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Weekly Review - October 9, 2017

Weekly Review - October 9, 2017

Guest Post - Monday, October 09, 2017


Economic data for the week was led by especially strong ISM manufacturing and non-manufacturing reports, decent construction spending, while the employment situation report for September was a mixed bag.

U.S. stock markets continued to churn forward, while a stronger dollar held back developed foreign markets—with the exception of emerging markets, which outperformed all groups. Bond returns were tempered, as U.S. rates rose a bit. Commodities lagged due to a drop in the price of crude oil and natural gas.

Economic Notes

(+) The ISM manufacturing index for September rose +2.0 points to 60.8, to a new cycle peak, beating forecasts calling for a decline to 58.1. In fact, this is the strongest survey result since the spring of 2004, and before that, 1984. The underlying data was generally strong throughout, with increases in new orders, production and employment, while supplier deliveries rose even more dramatically—which was a negative component relative to the total and due to hurricane-related disruptions. Prices paid also increases significantly for the month. Overall, the result points to continued manufacturing strength.

(+) The ISM non-manufacturing index rose +4.5 points in September to 59.8, the highest level in 12 years, and beating the median forecast of 55.5. Several underlying components were higher, including new orders, business activity and employment, while supplier deliveries declined to boost the index due to hurricane disruptions—as they did with the manufacturing index.

(+) Construction spending for August rose +0.5%, beating forecasts calling for a +0.4% gain, and was coupled with an upward revision for a prior month. Private residential and non-residential showed gains in line with the broader report, while the data for public spending was even stronger, especially on the residential side, which gained over +1% for the month.

(+) The trade balance for August narrowed by -$1.2 bil. to a deficit of -$42.4 bil., tighter than an expected -$42.7 bil. For the month, exports rose +0.4%, which offset a -0.1% drop in imports. It seems the hurricanes may have played a role, although this is more difficult to discern in certain data.

(-) The final wholesale inventory report for August fell by a tenth from the earlier report to a +0.9% gain, which was below expectations for no change. The gain was led by ex-petroleum sales, which gained +1.2%.

(+) Factory orders for August rose +1.2%, which beat expectations calling for a gain of +1.0%. The month was highlighted by a bounce in orders for commercial aircraft, which is a bumpy series. Shipments also increased by nearly a half-percent, as did inventories.

(0) The ADP employment report of private payrolls showed a gain of +135k, which matched consensus forecasts; however, the August number was revised down somewhat. Service jobs rose by +88k, with professional/business services and education/healthcare coming in as the strongest contributors. Goods-producing construction and manufacturing both rose; on the other hand, trade/transports/utilities as well as information services jobs fell. It appeared that the recent hurricanes have contributed to a lag in small business employment.

(+) Initial jobless claims for the Sep. 30 ending week fell -12k to 260k, which was a bit below the 265k expected. Continuing claims for the Sep. 23 week rose by +2k to 1,938k, still below the 1,950k expected. Claims fell in states largely affected by recent hurricanes, as conditions slowly returned to normal in affected areas. Other than that recent anomaly, claims levels remain very low, indicating a positive impact on labor conditions.

(-/0) The September employment situation report was disappointing from a payrolls standpoint, but that was largely expected, due to the impact of recent Texas and Florida hurricanes. However, when removing those temporary weather impacts (which could boost upcoming reports as affected areas rebuild and settle back to normal), higher wage growth and otherwise strong fundamentals appear to have further heightened the probabilities of a Fed rate increase in December—which is why anyone cares so much about this in the first place.

Nonfarm payrolls actually declined by -33k, which was worse than the expected small gain of +80k and the first actual loss in payrolls in seven years. Additionally, data for a few prior months was revised down by almost -40k. It was mostly a shock to the trailing 12-month trend, which averaged +172k jobs per month over the past year. For September, the bulk of jobs lost were in the food services category (-105k), which, considering where the hurricanes were located, was as expected. On the positive side, construction rose +8k, education/health gained +27k, and trade/transports/utilities added +26k jobs to offset the hurricane damage.

The unemployment rate fell -0.2% to 4.2%, which was a positive surprise, compared to expectations for no change, reaching a new low for the recovery cycle and beyond the theoretical level of 'full employment'. Interestingly, the household employment measure came in far stronger, gaining +906k to offset a decline the prior month. The labor force participation rate ticked up as well, by a few tenths, to 63.1%. The U-6 underemployment rate also fell, by -0.3%, to 8.3%. Compared to lackluster expectations for monthly employment due to the hurricanes, these components continued to show fundamental strength.

Average hourly earnings rose +0.5% for Sept., which beat expectations of a +0.3% increase, and was coupled with a revision higher for an earlier month as well. This brought the more closely-watched year-over-year increase to +2.9%, a pace of almost a half-percent faster than in Aug. Average weekly hours were flat at 34.4.

Market Notes

Period ending 10/6/2017

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U.S. stocks rose, with the S&P hitting several new highs yet again over the course of the week. Large-cap and small-cap stocks performed within a fraction of a percent of each other. From a sector perspective, materials and financials led the way, with gains nearing +2%, while losing sectors were energy and consumer staples. Amazingly, the S&P has now gone 500 days without a significant -10% correction. Small caps performed in line with large caps for the week, with the recent stronger performance of small companies likely linked to improved sentiment in the area of tax reform, which could stand to benefit small firms more directly.

Foreign stocks in developed markets were held back by a stronger dollar, which took gains in local currency terms for Europe and the U.K. back down to flat for U.S. investors, while Japanese markets retained their gains. Spanish markets have continued to experience volatility, and losses last week, as the independence referendum in Catalonia (home of Barcelona, representing almost a quarter of their national economy) has shaken investor confidence. However, an extreme outcome, which would be defined as Catalonia breaking off from the rest of Spain, appears less likely at this time, as the movement has little international support—however, a prolonged period of uncertainty could continue to weigh on the Spanish economy. On the positive side, PMI results in Europe have reached high levels very near those registered in the U.S. Emerging market gains, however, surpassed all other regions for the week, with gains by the majority of BRIC nations, with strong Chinese manufacturing results; the exception was Russia, which lagged along with oil.

U.S. bonds fell back a bit, as yields rose across the yield curve slightly with stronger economic growth and rising consensus of a Fed hike in December, notably after rising wage growth noted on Friday. Bank loans ended the week in the positive, however, with high yield flat, and investment-grade credit slightly negative—outperforming treasuries. Foreign developed market bonds were held back by a stronger U.S. dollar, resulting in sharp losses, while emerging market debt suffered to a far lesser degree, with local and USD debt performing similarly.

Real estate in the U.S. gained, despite higher interest rates, and outperformed European REITs but underperformed strong gains from Asian REITs.

Commodities fell back during the week, led by declines in energy. Agriculture and precious metals fell back slightly on net, while industrial metals gained to continue their winning streak as of late. Crude oil fell back to earth last week, declining nearly -5% to $49.29 by Friday. Despite a new tropical storm reaching the gulf states and meetings between Russia and Saudi Arabia, in some part intended to limit oil production further to lift prices and bolster the government balance sheet for each, higher U.S. production numbers showing their highest levels in two years outweighed the other factors.

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 2, 2017.

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