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Weekly Review - November 24, 2014

Weekly Review - November 24, 2014

Guest Post - Monday, November 24, 2014

Summary

  • A busy week of economic data releases: modest weaker industrial production and below consensus expected capacity utilization in October; absent deflationary risk, both domestic PPI and CPI in October came in slightly above the consensus expectation, but remained within the Fed's inflation target.
  • Mixed housing market data in October showed disappointing housing starts with stronger building permits number and an upside in existing-home sales.
  • U.S. job markets continued to slowly improve as initial jobless claims stayed below 300k for the tenth week, the first such stretch since 2000. The 4-week moving average of continuing claims fell to its lowest level since January 2001.
  • Fueled by major central banks' further monetary easing commitments, global equity markets were generally up with EM outperforming domestic equity and EAFE stocks.

Economic Notes

(-/0) The general business conditions index of the Empire State Manufacturing Survey improved from 6.2 in October to 10.2 in November, but slightly below the consensus expected 12.0. Business conditions for New York manufacturers continued to expand as indicated in the gains of the new orders and shipments indices; however, reductions in the employment and prices received indices offset some of the strength in the current indicators. The index for future general business conditions for next six months climbed six points to 47.6 in November, marking the highest level since January 2012. Optimism about future conditions expressed itself the most in the future new orders, employment, capital expenditure and technology spending sub-indices.

(-) After surging 0.8% in September, industrial production edged down 0.1% month-over-month to 104.9 (2007=100) in October, missing the market consensus +0.2% rate. Over a one-year period, total industrial production rose 4%. Within the major industry groups, mining production fell 0.9%, particularly in the oil and gas-related categories; however, on a year-over-year basis, mining production was up 9.9%. In addition, utilities output declined 0.7% as mild weather dragged natural gas utilities production. Excluding more volatile categories, manufacturing production actually increased 0.2% in October, right on target as the consensus expectation. The capacity utilization rate for the industrial sector fell 0.3% from 79.2% in September to 78.9% in October, below the consensus expected 79.3%. The utilization rate is still 1.2% below the average rate of 80.1% for the last four decades.

(0/+) Producer Price Index (PPI) for final demand was up a seasonally adjusted 0.2% in October from September, slightly higher than the consensus view of the 0.1% decline. The upward surprise was mainly attributed to the sub-index in the final demand services, which moved up 0.5% while the sub-index for the final demand goods declined 0.4% led by 3% falling in energy prices. Within the final demand services category, a 26.1% jump in margins for gasoline stations explained for nearly 40% of the price increase in the category as retail gasoline prices declined more slowly than wholesale prices. The core PPI (PPI- ex Food & Energy) for October was up 0.4%, above the consensus view of the 0.1% increase.

(0) The Headline CPI was flat in October, month-over-month on a seasonally adjusted basis, slightly above the consensus expected 0.1% decrease. The food index rose 0.1% while the energy index declined 1.9% in October. In the last 12 months, the CPI was up 1.7% before seasonal adjustment, including a 3.1% increase in the food index and a 1.6% decline in the energy index. Excluding food and energy, the core CPI increased 0.2% in October, exceeding the consensus expected 0.1%. The surprise was mainly due to price increases in airline fares, lodging away from home, household furnishings and operations and prescription drugs, etc.

(0) Initial jobless claims for the week ending November 15 came in at 291k after seasonal adjustment, which was slightly worse than the 284k expected by consensus. The 4-week moving average was 287k, trending slightly upward from the previous week's revised average by 1,750. No special factors impacted the latest initial claims. Continuing claims for the week of November 8 decreased 73k from the previous week to 2,330k, a slightly positive surprise from the consensus view of 2,370k. The 4-week moving average of continuing claims continued edging lower to 2,369k, marking the lowest average level since January 2001.

(0) Housing starts in October came in at a seasonally adjusted annual rate of 1,009k, down 2.8% from September, missing the consensus expectation of a 0.8% gain but still 7.8% higher than the level in October 2013. The reading's monthly decline was driven mainly by the volatile multifamily category's lower housing starts. By region, only the South saw starts rising last month. Building permits in October were at a seasonally adjusted annual rate of 1,080k, up 4.8% compared to September and better than the consensus expectation of a 0.9% increase. The increase in building permits resulted mainly from the multifamily category, particularly for the 2 to 4 building units.

(+) Existing-home sales in October were up 1.5% to a seasonally adjusted annual rate of 5.26 million. The latest monthly increase was better than the consensus of -0.4%. Existing-home sales increased in all regions except the West, where the sales level remained below a year ago.

Market Notes

Period ending 11/21/2014

1 Week (%)

YTD (%)

DJIA

1.06

9.73

S&P 500

1.21

13.71

Russell 2000

-0.10

1.88

MSCI-EAFE

1.03

-1.96

MSCI-EM

1.37

0.17

BarCap U.S. Aggregate

0.09

5.29

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

11/24/2014

0.02

0.54

1.62

2.32

3.04

11/21/2014

0.01

0.53

1.63

2.31

3.02

The domestic equity market marched higher for the fifth consecutive week as global central banks pledged to continue stimulating economies with additional accommodative measures.

The S&P 500 index hit several new all-time highs last week, ending its year-to-date performance above 13%. Large cap stocks outperformed both mid and small cap stocks. Within the S&P 500 index, the materials, energy, utilities and health care sectors led the markets, outperforming the telecom, technology and financial sectors.

Outside the U.S., bad news came from the world's third-largest economy: Japan's GDP declined 1.6% in the third quarter after having contracted 7.3% in the second quarter. To deal with Japan's recession, Prime Minister Shinzo Abe announced a package of economic stimulation plans, including an 18-month delay of a sales tax hike originally targeted for October 2015. Meanwhile, European Central Bank President Mario Draghi reiterated the bank's commitment to expanding its bond purchase program if the Eurozone economy deteriorates further. European investor confidence was boosted as Germany narrowly averted recession in the third quarter. Germany's Q3 GDP growth gained 0.1% after the second quarter's negative reading. The MSCI Pacific index declined 1.55%, 3.9% underperforming the MSCI Europe index's 2.39% for the week.

Within the emerging markets, China's central bank unexpectedly cut the benchmark interest rate for the first time in more than two years to boost growth. Emerging markets stocks performed relatively better than both the EAFE markets and domestic equity markets.

The MSCI BRIC index was up close to 2%, ahead of the broad emerging markets. The EM Latin America region rallied 7.28%, outpacing both emerging countries in Europe and Asia.

The BarCap U.S. Aggregate Bond index was slightly positive, up 9 bps. Compared to the above 3% yield level at the beginning of the year, the U.S. 10-year Treasury yield barely moved last week and held flat at 2.31% from the week before. Short-term bonds underperformed long-term bonds. Government bonds did better than corporate bonds, as heavy new corporate debt issuance before the holiday season pressured the secondary market.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were down by 24 bps, lagging emerging market bonds' positive return of 0.6%.

U.S. REITs were up 1%, beating foreign REITs by 1.6% during last week. Commodity returns were positive, up 1.06% as measured by the Bloomberg Commodity Index (former DJ-UBS index). It slightly outperformed the energy-heavy S&P GSCI Commodity index's weekly return of 0.81%.

Have a wonderful Thanksgiving holiday.

Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Goldman Sachs, Marketfield Asset Management, MFS, MSCI, Morningstar, National Association of Realtors, Payden & Rygel, S&P Dow Jones Indices, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Department of Commerce, U.S. Department of Labor, U.S. Department of the Treasury, U.S. Federal Reserve, Value Line, Yahoo!. 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 17, 2014.

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