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Weekly Review - September 11, 2017

Weekly Review - September 11, 2017

Guest Post - Monday, September 11, 2017


The short week ended with a temporary respite for the federal budget and debt ceiling debate, strong ISM services results, but higher jobless claims due to hurricane effects.

U.S. stocks stumbled a bit on the week, as did foreign stocks in local currency terms, but the latter were saved by a large decline in the U.S. dollar for the week. Bonds experienced a positive week as yields for certain maturities fell to their lowest levels in some time. Real estate bucked the trend and fared well, while commodities were generally flat with offsetting forces.

Economic Notes

(0) Perhaps the most unusual news of the week was the agreement between the President and the Democratic party (as it was their idea) to extend the budget and debt ceiling for another 3 months to around year-end, rather than the 18 months Republicans had been lobbying for. This brings the next debt limit deadline sometime in early to late spring of next year (this is always a moving target, based on spending and debt issuance levels between now and then, as well as tax receipts). Markets seemed neutral on the news, considering that kicking the can down the road, so to speak, will result in the same issues being raised in a few months.

(-/0) The August non-manufacturing ISM index of services rose +1.4 points to 55.3, reversing a decline the prior month, but fell below the expected 55.6 slightly. The underlying components in the survey were all in line with the headline number, with business activity, new orders and employment all increasing, as did prices paid.

(0) Factory orders for July fell -3.3%, which was on target with expectations and reversed the strong results from June, both of which were largely due to the timing of ordering expensive commercial aircraft. Core goods orders were revised higher, as were shipments a bit.

(0) The trade balance widened to -$43.7 bil, which was less than the expected -$44.7 bil. Both imports and exports declined by a few tenths of a percent. Imports actually rose a few tenths, outside of petroleum, while exports were weighed down by a one-percent drop in the non-energy segment.

(0/+) Nonfarm productivity rose +1.5% for Q2, which is revision of just over a half-percent from the initial report, and beat expectations by two-tenths. It is also an improvement, on the order of two times, compared to the pace during the recovery thus far. Unit labor costs rose at an annualized +0.2% for Q2, a bit below expectations; this represented a -0.2% decline over the trailing 12 months. Compensation per hour gained an annualized +1.8% for the quarter, bringing the actual year-over-year figure to +1.1%. This figures have improved but do remained below target from what economists would like to see from a wage growth standpoint, which naturally connects into inflation measures.

(-) Initial jobless claims for the Sep. 2 ending week rose by a dramatic +62k to 298k, surpassing the 245k level expected. This was the sharpest one-week gain in over two years, and no doubt was impacted by Hurricane Harvey (as 85% of those new claims were from Texas) but there was a also a residual effect from plant shutdown activity in the Great Lakes region. Continuing claims for the Aug. 26 week declined by -5k to 1,940k, which was below the unchanged 1,945k level expected. Unsurprisingly, natural disasters tend to temporarily (or permanently) impair employment, so claims have a habit of rising dramatically during such events. With Hurricane Irma on the horizon for Florida, we suspect claims may rise further in the short term. However, the longer-term structural trend continues to look positive with non-storm areas running at low levels.

(+) The Fed's Beige Book, which chronicles regional financial conditions around the U.S., in this case mid-July through August, showed all districts reporting 'modest' to 'moderate' growth. This was either unchanged or an improvement on the prior report, with the exception of the Chicago area, where a deceleration of growth was reported. By industry, it appeared consumer spending improved with the exception of autos, which have struggled as of late. Manufacturing was strong, in keeping with broader national indexes, with sentiment looking optimistic. Labor markets continued to tighten, with selected job shortages in manufacturing and construction, and modest/moderate wage growth.

Interestingly, Fed Vice Chair Stanley Fischer has resigned from the FOMC, effective in mid-October, for personal reasons. This creates another vacancy that needs to be filled (the board has been running with several openings for some time). While some debate could ensure about the philosophical views of various candidates, many central bank committee members tend to be relatively conventional in their economic training, although they may subscribe to different schools of thought. That said, adding new members has not tended to rock the boat in an extreme way. Of course, there are exceptions, such as Paul Volcker, who's appointment to Fed Chair in 1979 resulted in the 'whipping' of inflation back into shape from high levels in prior years. The force of personality tends to be more of a factor in the role of chair than for other committee seats.

Market Notes

Period ending 9/8/2017

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BlmbgBarcl U.S. Aggregate



U.S. Treasury Yields

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U.S. stocks pulled back a bit on the shortened holiday week with small caps under-performing large caps. From a sector standpoint, health care and energy led the way, while technology and consumer cyclicals pulled back. With a lack of other meaningful news, uncertainty surrounding two back-to-back severe hurricanes played a role, and especially punished insurance company shares based on the spike in expected upcoming claim payouts. On the positive side, the Washington budget deal removed one element of uncertainty.

As a side note, the effects of weather disasters on markets and the economy tend to be fairly short-term in nature, with the bulk of the effect showing up in labor statistics. While these two events could and will likely depress economic activity in these regions in the near-term, rebuilding activities tend to play a positive role on GDP growth in quarters moving forward.

Foreign stocks generally lost similar ground as U.S. stocks in local terms, while a -1.5% drop in the USD index converted these into net positive results in USD terms. The ECB meeting ended with no change in policy or their quantitative easing program, although the bank noted it stood ready to increase purchases if inflation remains persistently low. Interestingly, this is counter to recent hints around both the future of the policy and future 'tapering'. Some concern remains about the impact of the stronger euro this year on equity prospects, which have improved, which is reflected in performance. Emerging markets experienced less of a currency impact and ended flattish for the week on net.

U.S. bond yields ticked lower across the intermediate and longer part of the curve, as the 10-year treasury fell to its lowest levels since last November as investors moved away from risk and inflation estimates remain tempered. Treasuries outperformed investment-grade credit, and high yield bond returns lagged for the week. This is another reminder of the unpredictability of interest rates, especially when many experts again espoused this year that 'we won't get to 2 percent again any time soon'. Interestingly, on the credit side, August represented the second month in a row with no high yield bond defaults, and the first month in over three years when no bond or bank loan experienced a default. Obviously, credit conditions remain quite strong, which likely explains the increasingly tighter spreads of lower quality high yield bonds versus treasuries and their deteriorating valuation prospects; loan spreads have tightened as well, but the variable-rate component remains an attractive feature in an environment of increasingly higher short rates, now that many have reached or exceeded LIBOR, where they again can 'float' as intended and reset higher.

Foreign developed market debt in USD terms gained sharply, but was largely the result of a weaker dollar. EM debt returns were also affected by USD movements, with both local and hard currency ending the week higher, but local outperforming.

Real estate gained in the U.S., and even more so abroad, in contrast to broader equities, and likely aided by lower interest rates. Apartments and retail recovered somewhat, a bit better than other segments, and outperformed mortgage REITs despite lower rates.

Commodities ended flattish in the short week, as lower prices for several industrial metals due to weaker China results were offset by strength in precious metals. Despite a blip higher mid-week, crude oil closed just above where it started at $47.48; natural gas and unleaded gas declined sharply as storm concerns dissipated.

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 5, 2017.

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