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Weekly Review - November 21, 2016

Weekly Review - November 21, 2016

Guest Post - Monday, November 21, 2016

Summary

In the week after the election, attention refocused onto potential policies as well as the strength of current data to again gauge the probability of a Fed rate increase in December. Retail sales and manufacturing data both came in better than expected, as did housing starts and jobless claims. Inflation showed more tempered gains, as represented by PPI and CPI.

Equity markets gained in the U.S. in a continuation of a post-election rally. Foreign stocks gained in local terms, but a stronger dollar headwind pared these to declines. Investment-grade bonds lost ground again on higher interest rates, while floating rate debt fared well. Commodities gained on the back of higher oil prices.

Economic Notes

(+) Retail sales rose +0.8% for October, which outperformed the +0.6% increase expected, in addition to revisions higher for prior months totaling almost a half-percent. Sales of both autos and building materials gained +1% for the month, while gasoline rose +2%. On a core/control level, excluding the volatile groups, sales rose a similar +0.8%, but even more substantially outperformed expectations calling for +0.4%. Strength was seen across the board, including non-store (i.e. online) retail, which gained +1.5%, as well a general merchandise and electronics.

(+) The New York Empire manufacturing survey improved from a negative -6.8 in October to +1.5 for November, which outperformed expectations calling for a continued weak -2.5. Components were mixed, with new orders and shipments rising into expansionary territory, but employment showed deeper contraction. While these regional monthly reports can be spotty, a show of strength is obviously better than the opposite.

(-/0) The Philadelphia Fed survey for November came in at +7.6, which was two-tenths lower than expected and a few points lower than last month's result. New orders and shipments gained steam by rising a few points into further expansionary territory, as did employment in becoming slightly less contractionary. Along with the New York Empire report, this shows positivity in the manufacturing segment.

(0) Import prices for October rose +0.5%, which was a tenth of a percent higher than expected. However, excluding fuels, prices fell by -0.1%. As implied by those results, imported petroleum was the key culprit, rising +7.5% for the month, while prices for auto imports gained +0.3%. Oil is obviously the swing factor in month-to-month inflationary pressures, but the direction of the dollar (which has gained ground over the past six months but remains flat on a year-over-year basis) is another key driver.

(0) The producer price index rose +0.3% in October, which was along the lines of consensus. However, core PPI, excluding food and energy, declined -0.2%, contrary to an expected gain of +0.2%, due to a drop in the 'trade services' category that can be somewhat volatile month-to-month. Health care gained +0.2% as one of the larger areas of change for the month. Overall, though, offsetting influences resulted in a muted report.

(0) The consumer price index (CPI) for October rose +0.4% on a headline level and +0.2% on an ex-energy and ex-food core level, which were generally on par with expectations. Energy prices rose +3.5% to move the headline number, while food prices were slightly lower. In the core component, airline prices declined -2%, as did wireless phone prices (competitive price wars here continue) and the recent culprit, medical care/supplies/equipment inflation was flattish. However, owners' equivalent rent rose +0.3% in keeping with a continued strong housing price environment. Year-over-year, headline and core inflation rose +1.6% and +2.2%, respectively, which remain well within recent ranges.

It's important to remember that inflation is traditionally measured in trailing 12-month terms, so the 'old' months roll off which are replaced continually by new data. Due to this, extreme influences such as the oil price decline of a few years ago begin to become less influential and partially explain why inflation is 'normalizing' higher. Recent fears about inflation have been focused on the potential impact of Trump's global trade policy and planned fiscal stimulus of tax cuts and infrastructure spending, which could boost economic growth, and hence, inflation; however, any actual impact remains to be seen.

(0) Industrial production was flat on net in October, relative to an expected gain of +0.2%, due to several offsetting factors. The main culprit was utilities production falling -2.6% due to Oct. being one of the warmest such months on record, depressing demand for heating. Mining production, however, gained over +2%, due to gains in coal and oil support services and an improving rig count. Manufacturing production rose +0.2%, which was a tenth better than expected, and consistent with small gains in manufacturing seen in other data. As a component of this auto production rose at a healthy clip of +0.9%. Capacity utilization came in at 75.3%, which was below consensus expectations calling for 75.5%.

(+) Housing starts rose a sharp +25.5% for October, surpassing the expected +10.4% increase. This data point is typically volatile month-to-month, to say the least, but anecdotally it was the largest one-month increase since 1982. Under the hood, interestingly, this result was due to a +11% gain for single-family, but also a +69% gain for multi-family starts (to reverse a -40% decline the prior month). The gains appeared to be strong nationwide, although the Midwest and Northeast saw the most dramatic gains. Building permits rose +0.3% for the month, compared to consensus forecast expectations for a -2.7% decline. Single-family permits rose +3%, while multi-family fell -3%. Overall, it was a volatile month as is often the case in this series, but it does demonstrate demand for housing in response to rising prices and demographic demand (as building during the recovery hasn't kept up).

(0) The NAHB homebuilder sentiment index for November came in flat at 63, which was as expected. Prospective buyer traffic ticked a point higher, while current sales were flat and future sales expectations declined by a few points. Regionally, the West, Northeast and Midwest all improved in sentiment, while the South was unchanged. Overall, the index remains near recovery highs, which tends to be a positive for housing start activity going forward.

(0) The Conference Board's Index of Leading Economic Indicators rose +0.1% in October, which was a slightly slower pace than the prior month. Key drivers were strength in the interest rate spread (with higher longer-term rates) and average weekly hours, while jobless claims and new orders represented negative influences. The coincident and lagging indicators rose +0.1% and +0.2%, respectively.

(-) Initial jobless claims for the Nov. 12 ending week fell by -19k to 235k, which was far below expectations of 255k. In fact, these are the lowest claims readings since the early 1970's, with the caveat that Veteran's Day (or any holiday) can cause distortions in the normal claims figures. Continuing claims for the Nov. 5 week came in at 1,977k, which were also below the 2,030k expected.

Market Notes

Period ending 11/18/2016

1 Week (%)

YTD (%)

DJIA

0.26

10.98

 

S&P 500

0.89

8.87

Russell 2000

2.62

17.34

MSCI-EAFE

-1.52

-3.30

MSCI-EM

-0.54

6.35

BarCap U.S. Aggregate

-1.02

2.54

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

11/11/2016

0.48

0.92

1.56

2.15

2.94

11/18/2016

0.44

1.07

1.80

2.34

3.01

U.S. stocks continued their decent run following the prior week's election. From a sector standpoint, energy and financials saw the largest gains, with higher oil prices and hopes for reduced financial industry regulation, respectively, while health care declined a percent. Fed Chair Yellen's testimony to Congress also reiterated that a rate increase could be 'appropriate relatively soon', assuming current data continues in a growth trajectory.

Foreign developed market stocks were generally higher in local terms, led by Japan, where GDP growth came in at a faster rate than expected; however, a stronger dollar turned developed market gains into losses. Emerging markets lost ground in local terms, but with a smaller currency impact actually outperformed developed markets, with strong weeks in commodity-oriented Brazil, Russia and Mexico. The central bank of Mexico raised interest rates in order to combat the sharp decline of the Peso and stem inflationary impacts.

U.S. bonds lost ground during the week as interest rates ticked up again with the bellwether 10-year Treasury getting above 2.3% for the first time since last December. Credit outperformed government debt, with high yield ending the week with minimal losses and floating rate bank loans continuing their positive performance of recent weeks. Foreign bonds lost ground in line with U.S. bonds, with ended up worse due to a stronger dollar for the week.

Real estate gained in the U.S., similar to broader equities and bucking the impact of higher interest rates. Foreign REITs generally declined with a stronger dollar headwind.

Commodities experienced gains for the week, despite a stronger dollar. Oil prices gained +5% to $46.40, upon renewed hopes (again) for OPEC production cuts. Industrial metals lost some ground in a partial reversal of strength the prior week while precious metals struggled again as interest rates crept up, rendering gold and silver less attractive.

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 14, 2016.

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