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Weekly Review - November 2, 2015

Weekly Review - November 2, 2015

Guest Post - Monday, November 02, 2015

Summary

  • Economic data for the week was again mixed, with advance GDP for the third quarter coming in at a tempered level, but not too far off of expectations, while housing numbers and consumer sentiment surveys disappointed. However, the Chicago PMI manufacturing report moved back up into positive territory.
  • Equity markets gained a bit on the week in the U.S., but struggled abroad—especially in emerging markets. Bonds also lost ground domestically upon higher interest rates. Commodities were flat overall, but energy bounced back to gain a few percent on the week.

Economic Notes

(0) As we elaborated on in the mid-week Fed Note, the FOMC meeting was uneventful from an action-oriented basis (as there was no action). After the fact, some economists were surprised somewhat about the changes in language, including the reference to the ‘next meeting’ (December) as a point of demarcation for a possible policy change as well as removal of the references to a challenging foreign environment that were used in the Sept. meeting statement. Many are slicing and dicing the language changes in the release, as is usually the case, but these don’t appear to be as meaningful as suggested by first glance, and aren’t nearly as bullish on the economy as the Fed would have hoped to be at this point. As we mentioned before, every FOMC features an evaluation of the appropriate interest rate policy, so specifically mentioning that policy changes were on the table may reinforce their baseline timing and hopes for a December liftoff, but doesn’t really tell us anything we didn’t already know.

(0) The first estimate of 3rd quarter real GDP came in at an annualized +1.5%, which was just below the expected +1.6%. Consumer spending was more solid than thought, coupled with slower inventory accumulation which subtracted less than expected (these factors will tend to offset each other quarter-to-quarter due to calendar timing). Also, growth in business fixed investment was quite a bit below what some economists predicted in keeping with continual low corporate capex spending that has been characteristic of this recovery thus far. This was especially in the growth of investment structures, which was down -4%. PCE inflation was also low, at +1.2% on a quarter-over-quarter annualized basis, which again reflects very tempered pressures. Interestingly, as was pointed out by a well-regarded economist (Stephen Roach, formerly of Morgan Stanley), since early 2008, real personal consumption expenditures (over 2/3 of GDP) have grown at an average annual rate of +1.1%, which is the weakest rate since World War II. In the decade prior to the financial crisis (1996-2007), real consumption growth grew at a +3.6% rate.

(-) Both personal income and personal spending for September rose by +0.1%, which was about half that of expectations. Income was up nearly +3.5% from a year ago. The PCE headline and core price indexes fell -0.1% and rose +0.2%, respectively, which was largely in line with expected; more meaningfully, year-over-year the PCE headline inflation rose a tempered +0.2% and core gained +1.3%—both generally in line with consensus and other surveys that displayed similar very low levels of change. The employment cost index rose +0.6% on the quarter and +2.0% on a year-over-year basis.

(+) The Chicago PMI survey rose sharply back into positive territory in October, improving from a contractionary 48.7 last month to 56.2. Large gains were seen in both production and new orders.

(+) The trade balance (deficit) tightened by about $8 bil. from August to September, to -$58.6 bil. Nominal goods exports rose +2.4% on the month, reversing a prior decline, while imports dropped by a similar -2.6%, more than reversing a prior increase. This is good news, as it appears the strong dollar played less of a damaging role than in prior reports. While trade looks to have subtracted about 0.2% from annualized growth in Q3, this is less than was first predicted.

(0) Durable goods orders for September fell by -1.2%, which was slightly less than the -1.5% drop anticipated by consensus. Removing transports cut the decline to -0.4%, and core orders, which are classified as non-defense ex-aircraft, fell by only -0.3%, which reflected the large decline in civilian aircraft orders during the month and disappointed somewhat, where a small gain was expected in this series. There were some downward revisions to prior months as well, which was another negative. All-in-all, this is another indication of manufacturing slowing that has characterized the ‘soft patch’ seen in many other recent economic reports, and has kept GDP somewhat contained. Core capital goods shipments rose +0.5% during the month, which was a tick or so better than forecast, but also featured a few downward revisions.

(0) The S&P/Case-Shiller home price index for August rose +0.1% on a seasonally-adjusted basis, on target with expectations. The majority of cities experienced positive gains, with Portland and Dallas leading the way, showing gains of nearly +1% on the month; Detroit and Minneapolis moved in the opposite direction, losing about -0.5% each. Year-over-year, this series has shown a +4.7% increase, led by San Francisco and Denver, gaining +11% each. New York, Chicago and Washington D.C. rose the least, at just under +2%.

(-) New home sales for September fell by -11.5%, which was much more extreme than the -0.6% expected by median consensus, and occurred across all four major regions—the Northeast being the largest. This decline was also coupled with a downward revision for several prior months. Pending home sales fell by -2.3% for September, which disappointed compared to an expected gain of +1.0%. Seasonally, fall is not the best season for pending sales (compared to spring and summer), so this could have played a role in the results.

(-) The final Univ. of Michigan consumer sentiment index for October fell about -2 points from the initial estimate to 90.0—and also short of expectations calling for 92.5—although the figure was an improvement on September’s final result. Consumer assessments of current conditions fell by over -4 points while future expectations fell just slightly. Inflation estimates for 5-10 years out fell another tenth to 2.5%, which is the lowest level for this particular measure in over a decade. It tends to hover just under 3%, which is the realized long-term CPI inflation experience.

(-) The Conference Board’s consumer confidence index fell from 102.6 in Sept. to 97.6 for October, which disappointed relative to the 103 level expected. The change was mostly due to a decline in households’ downgrade in current economic conditions, while expectations for the future barely fell (future expectations have generally been more closely correlated to growth, so could be much more meaningful, as are many future- vs. present-condition based measures).

(+) Initial jobless claims for the Nov. 24 ending week rose +1k to 260k, which was less than the expected increase to 265k. Continuing claims for the Nov. 17 week fell by –37k, to 2,144k, more than expected compared to consensus estimates of 2,160k. These results continue to roll along at very low levels.

Market Notes

Period ending 10/30/2015

1 Week (%)

YTD (%)

DJIA

0.10

1.04

S&P 500

0.22

2.70

Russell 2000

-0.34

-2.53

MSCI-EAFE

-0.30

2.13

MSCI-EM

-2.39

-11.34

BarCap U.S. Aggregate

-0.32

1.14

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

10/23/2015

0.01

0.66

1.43

2.09

2.90

10/30/2015

0.08

0.75

1.52

2.16

2.93

U.S. stocks rose on the week slightly with another mixed result on the economic front and equally mixed earnings numbers. For Q3 as a whole, year-over-year earnings are looking to experience their worst decline since 2009—however, removing the energy patch from the equation, the results look quite a bit better, and solidly positive. From a sector standpoint on the week, healthcare and consumer cyclical stocks led the way, gaining several percent on the week, while more defensive staples and utilities lost ground.

The U.S. government agreed on a debt ceiling deal, that would extend the deadline predicted to be hit in early November to out to March 2017. No other legislation was piggybacked on the bill, which may be a good thing by turning this situation back into a ‘given’ instead of being held hostage by policy bickering—uncertainty from that was what caused so much market turmoil a few years ago, so perhaps some lessons have been learned. More than one economist has lamented the periodic turmoil each time this issue surfaces, with hopes for a longer-term fix for this process not looking likely anytime soon.

Overseas, stocks came in weaker generally, with Japan as one of the few major markets ending up in the positive, as the JCB voted overwhelmingly to keep the current stimulus plan in place and noted, similar to ECB President Draghi a few years ago, there are essentially ‘no limits’ on policy options for ongoing stimulus. Emerging markets were hit again, largely in the commodity exporter complex in Indonesia, Russia, and Brazil, among others (returns for the month of October, however, were quite good for this group).

U.S. bonds in the U.S. struggled, as hawkish FOMC language and lack of a real negative pushed rates higher (the path of least resistance at this point). High yield and other credit fared relative well during the week, while longer governments with little coupon cushion experienced the worst declines. Foreign bonds fared relatively well in developed markets (mostly Europe, but also Japan) as hopes for additional stimulus this year dampened interest rates, while emerging markets were mixed (some winners and some losers, based on oil dependency).

Real estate in the U.S. generally lost ground in line with higher interest rates, although the more cyclical lodging/resort sector recovered sharply, as did non-U.S. developed market REITs in Europe and Japan—again, with sentiment driven by hopes for additional economic/monetary stimulus that can be expected to help prospects for tenant demand growth critical to real estate pricing.

Commodities were largely flat on average, with indexes again driven by the amount of energy exposure. Crude oil prices took a tumble early in the week before recovering by +5% to near $46.50 by Friday. It’s now affecting the big players, as Chevron announced a cut of almost 10% of its workforce as a result of the new oil price reality. The worst case fears have trailed off a bit, though, as the last several months have seen prices stick to a general trading range of a few dollars in either direction of $45 over the last several months as demand and supply news has tended to offset from week to week. Last week, metals were generally weaker across the board, while agricultural prices were several percent higher thanks to the ‘softs’ group (specifically, cocoa, coffee and sugar), due to some crop harvest uncertainty abroad.

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 October 26th, 2015.

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