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Weekly Review - October 17, 2016

Weekly Review - October 17, 2016

Guest Post - Monday, October 17, 2016

Summary

In a lighter week for economic data, retail sales came in stronger than in the previous few months, but remained lackluster. Producer inflation picked up slightly, consumer sentiment fell a bit while labor was mixed with a drop in job openings but continued low jobless claims.

Global equity markets generally lost ground on the week, foreign markets outperforming U.S. in local terms, but the gains being reversed by a stronger dollar. Bonds were mixed, with small positive results in the U.S. and losses in foreign debt due to the dollar effect. Crude oil gained ground again, leading the commodity group upward.

Economic Notes

(0) The minutes from the September FOMC meeting again showed few surprises, but were interesting from the fact that committee discussion appeared to show growing support for a rate hike 'soon', although the exact timing remained the key issue in question. Much of the debate was centered around the remaining levels of labor market slack (there still appears to be some, but some feel the smaller amount now is negligible in terms of holding up any rate increases), as well as the pros and cons of letting inflation 'run hot' for a while to build economic growth momentum, in keeping with what Janet Yellen has alluded to in other public comments. Such a policy would keep a damper on the pace of rate increases.

(0) Retail sales for September rose +0.6% on a headline level, which generally met expectations. The gain on the headline side was largely driven by a +1.1% increase in auto sales, a +2.4% gain in sales of gasoline (as usual, due to higher prices) and a +1.4% jump in building materials. The core/control group, however, which removes those just listed three more volatile components, only gained +0.1%, which disappointed relative to expectations calling for a gain of almost a half-percent. Weaker areas included flat results for clothing, a percent drop in electronics and half-percent decline in 'general merchandise'. However, this still reversed the trend of a few negative months in a row during the summer. The total retail sales figure for Q3 came in at an annualized gain of +1.1%, which represented a substantial slowing in pace from Q2's +6.7% annualized gain. Consumer spending has was been an area of strength, at least relative to lackluster business spending, so no doubt this trend will continue to be watched closely.

(0) Import prices for September rose +0.1%, which was about half the rate of growth expected. A rise in prices of imported petroleum by +1.2% accounted for essentially all of the change, as non-petroleum prices were flat for the month. On the consumer side, imported auto prices were +0.2% higher, while non-auto prices were also flat. The annual price equated to -1.1%, the smallest in two years, and represents some deflationary pressure (as the result of plummeting oil prices and a stronger dollar) tailing off somewhat.

(0) The producer price index for September rose +0.3% on a headline and +0.2% on a core level, which were both a tenth or so above expectations. The headline figure was led by a +2.5% rise in energy prices, while food rose a half-percent; core PPI inflation was pressured upward by a gain in medical costs. Year-over-year, headline and core PPI are up +0.7% and 1.5%, respectively, pointing to tempered pipeline inflation, although it has firmed a bit over the last several months.

(-) The preliminary Univ. of Michigan consumer confidence survey experienced a decline from 91.2 to 87.9 in October, which disappointed relative to an expected gain to 91.8. While sentiment concerning current conditions ticked higher a bit, expectations for the future declined. For the inflation measure, the forward 12-month expectation of 2.4% was unchanged, but inflation for the upcoming 5-10 years fell by -0.2% to 2.4%.

(0/-) The government JOLTs report of job openings for August tapered off a bit to 5,443k, compared to 5,800k expected. The layoff and discharge rates were flat at 1.1%, as was the hiring rate at 3.6% and quits rate at 2.1%. Despite the lackluster month, the level of openings remains high, and layoffs low, which indicate healthy labor market activity.

(+) Initial jobless claims for the Oct. 8 ending week came in at 246k, below the expected 253k, and continuing to hover at a very low level. Continuing claims for the Oct. 1 week registered at 2,046k, just under the forecasted 2,050k level. Despite some possible distortions from the recent hurricane affecting FL and SC, which could boost claim numbers later somewhat, levels remain very low an in line with recent positive labor trends.

Market Notes

Period ending 10/14/2016

1 Week (%)

YTD (%)

DJIA

-0.56

6.28

 

S&P 500

-0.95

6.17

Russell 2000

-1.94

8.01

MSCI-EAFE

-1.40

-0.47

MSCI-EM

-1.94

12.96

BarCap U.S. Aggregate

0.09

5.33

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

10/7/2016

0.33

0.83

1.26

1.73

2.46

10/14/2016

0.32

0.84

1.28

1.80

2.55

U.S. stocks declined for the week, with a few earnings disappointments and concerns over Chinese export and growth data. Utilities led the way, as the only sector with positive returns for the week, while health care incurred the most damage, down over -3%, due to some earnings concerns—earnings will take on a renewed focus in the coming few weeks as we enter the sweet spot of Q3 company results. Higher-beta small caps underperformed larger-caps, although they've still retained an edge year-to-date.

Foreign stocks also experienced negatively, with Europe ending up the best of the lot, followed by Japan, emerging markets and U.K. trailing the pack. A sharp gain in the U.S. dollar during the week acted as a headwind on the foreign side.

U.S. bonds earned minor gains, except in longer-term government bonds due to a steeping of the yield curve higher in the 10-year and longer range. On the investment-grade side, credit outperformed governments as spreads contracted, with floating rate bank loans retaining its positive momentum of recent weeks. Foreign bonds lost significant ground with the stronger dollar for the week—more so in developed markets than in emerging.

U.S. real estate experienced gains during the week, in contrast to broader equities, with residential/apartments experiencing the strongest gains, while regional malls/retail came in behind in keeping with the mediocre retail sales reports. Asia and European REITs, however, declined, due to currency impact.

Commodities in general ended in the positive for the week, with strong gains in agriculture and energy, while industrial metals lost ground for the period. Crude oil experienced an unusually high spike early in the week before coming down to earth by Friday, gaining just +1% to $50.35. Interestingly, based on Baker Hughes rig counts, it's been about four months without a cut in rig counts, although there haven't been a lot added, either, which points to some but not extreme rising U.S. production. On the other hand, production looks to be rising at a steadier pace in areas like Libya, so there looks to be continued back-and-forth on supply speculation going forward.

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 10, 2016.

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