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Weekly Review - November 20, 2017

Weekly Review - November 20, 2017

Guest Post - Monday, November 20, 2017

Summary

Economic data for the week was highlighted by stronger retail sales, mixed-but-still-strong manufacturing and industrial production results, along with slightly higher inflation. Homebuilder sentiment improved, while jobless claims remained very low.

U.S. equity markets were mixed with small caps outperforming large caps. Emerging market stocks similarly outperformed developed market equities. Bonds achieved positive gains, while foreign bonds were helped by a weaker dollar. Commodities lost a bit of ground with crude oil prices ending flat for the week.

Economic Notes

(+) Retail sales for October rose +0.2%, beating forecasts calling for no change. The headline number was driven by auto sales gains and food/beverage, which each rose +0.7%, offsetting weakness in building materials. The core/control retail sales measure came in at a stronger +0.3%, which met consensus forecasts, with strength in health/personal care and clothing/accessory. Non-store (online) retail sales results fell nearly a half-percent for the month.

(0) The Empire state manufacturing index fell -10.8 points to a still-positive +19.4 for November, but below the +25.1 reading forecast. Underneath the surface, new orders and inventories gained, while shipments and employment lost ground. Despite the mixed results for the month, the positive reading overall points to decent manufacturing activity.

(0/-) The Philadelphia Fed manufacturing survey for November fell -5.2 points to +22.7, which was just below the expected +24.6 reading. New orders gained, while shipments and employment fell, despite remaining in solidly expansionary territory—just not to the same degree as the prior month. Inventories declined, deeper into contractionary territory, while prices paid rose again to higher levels. Like the NY Empire report, November was weaker than October, but levels remain quite expansionary.

(+) Industrial production for October rose +0.9%, a pace almost twice that of the +0.5% gain expected. Manufacturing production as a subset, rose +1.3%, which also sharply surpassed expectations calling for half the gain reported; utilities output also gained +2.0%, which countered a -1.3% drop in mining (which includes the energy complex). Some of this impact was due to a bounceback from recent hurricanes, but the segment grew a bit regardless of that. Capacity utilization rose 0.4% to 77.0%.

(0) The consumer price index for October showed a gain of +0.1% and +0.2% on a headline and core level, respectively—largely in line with expectations. Energy commodity prices declined over -2%, which led the headline differential, as food prices were flat on the month; it appeared the gasoline disruption caused by recent hurricanes in prior months had abated. In other areas, the prices for used cars, shelter and medical care services all experienced increases on the month higher than that of overall inflation. On a year-over-year basis, headline CPI rose +2.0%, while core CPI increased +1.8%—both of which remain hovered around the Fed’s target level. Energy commodity prices (crude oil and gasoline) experienced a gain of +10% over the last 12 months, contributing to the differential, while shelter costs gained +3% during the year. Many other areas experienced far lesser degrees of inflation, or even deflation.

(0) The producer price index for October showed an increase of +0.4% on both a headline and core level, beating expectations of only a tenth or two. Food prices rose +0.5%, while energy prices were flat, both higher than expected. Other prices were taken higher by the trade services category, which gained +3%. Year-over-year, final demand PPI rose +2.8%, which was the highest showing in over five years. This was a faster pace than expected, in contrast to a more moderate CPI reading.

(0) Import prices rose +0.2% in October, which was about half the pace forecast, while September prices were revised up slightly. The ex-fuels edition was identical to the headline version, with industrial supply prices rising a percent. However, consumer goods prices excluding autos lost a tenth, reiterating higher car prices over the past month.

(+) Housing starts rose +13.7% for October to a seasonally-adjusted rate of 1,290k, surpassing the +5.6% gain expected. The usually sporadic multi-family group accounted for the bulk of the increase, rising by +37%, while single-family starts gained +5% to a level matching the prior cycle high. Regionally, the Northeast experienced the strongest gains, at over +40%, while the South and Midwest rose by almost +20% each. Building permits rose +5.9%, which also surpassed forecasts calling for +2.0% increase. Multi-family led here as well, rising +14%, while single-family gained +2%. The West region experienced the sharpest permit gains, while all others fared in the lower-to-mid single digits. Compared to a year ago, overall starts are down -2.9%, but the series can be very choppy from period to period. It’s experienced a steady climb upwards since the lows of early 2009, but upward progression seems to have flattened somewhat (although more from the multi-family side than the single-family side—with the latter showing expansion generally).

(+) NAHB homebuilder index ticked up +2 points to 70, countering expectations for a slight decline to 67. Current expectations for sales as well as prospective buyer traffic both increased, while future sales expectations fell a bit. Regionally, the Northeast gained the most ground, while others were flat or experienced slight gains.

(0) Initial jobless claims for the Nov. 11 ending week rose +10k to 249k, rather than the expected drop to 235k. Continuing claims for the Nov. 4 week fell by a dramatic -44k to 1,884k, below an expected level of 1,894k—reaching a new low point for the cycle. No unique anecdotes were mentioned, other than continued claims being added to Puerto Rico’s count; otherwise, overall claim levels remain very low, which point to a strong underlying labor market nationally.

Market Notes

Period ending 11/17/2017

1 Week (%)

YTD (%)

DJIA

-0.19

20.76

S&P 500

-0.06

17.27

Russell 2000

1.24

11.23

MSCI-EAFE

-0.59

20.95

MSCI-EM

0.71

31.80

BlmbgBarcl U.S. Aggregate

0.24

3.20


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

11/10/2017

1.23

1.67

2.06

2.40

2.88

11/17/2017

1.29

1.73

2.06

2.35

2.78

U.S. stocks were mixed with large-caps coming in slightly negative, while small-caps recovered with sharper gains, as earnings reports for the week came in with strong results. By sector, consumer discretionary and consumer staples led the way with gains over a percent, helped by a strong showing from constituent Wal-Mart, while energy stocks lost the most ground during the week, down over-3%, as oil prices fell back somewhat during the week. The House passed their version of the tax bill during the week, but it remains to be seen what happens in the Senate, whose version varies in some respects. With Congress out for the holiday week, news will have to turn elsewhere for the time being.

Foreign stocks were mixed, with more negative returns in Europe and Japan helped somewhat by a weaker dollar, following weaker-than-expected earnings. Interestingly, in Japan, stocks lost -2% in local terms, despite strong corporate profitability, but a government report noted that the nation could be close to exiting its period of deflation (which would naturally result in lowered QE over time). Similarly to developed markets, a weaker dollar turned smaller emerging markets gains more strongly positive. Strength in Brazil and South Africa offset weakness in China and Russia. Overall, the recovery occurring in foreign markets continues to press higher and has caused some economists to reassess their assessments of global growth higher over the next year or two.

U.S. bond indexes rose on the investment-grade side, as rates declined on the longer end of the yield curve, although they twisted a bit higher on the shorter-side, in keeping with expectations for the Fed to move rates higher in December with recent benign economic and labor news, as well as higher inflation last week. While most investment-grade bonds performed within a fairly tight range, high yield lagged with flat returns, in keeping with more recent weakness. Developed market foreign debt performed similarly to domestic bonds, although a weaker dollar propelled gains to nearly a percent for the week. Emerging markets in both local and USD terms fared among the best in the group.

Real estate in the U.S. declined slightly, with residential real estate suffering, while mortgage REITs and retail/malls bouncing back from recent negative momentum. REITs lost more ground and European real estate gained.

Commodity indexes lost ground, despite the weaker dollar. Precious metals led, by gaining nearly +2%, while energy, industrial metals and agriculture as a whole all declined. Despite a dip mid-week, due to demand concerns noted in an international agency report and rising U.S. production, crude oil prices recovered close to where they started the week, at $56.71.

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 November 13, 2017.

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