for services has a bit of a different connotation for non-manufacturing items than it does manufacturing (where prices paid can be a more dramatic pass-through of higher commodity input prices). Overall, the report was a decent one, and a reversion back to later-2015 levels; with 50 being the cut-off for expansion vs. contraction, the 55 and over level is considered positive.

(-/0) Construction spending grew +0.3% in March, which was two-tenths below expectations. Residential construction led the way, with a +1.5% increase, while non-residential declined by nearly a half-percent.

(0) The trade balance narrowed more than expected from -$47.0 the prior month to -$40.4 bil. in March, and tighter than the -$41.2 bil. expected. Both goods imports and exports declined, so activity in general was lower, while services edged upward a bit.

(0) Fed Senior Loan Officer Survey for the 2nd quarter showed that banks tightened lending standards in commercial industrial and real estate loans, but eased standards for most residential real estate lending. Demand appeared to have weakened during the period for commercial/industrial loans, but increased for commercial and residential real estate loans of all types. Willingness to make consumer installment loans (auto and credit cards) increased, along with consumer demand.

(-) The ADP employment report for April showed gains of +156k, which fell short of the expected +195k. Services experienced the greatest gains, of +166k jobs added, including +27k business/professional and +25k trade/transports/utilities. Goods-producing jobs declined by -11k net on the negative side, which included a large drop in manufacturing employment.

(0) Initial jobless claims for the Apr. 30 ending week rose to 274k, which was +14k above expectations. Continuing claims for the Apr. 23 week ticked downward to 2,121k, which was -7k below expectations. No special factors appeared to be at play, per the DOL. This is the time of year, however, where seasonal shutdowns in certain areas, such as auto plants, may play a factor on certain weeks.

(-) The April employment situation report was a bit of a disappointment compared to expectations and results of recent months. Nonfarm payrolls came in at +160k, which came in short of the anticipated +200k; additionally, prior months were revised downward by -19k—mostly in the areas of construction, retail and government. For April, job gains occurred in professional and business services (+65k), health care (+44k) and finance (+20k). Losses continued in mining (-7k, which includes oil/gas extraction activities); overall, mining employment has fallen by a total of -191k since its peak in Sept. 2014—the bulk of which are categorized as 'support activities'. The household survey showed a contraction in employment for the month following several months of strong gains.

The unemployment rate was unchanged at 5.0%, compared to expectations of a tenth of a point drop. This was partially affected by the labor force participation rate falling a few tenths to 62.8%. The U-6 underemployment measure, on the other hand, fell a tenth to 9.7%. Additionally, the number of long-term unemployed (6 mo. or more) declined by -150k.

Average hourly earnings rose +0.3% for the month, which was generally as expected, and represented a +2.5% increase over the prior year. Average weekly hours worked rose a tenth to 34.5, which was also considered a positive.

(0) Earlier in the week, nonfarm productivity came in at -1.0% for the first quarter, which was slightly less negative than consensus expectations calling for -1.3%. Year-over-year, productivity grew at a rate of +0.6%, which is considered to be quite slow. Productivity remains very low, growing at a rate of about +1% on average during the recovery period—the slowest in the post-war era (the average per year has been about 2.4%). Unit labor costs rose +4.1% annualized for the quarter, almost a percent higher than expected, and resulting in a +2.3% year-over-year increase. There have been some signs of wages tightening over the past quarter, but evidence remains sporadic and will have to be watched.

Overall, this jobs report disappointed some people, as the pace of gains from recent months appears to have taken a breather. More importantly, it has caused some economists to pare back their thoughts of a Fed rate move in June (others were skeptical of even that being possible). Instead, general expectations have been pushed back to September or December—closer to the more 'pessimistic' forecasts seen earlier in the year.

Market Notes

Period ending 5/6/2016

1 Week (%)

YTD (%)

DJIA

-0.10

2.73

S&P 500

-0.33

1.40

Russell 2000

-1.40

-1.38

MSCI-EAFE

-3.03

-3.23

MSCI-EM

-4.15

1.41

BarCap U.S. Aggregate

0.17

3.60

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

4/29/2016

0.22

0.77

1.28

1.83

2.66

5/6/2016

0.19

0.74

1.23

1.79

2.62

U.S. stocks generally lost ground on the week, led by mixed economic and earnings releases. From a sector standpoint, energy and materials were the hardest hit, in conjunction with commodity prices, while defensive consumer staples and utilities earned positive returns for the week. With earnings season wrapping up, and close to 90% of the S&P having reported, the headline number continues to look weak with -6% year-over-year earnings growth. However, removing energy from the equation raises the figure to just under +4%; so a similar story to what we've seen over the past year.

It may appear that we've seen less volatility over the last several weeks, and, in fact, we have. From March 1 through Friday, the average daily absolute change has been just under +/- 0.50% per day, which is a shade under the long-term average of +/- 0.66% experienced since 1950. During January and February, the average daily absolute change spiked at +/- 1.09%, so it didn't just seem more volatile—it significantly was.

Abroad, Japanese shares led with positive results, while most other regions performed negatively in line with U.S. stocks as well as the headwind of a stronger dollar. Emerging markets suffered the most, down nearly -5%, on commodity weakness—mainly among the larger BRIC exporters such as Brazil, Russia and Mexico—although negative returns were widespread globally. Turkey's prime minister abruptly resigned in a disagreement with the long-standing president, corresponding with a severe market decline.

U.S. investment-grade bonds gained some ground on the week, with general risk-off sentiment for equities and lower interest rates. No doubt, the poor employment report on Friday caused analysts and traders to reevaluate the likelihood of Fed action in coming months, which could perpetuate an assumed 'low for longer' rate environment. (Interestingly, fed funds futures now indicate a <5% chance of a hike next month and just under 50% for December.) Conversely, high yield debt lagged with lower oil prices. Developed market foreign bonds also lost some ground, with local currency emerging market bonds down several percent in keeping with dollar strength.

U.S. real estate bucked the trend of other equity groups, coming in with a +5% gain for the week, led by retail. Foreign REITs lagged with negative returns, in similar fashion to other foreign equities.

Commodities declined several percent, led by a stronger dollar—weakness was experienced in most all sub-groups. Industrial metals lost the most ground, but oil news continued to drive sentiment, with prices declining from $46.00 the prior week to $44.65 by Friday. Iran discussed the possibility of participating in a production quota under certain conditions, while Saudi Arabia raised prices for certain crude sales to Asia—which boosted sentiment of traders.

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 2, 2016.

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