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Weekly Review - October 16, 2017

Weekly Review - October 16, 2017

Guest Post - Monday, October 16, 2017

Summary

Economic data for the week was focused on the FOMC minutes, which appeared to sustain high odds for a December rate hike, retail sales came in as expected, as did inflation, while labor markets continued to show strength in the areas of job openings and jobless claims.

Equity markets rose globally, with foreign stocks outperforming U.S. names with help from a weaker dollar. Bonds also fared decently, with interest rates falling across the yield curve. Commodities gained in a variety of sectors, including oil, which again gained ground and rose above $50/barrel.

Economic Notes

(0) The minutes from the Sept. FOMC meeting focused on a variety of near-term economic effects from the three coastal hurricanes that made landfall during the period. Otherwise, low inflation was a continued topic of conversation, with concerns over continued low levels, which, of course, if persistent and concerning enough, could cause the Fed to reduce the pace of rate increases. At the same time, most members appeared to agree that a total of three hikes this year would be the base case, all else unchanged, which does imply a December move. However, there are a few weeks left for the data to play out.

(0/-) Retail sales for September rose +1.6%, a shade below expectations calling for a +1.7% gain. The headline gain was largely driven by sharp increases in both gasoline and vehicle sales, on the order of the mid-single digits, while building materials also increased. It appeared that these components were at least somewhat driven by a post-hurricane bounceback relative to the prior month. Removing the more volatile components, on a core/control level, sales rose a less-impressive +0.4%, with declines in electronics, furniture and ‘miscellaneous’.

(0) The producer price index (PPI) for September rose +0.4% on both a headline and core level, which matched expectations for headline and outpaced those a bit for core. The underlying increase was led by a gain in transportation/warehousing and ‘trade services’, each up +1%. Core intermediate producer prices rose +0.2%, bringing the rate to +3.2% year-over-year, outpacing standard inflation by a bit.

(0) The consumer price index (CPI) for September rose +0.5% on a headline level and +0.1% for core, ex-food and energy—generally on par with forecast. For the month, energy commodity prices rose +13%, which was the primary influence on the headline component, much of which was driven by a spike in gasoline prices related to the recent hurricanes and slowdown in refining. Core CPI changes were far less extreme, with shelter and transportation prices rising +0.3%, while prices declined up to a half-percent for new and used vehicles, and an even larger drop for medical care commodities. For the trailing 12 months, headline CPI gained +2.2% with core up +1.7%—both of which are within range of the Fed’s long-term target.

Interestingly, there are a variety of structural forces at work that appear to be holding inflation in check, with a large component being an estimated -0.5% drag from technological inputs, due to improvements in processing power, lower costs and increasing integrations into a variety of industries and production processes. It’s unlikely that this trend will be reversing any time soon, with mixed implications on economic growth and labor markets (although in hindsight, these evolutions in technology have been looked upon positively over the long run).

(+) The preliminary Univ. of Michigan index of consumer sentiment for October rose +6.0 points to 101.1, beating expectations calling for 95.0 and representing another new high point for the post-recession recovery. Consumer assessments of current conditions and future expectations both rose to similar degrees, with expectations outpacing the former by a bit. Inflation expectations for the coming year fell by a significant -0.4% to +2.3%, while those for the forward-looking 5-10 years decline by a tick to +2.4%.

(-/0) The government JOLTs job openings report for August fell back a bit from July’s high point to 6,082k, below the median forecast of 6,125k. The largest declines appeared to be in the manufacturing and professional services areas. The rate of job openings was unchanged at 4.0%, as was the layoffs rate at 1.2%. However, hiring ticked down by a tenth to 3.7%, and quits by a tenth to 2.1%. Despite being off the highs, JOLTs number continued to be quite strong.

(+) Initial jobless claims for the Oct. 7 fell by -15k to 243k, under the 250k level expected, with drops in Florida and Texas, most heavily affected by recent hurricane activity. Continuing claims for the Sep. 30 week fell by -32k to 1,889k, below the 1,930k forecast. Claims levels seem to have shaken their hurricane effects, and are reverting back down to more normal levels in keeping with strong structural trends of high employment and few claims.

Market Notes

Period ending 10/13/2017

1 Week (%)

YTD (%)

DJIA

0.43

17.92

S&P 500

0.17

15.86

Russell 2000

-0.49

11.85

MSCI-EAFE

1.63

21.84

MSCI-EM

2.07

30.57

BlmbgBarcl U.S. Aggregate

0.48

3.48


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

10/6/2017

1.07

1.54

1.97

2.37

2.91

10/13/2017

1.09

1.51

1.91

2.28

2.81

U.S. stocks rose just slightly on the large-cap side, while small-caps declined. A variety of political actions during the week added drama, but refused to take away from positive market results, including executive actions meant to circumvent Obamacare provisions, controversy about the future of NAFTA, a slight lowering of tax reform probabilities with a Trump vs. Corker tweet battle continuing. From a sector standpoint, more defensive consumer staples and utilities led the way, gaining over a percent, as did technology, while telecom and financials lagged with losses. Staples results were led by Wal-Mart, which will buy back more shares and optimistic assessments on online activity. Financial stocks were hit with mixed earnings reports from several larger banks during the week.

Speaking of earnings, only a small number of companies have reported so far, with the coming weeks bringing more significant news. Interestingly, roughly half of S&P companies have reported a negative hurricane impact during the quarter, which could hold down results somewhat. The year-over-year Q3 earnings growth expectation is a more tempered +2.1% (per FactSet), with energy expected to bring over-100% growth relative to last year, while consumer discretionary and financials are expected to show declines. This blip falls off for Q4, where year-over-year earnings results are again expected to land in the 10-11% growth range, with 2018 estimates looking similar at this point.

Foreign stocks gained on the week, as returns in key developed markets in Europe and the U.K. were similar to those in the U.S. in local terms, but fared far better due to a falling dollar. The ECB noted that, while QE was being reduced, rates would remain lower for longer—keeping sentiment strong for European risk assets. Emerging markets fared even better yet, up over +2% on the week. This week, the Chinese 19th Party Congress, a meeting held only once every five years, is slated to elect national leadership as well as set goals for the coming five years. There seem to be thoughts of continued state-owned enterprise reform and possible forced deleveraging, in order to reduce internal debt risks; however, at the same time, it could slow the pace of growth.

U.S. bonds gained a bit overall, as rates again fell back, with investment-grade credit outperforming government bonds slightly. High yield bonds were flattish for the week, lagging other segments. Foreign bonds in developed markets gained in keeping with a weaker dollar, as did emerging market bonds to a somewhat lesser degree.

Real estate gained nearly +2% percent in the U.S., along with lower rates, with similar results in foreign markets Asia and Europe

Commodities gained ground in almost all segments, helped by a weaker dollar, moving broader indexes higher. Energy led the way, as natural gas prices gained nearly +10% as demand rose faster than expected; crude oil moved past the technically significant $50/barrel mark again, up over +4% to $51.45. Industrial metals continue to be buoyed by Chinese demand.

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 9, 2017.

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