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Weekly Review - October 24, 2016

Weekly Review - October 24, 2016

Guest Post - Monday, October 24, 2016


Economic data last week offered mixed results for manufacturing and industrial production, as well as housing, while official inflation picked up a bit due strength in energy/gas prices. Overall activity as described by the Fed Beige Book was a bit better than the previous month.

Equity markets were generally positive around the world, with foreign regions outperforming the U.S. Bonds also fared well with interest rates falling in key portions of the yield curve. Commodities ended the week flattish with minimal net movement in oil, the usual key driver.

Economic Notes

(-) The New York Empire State manufacturing survey declined from -2.0 to -6.8 during October, contrary to an expected gain up to an expansionary +1.0. Interestingly, while many of the underlying components underneath the surface were also contractionary, these appeared to improve upon last month's numbers, with shipments and employment showing the best movement.

(+) The Philadelphia Fed survey fell a bit, by -3.1 points to +9.7 in October, which still bested the +5.0 number expected. Interestingly, there were key improvements over last month in a few key areas such as new orders, shipments and employment. Occasionally, the Philly Fed numbers run in contrast to those from New York, which continues to show a mixed bag in terms of manufacturing results.

(0) Industrial production for September rose +0.1%, which disappointed relative to +0.2% growth expected. The overall number was weighed down by a -1% in utilities (often a weather-related issue), while mining (including energy) rose by +0.4% and manufacturing production gained a better-than-expected +0.2%. Of this, consumer goods output grew by +0.2% while business equipment fell by an equivalent amount. Regardless of the data point, the persistent stronger results from consumer spending and weakness in business capital spending have been very apparent.

(0) The consumer price index (CPI) for September rose by +0.3% on a headline basis and +0.1% for the core, which was largely as expected. Higher energy (+3%) including gasoline (+6%) prices helped on the headline side, as well as did a small increase on food prices. Core prices were largely affected by a decline in apparel by almost -1% (partially due a warmer-than average month perhaps) and wireless phone service; however, owners' equivalent rent rose by almost +0.4%, which was the strongest one-month increase in a decade. Year-over-year, headline and core CPI rose by +1.5% and +2.2%, respectively. For the trailing 12 months, medical care commodities and services are the largest gainers, at roughly +5% each. While the underlying figures don't look dramatic, core inflation has firmed a bit near the Fed's mandate. At the same time, comments from Yellen and others have expressed a potential desire to let inflation 'run hot' for a while in an effort to keep growth stimulus intact and perhaps pre-empt slowing that could lead to a recession at some point, although one is always inevitable.

(+) Existing home sales for September rose +3.2%, which surprised on the upside relative to the +0.4% gain expected; however, the prior month's figure was revised down by a half-percent. Single-family sales gained +4%, while the volatile multi-family segment fell by -3%. Regionally, every area gained ground, with the Northeast and West gaining at or over +5%.

(-) Housing starts for September fell by -9.0% to 1,047k seasonally-adjusted annualized units, which was far below the forecast gain of +2.8%. Single-family starts rose for the month by +8%, while the sporadic multi-family category declined -38%, showing volatility fairly typical for the group and are often self-correcting over multiple months. Building permits rose +6.3%, which did outperform expectations calling for a +1.1% gain. Single-family permits increased just under a half-percent, while multi-family gained +17% for the month. Per usual, these two indicators are extremely volatile and often contradictory, so it's difficult to make too much of either on a short term basis. Smoothing out these bumps, total housing starts are down -15% on a year-over-year basis, the worst such rolling period since Spring 2011.

However, trends in such a sporadic series can be difficult to spot unless they're viewed from a wider lens. As we can see, the great housing boom of the 1990's and early 2000's began in the depths of the 1991 recession, peaking just prior to the Great Recession. Following the substantial drop-off in the recession's wake, starts troughed at an unsustainably low 500k or so level, and have crawled back since to just over the 1,000k/year mark. This may not be a pace sufficient to maintain demographic demand growth for new households, but is in far better shape than it was—without being near last-cycle peak levels.

Housing Starts Graph for October 24, 2016

Source: Federal Reserve Bank of St. Louis

(0) The NAHB homebuilder sentiment index for October declined by -2 to 63, which was right on target with expectations and remains near a recovery high. Future sales expectations rose a point, while current sales and prospective buyer traffic ticked down a bit. Regionally, the Northeast and Midwest experienced gains, while the West and South each ticked down for the month.

(+) The Conference Board's Index of Leading Economic Indicators for September rose +0.2% to reverse a decline of similar magnitude the prior month. For the month, housing permits, low levels of jobless claims and the interest rate spread acted as primary contributors to the leading index's gain, offsetting some weakness in equity prices and the average workweek length. The coincident index and lagging index both rose by the same +0.2% each for the month, with contributing segments including payrolls, personal income and industrial production.

(-) Initial jobless claims for the Oct. 15 ending week increased a bit to 260k, over the 250k expected. Continuing claims for the Oct. 8 week came in at 2,057k, which was just above the expected 2,053k. It appears that aftereffects from the hurricane along the Florida through Carolina areas could explain a bit of the increase. Overall, though, levels remain very low.

(0) The Fed Beige Book, that describes qualitative economic conditions throughout the country, showed that activity continued to expand at a 'modest' to 'moderate' pace generally through later August and September. Interestingly, growth improved in a few areas. Per the trends seen in editions, consumer spending and manufacturing remained mixed. In the latter, a stronger dollar and low activity in the energy sector appeared to be key drivers behind the slow pace. Demand for both business and consumer loans both increased. On the positive side, employment expansion was moderate and labor conditions appeared to tighten, with some higher wage pressures noted last month in a few manufacturing-oriented districts, but this was not widespread. Inflation generally remained within recent ranges, so controlled.

Read the "Question of the Week" for October 24, 2016:

What are the prospects for recession at this point?

Market Notes

Period ending 10/21/2016

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

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U.S. stocks gained ground on the week with about a quarter of the S&P reporting earnings, which ended up relatively decently. From a sector perspective, materials, financials and consumer discretionary stocks led the way in terms of gains, while industrials and consumer staples were among the only losing sectors for the week. Earnings for Q3 have begun to be released, and results so far have been slightly better than the already-tempered expectations.

Foreign stock returns were led by Japan and emerging markets, but Europe and the U.K. also outperformed U.S. stocks for the week. ECB President Draghi announced that monetary policy was being kept as is, which relieved those fearing a 'taper' down from current dramatic easing to something less extreme, although he did admit that it wouldn't last 'forever', and nothing 'abrupt' was likely planned when backing off eventually did occur, which didn't provide a high level of clarity. Japanese stocks looked to be led by decent earnings results and comments from officials that current stimulus policies remain appropriate and don't need to be reduced.

In emerging markets, a Q3 growth number coming out of China showing +6.7% was as expected.
Brazil cut their benchmark rate by ¼ percent to 14.0%—the first rate cut in 4 years, mostly due to internal uncertainties surrounding in-progress fiscal reforms—which resulted in positive market reaction. Mexico also fared well, which has occurred a few times in recent months and coinciding with polls results favoring Clinton over Trump, who is seen as being less favorable to Mexican interests and cross-border trade.

U.S. bonds fared a bit better last week with interest rates falling back somewhat across the longer end of the yield curve. While all domestic bond categories ended the week generally higher, corporate—particularly high yield—bonds outperformed for the week over governments and floating rate bank loans. Developed market foreign debt was the lowest-returning group for the week, USD-denominated emerging market debt was the best-performing (as the dollar generally gained ground).

Real estate in the U.S. gained slightly, in keeping with broader equities, but were out gained by Europe and Japan, related to factors discussed earlier.

Commodities rose slightly on the week, with gains in precious metals, livestock and energy offset by losses in industrial metals and broader agriculture. Copper suffered particularly due to fears of slowing Chinese demand, which is one of the more common catalysts for the metals group in recent years. Crude oil briefly moved toward $52/barrel with larger than expected inventory draw downs before settling back to a touch under $51 by Friday, netting out to a minimal change for the week.

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 17, 2016.

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