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Weekly Review - October 2, 2017

Weekly Review - October 2, 2017

Guest Post - Monday, October 02, 2017


Economic news for the week included generally few surprises—a small revision upward for prior-quarter GDP, strong manufacturing results, mixed but generally disappointing housing data, slightly weaker sentiment and weather-affected jobless claims.

U.S. equity markets rose, led by small-cap stocks, while foreign markets were mixed, being negatively affected by a stronger U.S. dollar. Bonds lost ground on the government side with higher rates, while credit fared better. Commodities were mixed, as a pullback in metals was matched by higher pricing for crude oil.

Economic Notes

(+/0) The final GDP growth number for the 2nd quarter was revised up from the second estimate of +3.0% last month to +3.1%, which is the strongest growth in two years. Details released indicate a boost in inventories as being the catalyst for the upgrade in growth, business fixed investment and housing spending were downgraded by a bit, while little else was changed in a meaningful way.

Estimates for 3rd quarter GDP have been downgraded substantially, to the 1.5-2.0% range, due to shorter-term hurricane effects that have damped economic activity in two significant areas—south Texas and Florida. However, as we've mentioned, this is a natural tendency of natural disasters, which demonstrate a near-term negative effect but a few subsequent quarters of often above-average growth as rebuilding efforts are counted as 'growth' in formal measurements.

(+) Durable goods orders rose +1.7% in August, beating the median forecast calling for a +1.0% gain, and reversing a decline the prior month due to specific cyclical items. The headline increase was driven by a +45% increase in non-defense aircraft, a series that is extremely lumpy on a shorter-term basis. Core capital goods orders rose +0.9%, which still beat consensus expectations of +0.3%. Core capital shipments rose +0.7%, sharply higher than the expected +0.1% increase. Inventories also rose, continuing a strong 2017 trend, which denotes underlying strength. Interestingly, the Census mentioned that it did not appear recent hurricane activity played a major role during the period.

(0) Personal income for August rose +0.2%, which was on par with expectations, despite a revision down for the prior month. Personal spending rose +0.1%, also, as expected, which kept the savings rate unchanged at 3.6%. The headline and core PCE price index rose +0.2% and +0.1%, respectively—both below expectations, and reflecting a +3% gain in energy for the month. This brought the year-over-year inflation change to +1.4% for headline and +1.3% for core, which obviously remain below the Fed's target.

(+) The Chicago PMI report for September rose +6.3 points to 65.2, which was the 2nd-highest reading in three years. Within the report, order backlogs rose to nearly a 30-year high, while output and new orders also saw gains and contributed, as did inventories and employment. Inflation reports also rose a bit, which appeared to be tied to commodity price increases. All-in-all, this reflects strength in manufacturing reports from other sources.

(+) The advance goods trade balance report showed a deficit of -$62.9 bil. in August, which was a narrowing of $1 bil. from a month prior. Exports rose over +1%, with gains in exported autos and other consumer goods leading the way, while imports ticked down slightly—possibly related to hurricane activity.

(+) The S&P/Case-Shiller home price index for July rose +0.4%, besting expectations calling for a +0.2% increase. Gains occurred in all but three of the 20 cities covered in the index, with San Francisco and Seattle leading the way, with twice the increase of the national index. Some economists are debating some seasonal adjustment issues in the near-term summer data, but the cleaner year-over-year gain showed a tick up a bit to +5.8%, which remains quite strong.

(-) New home sales for August fell -3.4% to 571k, on a seasonally-adjusted annualized level, compared to expectations for a slight gain to 585k; additionally, there were some downward revisions for prior monthly data. To no surprise, weather contributed to a -15k drop in the Southern U.S., while the West and Northeast experienced smaller declines while the Midwest was flat. The median and average sales prices for August were $300,200 and $386,100, respectively. The average price is +3.7% higher than a year ago—a slower rate than the urban-focused Case-Shiller benchmark. Inventory ticked up 0.4 of a month to 6.1 months supply, at a seasonally-adjusted 284k, which is the highest level in several years.

(-) Pending home sales fell -2.6% in August, which lagged the smaller decline of -0.5% expected. As with several other housing and broader economic series, hurricanes played a role as the South experienced a -4% decline, as did the Northeast at -5%. Aside from weather effects, it appeared that lower inventory levels and higher pricing played a role in other regions.

(0) The index of consumer confidence declined -0.6 of a point in September to 119.8, which was just a tick below the expected 120 level. Current conditions were responsible, falling several points, as did the labor differential that measures ease of finding employment, while expectations for the future rose by a half-point. It appeared that the dual hurricanes played a major role on confidence in FL and TX, to no surprise.

(0/-) The final September Univ. of Michigan consumer sentiment index fell -0.2 points to 95.1, compared to expectations calling for no change. Assessments of current conditions were the primary culprit, falling over -2 points, while future expectations rose a point. Inflation expectations for the coming year were flat at +2.7%, while those for the next 5-10 years ticked down a tenth to +2.5%.

(0) Initial jobless claims for the Sep. 23 ending week rose +12k to 272k, which was just a shade above expectations of 270k. Continuing claims for the Sep. 16 week fell -45k to 1,934k, far lower than the 1,993k expected. The effects of the hurricane in FL affected results there and in neighboring states to some extent, while normalization in TX resulted in offsetting lowered claims. Otherwise, barring any other weather events in the near-term, it's expected that these numbers will drift back toward normal in coming weeks.

Read the "Question of the Week" for October 2, 2017

Where do we stand now with tax reform?

Market Notes

Period ending 9/29/2017

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U.S. Treasury Yields

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5 Yr.

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U.S. stocks gained for the week, with small-caps again outperforming large-caps by a wide margin. The tax reform announcement mid-week was taken positively by the market, although the realization that it could take time to iron out brought sentiment back down to earth a bit by Friday. From a sector standpoint, energy and technology led the way—the former by further gains in the price of crude oil and the latter by strength in semis—while consumer staples ended flat and utilities were the only losing group for the week.

Interestingly, it was announced that a new 'FANG+' futures index will begin trading in November, which is focused on the popular group of stocks in the new age technology space. As we have often seen, new industry product launches can often coincide with peak popularity of a particular group (and, unfortunately, when forward-looking return potential begins to look less promising).

Foreign stocks in developed markets were up near or over the 1% mark in Japan, Europe and U.K. in local currency terms, but the negative influence of a stronger dollar—which gained 1% for the week—brought these back to just slightly positive on net. Returns largely tracked those in the U.S., other than relief over the results of the recent German elections, and some positive economic sentiment in Europe generally. The Japanese central bank has discussed continuing to buy an unlimited amount of government bonds to keep yields near zero—which is a continuation of current policy and in contrast to the U.S. removal of stimulus and somewhat to Europe, where stimulus is relative based on conditions. At this point, worldwide divergence is beginning to occur in earnest. Emerging markets stocks experienced negative returns on the week, as most of the BRICs lost ground, except for Russia, that gained due to a further recovery in oil.

U.S. bonds lost some ground as interest rates ticked higher—seemingly due to hopes that eventual tax reform will result in higher growth and a faster-acting Fed, and, perhaps more importantly, growth of the Federal deficit and new treasury supply. Due to the higher coupon buffer, investment-grade credit outperformed governments, albeit just ending flattish, with high yield faring a bit better. Foreign developed market bonds fared similarly to U.S. debt in local currency terms, but lost about a percent more as the dollar strengthened for the week. Similarly, USD-denominated emerging market bonds were flat, while EM local currency debt fared worse, losing nearly -2%.

Real estate returns in the U.S. were mixed, with positive results in the U.S., led by strength in the more cyclical lodging sector. Foreign REITs were negatively affected by a stronger dollar, and lagged.

Commodity indexes ended slightly higher for the week, despite the stronger dollar, which is usually inversely correlated. Gains in energy were offset by weakness in agriculture (mostly tropical softs again) and industrial and precious metals—the latter due to a push toward risk assets. Crude oil rose +2% to end the week at $51.67.

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 September 25, 2017.

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