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Weekly Review - November 23, 2015

Weekly Review - November 23, 2015

Guest Post - Monday, November 23, 2015

Summary

  • Economic data last week was generally sub-par, led by below-expected results in manufacturing, housing and industrial data; on the other hand, the index of leading economic indicators turned around with positive results.
  • Equity markets around the globe were sharply higher, with the U.S. leading the way with few specific catalysts but perhaps more Fed policy certainty. Bonds moved slightly higher domestically, while foreign debt results were mixed along with a stronger dollar. Non-oil commodities such as industrial metals and natural gas provided the volatility in that segment for the week, as crude oil traded within a fairly tight range.

Economic Notes

(-/0) The Empire manufacturing survey covering the New York Fed district improved slightly, by just over a point to -10.7 for November, but still trailed median forecasts calling for -6.5, and continues to show a degree of contraction in output. While still negative, new orders and shipments demonstrated higher levels of improvement by several points over the prior month, while employment was roughly flat and still negative. This report coincides with a general softness in American manufacturing activity over the past several months, although signs of some improvement are encouraging.

(+) The Philly Fed index also improved more than anticipated in November, rising from -4.5 the prior month to +1.9, beating expectations of a negative -0.5 reading. Improvements were seen across the board among various sub-segments, although new orders and shipments remain slightly negative, while employment rose back into the positive.

(-) Industrial production for October fell by -0.2%, which stood in contrast to an expected +0.1% gain for the month. However, the manufacturing production component actually rose +0.4%, which was double the increase expected; the discrepancy was due to weakness in the mining/energy and utilities sectors, due to lower energy prices and weather-related effects, respectively. Capacity utilization fell by -0.2% as well, to 77.5%, which was along the lines of expectations.

(0) The consumer price index for October rose +0.2% on both a headline and core level, which happened to be right on target with forecast. Key components such a food and energy generally rose within a tenth or so of the index figure, so few major outliers appeared during the month. Hospital services prices rose +2%, representing one of the larger contributors for the month, while rent of primary residence rose by +0.3%, in a deceleration of gains in recent prior months. Consumer goods such as apparel, new and used cars all fell in price, which was perhaps related to end-of-year discounting. On a year-over-year basis, this took headline inflation to +0.2% and core (ex-energy and food) to +1.9%, which is right below the Fed target.

(-) Housing starts for October declined by a dramatic -11.0% to 1.06 mil. units, compared to an expected more moderate -3.8% drop. Multi-family starts, which are always volatile on a month-to-month basis, fell by -25% from Sept., while single-family only declined by just over -2%, at a level that hasn't changed much over the past 6-month period. Building permits, by contrast, rose +4.1% in Oct. to 1.15 mil. units, which outperformed expectations of a +3.8% gain. Here, multi-family rose +7%, while single-family gained just over +2% (and have risen by 7% over the past 6 mo.). These housing metrics continue to be sporadic, although have shown some signs of improvement. Significant debate among economists and strategists continues in regard to when the important housing segment will begin to finally take off toward more normal levels.

(-) The NAHB housing market index of homebuilder sentiment, fell -3 points in November to 62, which underperformed the expected 64 reading. The Oct. number had been the highest in a decade, so the peak was short-lived. The change appeared to be due to a weaker single-family sales outlook and a drop in housing activity in the South.

(+) The Conference Board's index of leading economic indicators for October rose by +0.6%, following a few months of declines, ending up with a gain of +1.6% for the last six months. The financial components (interest rate spread and stock prices), building permits and credit led the way, while ISM was the only negative component for the month. Both the coincident and lagging indicators rose by a more tempered +0.2% each, in a string of consecutive small monthly gains. As we've mentioned before, there is no new data here, but the combination of factors is meaningful from a macro standpoint to assess overall business cycle progress. At this time, these factors show a green light.

Latest LEI through March 2009, Latest CEI through June 2009

(0) Initial jobless claims for the Nov. 14 ending week came in line with expectations at 271k, which largely in line with the expected 270k. Continuing claims for the Nov. 7 week largely unchanged at 2,175k, which were +8k above expectations. No special factors were involved as claims continue to plug away at low levels.

(0) The October FOMC meeting minutes were hawkish to the extent that consensus pointed to a baseline of liftoff in December, all else equal. 'All else' of course, being that conditions remain data-dependent based on information between now and meeting time. The various reasons for improved sentiment towards rate changes included more confidence in the economic outlook, interest in keeping the potential for low-rate driven financial imbalances contained as well as central bank credibility issues (interesting to see that acknowledged by the Fed, although it's valid). However, it appears that care is being taken to keep rate expectations low for coming periods to prevent fears of a rate spike of any kind.

As the charts below demonstrate and we've discussed a few times already, probabilities of a December rate hike have moved back above 2/3, although this metric can be quite fickle and reactive to both internal economic and outside events.

Probability of Fed Funds greater than .125% at Dec. meeting

Market Notes

Period ending 11/20/2015

1 Week (%)

YTD (%)

DJIA

3.48

2.28

S&P 500

3.34

3.40

Russell 2000

2.52

-1.33

MSCI-EAFE

2.52

1.31

MSCI-EM

2.52

-11.80

BarCap U.S. Aggregate

0.15

0.68

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

11/13/2015

0.14

0.86

1.67

2.28

3.06

11/20/2015

0.12

0.93

1.70

2.26

3.02

U.S. stocks experienced sharply positive returns, in fact the best week in over a year, although there was no key news event to pinpoint as a catalyst. Partially, some stability in crude oil pricing seemed to help, as did the FOMC minutes that alluded to more certainty about expectations for a December interest rate liftoff as a base case. Every S&P sector ended up in the positive, with growth components consumer discretionary and technology leading with gains over +4%, while utilities and energy were the laggards at around or just under +2%. Despite a 'risk-on' tendency during the week, large- and mega-cap stocks continued to outperform small-cap names, which remain in the negative performance category year-to-date.

Foreign equities also gained on average, with emerging markets slightly edging out developed, as Russian stocks ended up the winners after an apparently successful G-20 meeting with Putin and some cooperation on the terrorist front—these types of developments raise hope for reduced sanctions, that would help Russia get back on more solid economic growth footing. Other commodity nations also gained on the week, including Brazil, Mexico and Norway, while Japan came in last place, only gaining a percent for the week, as monetary policy there was kept unchanged.

U.S. bonds gained a few basis points in total return as yields edged slightly lower, with governments leading and U.S. high yield indexes lagging with continued concerns over the energy/materials segment. Emerging market and European periphery debt fared well in a generally risk-on week.

Real estate experienced sharp gains, led by U.S. health care and residential—the latter no doubt aided by continued concerns over single-family housing data. Lagging areas included Asia as well as U.S. lodging, which has experienced double-digit losses year-to-date as the worst-performing REIT segment.

Commodity indexes were down a bit, largely due to weakness in industrial metals—copper and nickel specifically as Chinese growth concerns fell into the forefront. Crude oil was surprisingly tame, experiencing just a slight loss as pricing moved around in the tight $41-42 area most of the week. However, natural gas prices declined nearly -10% upon inventory/oversupply concerns and warmer-than-average temperature forecasts.

Have a good week and Happy Thanksgiving to you and yours.

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 16th, 2015.

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