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Weekly Review - September 18, 2017

Weekly Review - September 18, 2017

Guest Post - Monday, September 18, 2017

Summary

Key economic data for the week included a disappointing retail sales report, slightly weaker consumer sentiment, moderately higher producer and consumer inflation and slightly improved jobless claims. As anticipated, several of these metrics appear to be affected by recent hurricane activity.

U.S. equities gained for the week in a variety of sectors, accompanied by a positive week in developed foreign markets, although tempered due to the negative impact of a stronger dollar. Bonds lost ground on the investment-grade side as yields rose, with foreign bonds affected more negatively due to currency. Commodities gained for the week, as energy prices rose sharply.

Economic Notes

(-) Retail sales for August fell -0.2% on both a headline and core/control level, the largest drop in six months, in contrast to an expected gain of +0.1% and +0.2%, respectively. On the ‘positive’ side, gasoline station sales contributed to sales gains with higher gas prices, while auto sales and non-store sales declined, as did clothing, electronics and building materials. It appears the Hurricane Harvey effects may have likely played a role in the decline, as well as perhaps some normalization from the bump in sales from Amazon Prime Day the prior month.

(+) The NY Fed Empire state manufacturing survey fell -0.8 of a point to +24.4, which outperformed forecasts calling for +15.0. Underlying components in the survey showed strength, with gains in new orders, shipments and employment. Interestingly, it appeared additional oil/gas activity diverted to New Jersey as a result of the Gulf Coast hurricanes may have boosted certain regional results for the period.

(-) Industrial production for August fell -0.9%, compared to a forecasted gain of +0.1%, representing the first decline in over six months. Manufacturing production as a sub-component of industrial fell -0.3%, with petroleum/chemicals/plastics all falling, bucking forecast for a gain of +0.3%. Utilities production falling -5% was also a major contributor. Unsurprisingly, with energy and utilities weakness, hurricane effects appear to be at play. Capacity utilization fell -0.8% to end the month at 76.1%.

(0) The producer price index for August showed a gain of +0.2%, a tenth below expectations of +0.3%. On a core PPI level, ex-food and energy, the increase was reduced to +0.1%, which also lagged consensus by a tenth. Under the hood, finished goods and medical care prices were also soft. Year-over-year, core intermediate producer prices rose +3.1%, which is stronger than other inflation measures.

(0) The consumer price index for August showed a +0.4% gain, a tenth above expectations, on a headline level, while core inflation rose +0.25%, a few basis points above expectations. On the core side, shelter and transportation services were both up nearly a half-percent, leading the way, while energy gained +3% (gasoline being a catalyst at +6%) to boost the headline figure. Lodging has also been volatile over the past few months, which has added to inflation volatility. Year-over-year, headline and core CPI rose +1.9% and +1.7%, respectively, which is a faster rate than in prior months, but remains below the Fed’s mandate. Interestingly, food prices are up +1% over the trailing twelve months, so no longer deflationary, and energy prices are +6% higher. The reaction to this report was mixed, but seen as showing some signs of life on the inflation front. As it stands today, this may increase the probabilities a bit for December Fed action, but it remains far too early to speculate.

(+) The Univ. of Michigan consumer sentiment index fell -1.5 points to 95.3, beating the forecasted level of 95.0 by a bit. Assessments of current conditions rose a few points, while expectations for the future declined by a few. Again, some hurricane impacts could have played a role, notably in expectations of rebuilding activity. Insofar as inflation is concerned, 1 year ahead expectations rose a tenth to +2.7% (these are often correlated to near-term gasoline prices), while the 5-10 year ahead inflation consensus also rose a tenth to +2.6%.

(+) The government JOLTs openings data for July came in at 6,170k, beating the forecasted 6,000k level. This also represents a +11% gain over a year ago and is a new high point for this recovery. Openings rose in construction, leisure/hospitality and trade/transports/utilities, while manufacturing and education/health openings fell back. The hiring rate ticked up a tenth of a percent to 3.8%, as did the quits rate again to 2.2%, while the layoffs level was unchanged at 1.2%.

(+) Initial jobless claims for the Sep. 9 ending week fell -14k to 284k, below an expected 300k. Continuing claims for the Sep. 2 week rose +4k to 1,944k, which was below the consensus estimate of 1,965k. Part of the initial claim decline was due to a partial reversal of Hurricane Harvey effects in Texas, but these remain elevated. On top of this, Hurricane Irma effects in Florida are likely to cause a boost in claims for coming weeks—altering the fundamental longer-term trend of low claim levels.

Market Notes

Period ending 9/15/2017

1 Week (%)

YTD (%)

DJIA

2.19

14.75

S&P 500

1.63

13.33

Russell 2000

2.35

6.46

MSCI-EAFE

0.56

19.15

MSCI-EM

1.01

27.82

BlmbgBarcl U.S. Aggregate

-0.50

3.40


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

9/8/2017

1.04

1.27

1.64

2.06

2.67

9/15/2017

1.05

1.39

1.81

2.20

2.77

U.S. stocks gained, with sentiment higher as a result of damage reports from Hurricane Irma not looking as bad as initially expected as well as tempered rhetoric with North Korea. Small caps sharply outperformed large caps, which restoring some of their lag this year. From a sector standpoint, energy stocks gained over +3% on the back of stronger oil prices, along with similar strong returns from financials and telecom; defensive utilities lagged with a small loss for the week.

Foreign equities were ended mixed, largely due to currency effects. Japanese stocks gained +3% in local terms on the back of stronger economic results, and little apparent impact from North Korean tensions, although a weaker yen moderated much of these gains. On the other hand, local currency losses in the U.K. were turned into positive returns with a stronger pound. European results were less dramatic, with moderate gains. Emerging market stocks outperformed developed markets, with strength in China despite weakening growth—which has some investors convinced tightening measures are working to stem overheating. Additionally, eased restrictions on stock shorting boosted sentiment. Brazil also experienced gains despite another presidential indictment on corruption charges.

U.S. bonds suffered negative returns as risk won out during the week, driving yields across the curve higher. Investment-grade credit held up better than treasuries. High yield bounced back to a greater degree. Developed market foreign bonds lagged due to higher yields and the headwind of a stronger dollar. Emerging market bonds suffered a bit less due to a less severe currency impact.

Real estate gained modestly, underperforming broader equities, despite the usually-negative impact of higher interest rates. Cyclically-sensitive lodging and regional malls bounced back sharply, with gains of several percent to lead the way, while apartments lost ground. With a stronger dollar effect, Asian and European real estate lagged, with negative returns, while U.K. gained.

Commodities rose for the week, led by strength in the energy sector. Both natural gas and crude oil prices rose +5%, in crude’s case to $49.89/barrel, with expected inventory drawdowns and talk of the Saudi-led OPEC agreement to extend production cuts beyond March of next year. With risk taking precedence this week, precious metals prices declined, as did industrial metals.

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 11, 2017.

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