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Weekly Review - October 19, 2015

Weekly Review - October 19, 2015

Guest Post - Monday, October 19, 2015


  • Economic data for the week was generally lackluster, seen in retail sales and several manufacturing surveys. Inflation came in quite tempered, on par with recent months and expectations.
  • Equity markets gained on interpretations of weak data meaning the Fed may keep raising interest rates at bay; bonds performed well with rates falling. Crude oil declined on the week with continued uncertainty about demand/supply dynamics looking into next year.

Economic Notes

(-) Retail sales for September came in lower than expected, rising +0.1% on a headline level, compared to consensus calls for a +0.2% gain. Worse off, the ‘core/control’ measure used in GDP calculations which removes more volatile autos, gasoline and building materials from the equation, fell -0.1% on the month, contrary to an expected +0.3% gain. The reason for any increase at all was due to a +2% gain in auto sales, which continues to be a source of strength as of late. While overall sales have not fallen all year, despite some tempered month-to-month results, concern over durability of such high-profile reports may be additional ammunition for the Fed in keeping rate policy unchanged through year-end.

(0) The producer price index for September fell -0.5% on a headline level compared to a +0.2% gain expected, with energy falling -6% and food about a percent; core PPI excluding those two items fell by -0.3%. Services prices fell during the month, including passenger transportation, explaining much of the core change. On a trailing 12-month basis, headline PPI fell -1.1% (the eighth straight month of decline) while core PPI rose +0.5% over the period. Naturally, based on these figures, overall inflation by this metric remains quite low—so low, in fact, that hardly anyone can call it ‘inflation’ at all.

(0) The consumer price index for September fell by -0.2% on a headline and rose +0.2% on a core basis, similar to expectations. The energy group fell nearly -5%, explaining the difference, as food prices gained nearly a half-percent in the month. Shelter and medical costs rose +0.3%, as nearly all segments were within a few tenths of the core average. Year-over-year, headline and core CPI came in flat and up +1.8, respectively. The latter is only a tick off of the Fed’s target, which continues to be one of the sticking points in the FOMC’s delay in raising interest rates.

(-) The New York Fed Empire manufacturing survey for October improved by over +3 points, to -11.4, but fell below the consensus estimate of -8 and remained in negative territory. The underlying details showed additional weakness, though, with new orders, shipments and employment all deteriorating by several points, in contrast to the slight improvement experienced by the headline number. This reflects the soft patch in manufacturing as of late.

(-) Similar to the Empire, the Philly Fed survey improved a bit, by +1.5 pts. to -4.5, but remained weaker than the expected -2 result and in contractionary territory. Also, like the NY survey but even more dramatically, details showed weakness in new orders, shipments and employment.

(0) Business inventories for August came in flat, compared to an expected slight +0.1% increase. The inventory to sales ratio rose, however, from essentially zero to 1.4, which is close to a recovery high point. This lower inventory level may seem overly nuanced on a month-to-month basis, but it does affect calculations of GDP.

(0) Industrial production for September fell by -0.2%, which was on target with expectations; however, earlier months were revised up. Most manufacturing production declined, with the exception of motor vehicles, which moved higher by a few tenths; mining-related (including oil industry) production fell by -2% after flattening out for a few months. Capacity utilization fell but came in +0.2% higher than expected, at 77.5%.

(-) The JOLTs job openings report for August fell to 5,370k, well under expectations of 5,580k, in a reversal of the previous month’s strength. Declines were seen across the board, including professional/business services and leisure/hospitality, at losses of about -70k openings each. The hiring rate and quit rate were unchanged at 3.6% and 1.9%, respectively. Year-over-year, the measure is up +9%, which is towards the strongest level since the 2000-era.

(+) The preliminary October University of Michigan consumer sentiment index rose about +5 points to 92.1, beating expectations calling for a reading of 89.0. Strength was seen in both current conditions as well as future expectations, and 5-10 inflation expectations fell a tenth to 2.7%, which is within range of the past year or two.

(+) The Fed Beige Book, which provides an outlined anecdotal summary of economic conditions around the country, showed a continued theme of modest expansion over the past month or so. Since eight of these or so a year are published, you wouldn’t expect to see a lot of dramatic changes, but these can be useful in seeing changes at the margin in various regions. According to the report, businesses nationwide appeared to be growing and ‘generally optimistic’ about the near-term outlook. Specifically, manufacturing was mixed to weaker, with negative impacts from the energy sector continuing and a strong dollar also acting as a headwind; wages were also relatively subdued. On the positive side, auto sales and stronger home prices were present, as are some continued reports of shortages for skilled workers.

(+) Initial jobless claims for the Oct. 10 ending week fell by -7k to 255k, which was a positive surprise relative to the 270k expected. Continuing claims for the Oct. 3 also fell by -50k to 2158k, which fell below the 2,200k expected. No special factors were reported. These claims numbers continue to fall, remaining near a 42-year low, partially due to the labor market improving but also arguably from lower labor force participation, and fewer layoffs (new claims have to originate from somewhere).

Market Notes

Period ending 10/16/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks gained on the week, despite the presence of a key catalyst. To some extent, contained inflation numbers perhaps lowered the possibility of Fed action in December and the talk of biotech/pharma pricing as a campaign issue died down a bit (as expected). Stanley Fischer, the FOMC Vice Chair, made a comment at the annual IMF/World Bank meeting in Peru, that Fed is looking to raise rates this year, but is not completely committed to it.

From a sector standpoint, more defensive utilities and healthcare led with gains of nearly 2% while industrials brought up the rear, losing nearly that amount. In notable earnings news, mega-cap Wal-Mart fell -10% with disappointing guidance. Overall earnings results through Friday (just over 10% of S&P companies reporting, so granted a limited sample) show roughly two-thirds of reports coming in positively on a cap-weighted basis, which is close to the ratio of recent quarters.

Internationally, Chinese stocks gained over +5% on the week due to several anecdotal items. A quote from a central banker implied that the equity correction there is nearly over (due to the level of control the government attempts to take in market activity, this is taken with a bit more seriousness here than in other nations as it implies additional stimulus), as well as strong retail sales during their holiday week and reports of higher bank lending. However, this was somewhat offset by weakness in both Chinese exports and imports, as well as inflation that came in below expectations at 1.6%. This led emerging market indexes higher in general, which surpassed developed regions on the week. A slightly weaker dollar played a minor role.

On the negative side, commodity-exporter nations such as Brazil (which has other internal political problems), Russia and Indonesia all lost a few percent. As we’ve discussed previously, the emerging market group is getting more complicated to classify than simply ‘risk on’ or ‘risk off’. At the very least, the recent environment has created a clear delineation between commodity exporting nations, where lower oil prices have made a big dent in national revenues (think Russia and Brazil) and those that benefit from cheaper commodity imports (such as India and China). This is true of several developed market nations as well, which explains uncertainty over prospects in places like Canada, Australia and Norway.

U.S. bonds gained a bit on the week as interest rates fell, to a lesser degree than equities. As expected, long treasuries experienced the largest gains. With no significant currency impact, emerging market bonds also gained strongly in both USD and local currency terms. On the lagging side, high yield corporates rose minimally as energy price declines likely drove sentiment in the sector. As we discussed in last week’s monthly advisor meeting, the U.S. high yield is currently bifurcated into a majority of issues with relatively strong fundamentals and low and below-historical-average current default probabilities, whereas the energy/materials/mining complex is where the majority of pricing pressure has been focused. Then again, there do appear to be some opportunities here for names where fears have been overdone—as there usually is.

Real estate experienced another solid week with interest rates falling and fundamentals continuing to appear solid. U.S. retail, malls and apartments led the way, gaining nearly +2%, while more cyclically sensitive areas, such as lodging/resorts suffered, as did certain Japanese REITs.

Commodity prices declined on the week in general, as oil gave up last week’s gains to fall a few dollars from near $50/barrel back into the upper 40’s. Lower forecasts for 2016 demand appeared to be partially responsible as well as uncertainty about future Iranian demand. Precious metals, especially gold, experienced a gain of several percent on the week as bond yields fell and sentiment towards Fed action dissipated somewhat.

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 12th, 2015.

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