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Weekly Review - November 10, 2014

Weekly Review - November 10, 2014

Guest Post - Monday, November 10, 2014

Summary

  • The headline-worthy ISM manufacturing survey came in better than expected, while other releases were mixed. The employment situation report was also decent, but not overwhelming. The mid-term election that resulted in a Republican takeover of the Senate was a moderate boost to sentiment mid-week.
  • U.S. equity markets generally rose on the week, foreign markets were weaker. Bonds were generally flat as the yield curve flattened. A continued strong dollar was a headwind for both foreign assets and commodities.

Economic Notes

(+) The ISM manufacturing index rose from 56.6 in Sept. to 59.0 in October, surpassing expectations of 56.1 and was the strongest reading in a few years. The primary components of new orders, production and employment all improved during the month, while net exports declined—perhaps due to the impact of dollar strength. Similarly, the prices paid index declined, which was in line with cheaper commodity prices, but still gained on an overall level. Anecdotal commentary in the report showed strong demand and was positive across the board. While a score as high as 59 falls into the higher percentiles of strong releases, as we know, anything in the 50’s indicates growth.

(-)The ISM non-manufacturing index dropped a bit in October to 57.1, which was a disappointment compared to the 58.0 forecast. Business activity and new orders ticked down a few points, while employment rose a point (however all were in the ‘strong’ near-60 category). Prices paid moved downward as well, in keeping with other indicators.

(-) Construction spending in September fell by -0.4%, which disappointed relative to expectations of a +0.7% gain. As residential rose almost a half-percent on the month, the results were led by a -1% drop in the non-residential segment—in this case, street/highway spending and power were -3% lower. Commercial construction rose over a percent, however, so was a bright spot in the report.

(-) The balance of trade for September widened a bit into a larger deficit, to -$43.0 billion compared to a forecasted -$40.2 bil. As imports were little changed, this reflected a -1.5% decline in exports, which was driven by the industrial supplies segment (including petroleum). This may serve to lower Q3 GDP a bit in future revisions, and raise Q4 expectations.

(0) Factory orders for September fell -0.6%, which was on target with expectations. Core capital goods orders for the prior month were revised up slightly, and a bit more for core capital goods shipments.

(+) The Fed’s senior loan officer opinion survey showed that credit standards continued to loosen over the past three months, which is encouraging. This was particularly noted for commercial/industrial loans for firms of all sizes (large/mid a bit better than small), and the cost of funds fell a bit while demand for funds rose. On the commercial real estate side, loan standards continued to ease from last quarter’s trend, especially for construction/land development; standards for other segments didn’t change dramatically, but demand continued to build. Prime mortgage standards eased further, but not as quickly as the prior quarter, while demand turned from higher to flat; however, ‘nontraditional’ mortgage demand fell off and standards on such loans eased, in contrast to tighter conditions earlier in 2014. A few other areas, such as home equity and consumer installment loans, didn’t experience much easing, but banks generally were positive in terms of loan-making ‘sentiment.’ Credit card and auto financing demand gained, however. This measure is a ‘real-time’ gauge of loan demand vs. availability, so provides some useful information.

(+) The ADP employment report for October came in a bit better than expected, at +230k, compared to a consensus +220k. In the underlying data, construction gained almost +30k jobs, trade/transports/utilities gained +47k, while manufacturing gained at a softer rate of +15k. Additionally, the September number was revised up to +225k, closer to the government’s estimate, which tends to be the trend of how ADP and the official stats interact (they’re a bit more accurate on later revision than they are upon initial release).

(+) Initial jobless claims for the Nov. 1 ending week fell by -10k to 278k, but were again better than the expected 285k forecast. Continuing claims for the Oct. 25 week fell a bit to 2,348k, which was below the forecasted level of 2,363k. No special factors were reported by the DOL to raise questions of the data’s validity. Despite some early skepticism of the improvement in claims in this cycle, the trend has remained tenaciously strong and consistent.

(+) Nonfarm productivity for the 3rd quarter rose +2.0%, which was a half-percent better than forecast and in keeping with trend; the year-over-year productivity gain was just under a percent at +0.9%, which includes the impact of a weak Q1. Compensation/hour rose +2.3% and unit labor costs, which measures growth in comp/hr. per output/hr., rose +0.3% (a +0.5% gain was expected).

(0/+)The big employment situation report for October was decent, although a bit less robust than expected. Nonfarm payrolls in the establishment survey rose by +214k, which underwhelmed compared to a forecast of +235k. Growth was consistent across a variety of industries, including construction, factory and service, with a little better in health care/social assistance and transportation. Government employment rose less than the prior month, due to education effects and some back revisions for prior months were a net positive.

Despite expectations for no change, the unemployment rate fell a tenth of a percent to 5.8%—the best outright result since July 2008 when unemployment was on the upswing back from lows in mid-4’s. The labor force participation rate ticked back up a tenth of a percent to 62.8%, implying some stability in the underlying figure. The U-6 ‘underemployment’ figure (marginally attached to labor force and part-timers) came in even better, falling -0.3% to 11.5%. Average hourly earnings rose +0.1% to $24.57, about half of that expected, bringing the year-over-year figure to 2.0%—in line with broader inflation. Nonsupervisory/production workers, which are the majority, gained +0.2% on the month, so closer to expectations and trend. The average workweek lengthened a tick to 34.6 hours.

All-in-all, the strength of the report didn’t meet expectations, but it wasn’t terrible, either. The muted market reaction reflects this. One notable difference in recent months is the absence of major downside surprises, which implies that fundamentals are improving. The Fed’s commentary post-meeting acknowledged this as well (which it took them a long time to do). Of course, there are mixed market emotions about the whole thing, as everyone wants economic and labor strength, but such strength could also bring on a shortened timeframe until interest rate increases. There are times when economic growth and fickle investor sentiment don’t always coincide smoothly.


Read the "Question for the Week" for November 10, 2014:

How did last week's election impact the economy and market sentiment?


Market Notes

Period ending 11/07/2014

1 Week (%)

YTD (%)

DJIA

1.17

8.10

S&P 500

0.77

11.85

Russell 2000

0.01

1.91

MSCI-EAFE

-1.01

-3.79

MSCI-EM

-2.80

-1.50

BarCap U.S. Aggregate

0.08

5.20

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2013

0.07

0.38

1.75

3.04

3.96

10/31/2014

0.01

0.50

1.62

2.35

3.07

11/07/2014

0.03

0.51

1.60

2.32

3.04

U.S. stocks gained on the week, as decent-to-good news trumped the neutral. Large-cap stocks were all generally higher, while small-caps struggled early and never managed to end above zero. From a sector standpoint, conservative consumer staples and utilities were the gainers on the week, while healthcare and consumer cyclicals lost about a percent each. Healthcare stocks weakened partially due to the U.S. Supreme Court agreeing to hear a case that could threaten the government’s ability to provide Obamacare insurance tax credits.

The U.S. dollar, a comment for which has started to become a regular part of these reports, gained +2% on the week, causing another headwind for foreign and hard assets. Foreign stocks were generally down, in line with the dollar strength. Markets that bucked the trend were several in the European periphery, as the ECB announced that it’s seeking to expand its balance sheet by a trillion Euros while planning purchases of sovereign debt as well as equities. India and Japan also gained—the latter on continued strong sentiment due to planned asset buying as well. Stocks in Russia, Brazil and Turkey were down 5-10%, and were responsible for the bulk of negative index returns—the bulk of which was due to currency translation effects. Russia announced the possibility of using gold to pay for imports, interest rate increases and other measures hopes of stemming the ruble’s depreciation, which has been dramatic this year.

Bonds were little changed on the week, with bellwether rates ticking downward a few basis points. International bonds were negative in line with dollar strength. The Treasury announced cuts in the auction sizes for certain maturities, noting that reductions in 2- and 3-year issues are intended to reduce anticipated project overfunding in fiscal year 2015. The reduction is only by a few percent, but this type of trend may reduce supply over time and have an affect on yields for maturities involved.

Commodities were naturally affected by the rise in the dollar, and indexes fell by just less than the amount of its impact. On the stronger side, natural gas contracts rallied 20-25% as a cold snap is expected to hit many of the Northern states in the coming week. In other groups, base metals managed to get away with minimal losses, while West Texas crude fell from near $81 down to $78.50. Interestingly, gold gained 3% on Friday to near $1,170 in its best day in some time, which closed the gap on a poor week up to that point. Estimates from several commodities departments we review tend to peg the fair value to somewhere in the $1,000-1,200 range in coming years.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, CFA Institute, 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, Stratfor, 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 November 3, 2014.

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