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Weekly Review - Septemeber 19, 2016

Weekly Review - September 19, 2016

Guest Post - Monday, September 19, 2016

Summary

There were a flurry of economic data releases last week, with results tilted toward the negative—included were disappointments in retail sales and manufacturing, while consumer sentiment was a little better than expected, and jobless claims remain very low. Inflation also remains flattish, in line with the recent cyclical trend.

Equity markets experienced more volatility than during the last few summer months, but gained a bit on net in the U.S., while generally losing ground overseas. Bonds experienced a lackluster week as well, upon higher interest rates. Commodities lost ground thanks to a weaker dollar and higher perceived oil supply conditions.

Economic Notes

(-) Retail sales declined -0.3% in August on a headline level, which was a bit worse than the expected -0.1% drop. Stripping out some of the more volatile components of autos, gasoline and building materials, the 'core' sales component fell a less severe -0.1%, although this below the expected gain of +0.4% for the core. There were also a few downward revisions for prior months, which served to be a negative influence. Most segments in retail fell, including non-store (i.e. online) retail, sporting goods and furniture; however, food/beverage sales increased. Consumer spending overall has been a decent component of GDP, but continues to be sporadic on a month-to-month basis. The ongoing irony of headline retail sales is that a drop in gas prices is a significant negative for the report, yet arguably provides one of the most important benefits to consumers.

(-/0) The New York Empire manufacturing survey for September came in at a contractionary -2.0, disappointing compared to the expected -1.0 reading, although it is an improvement on the -4.2 from August. Under the hood, however, several key components weakened substantially, including new orders, shipments and employment.

(+) The Philadelphia Fed index, on the other hand, rose from +2.0 in August to a much stronger +12.8 for September, contrary to an expected decline to +1.0. Underlying components were mixed, though, as new orders moved into expansionary territory, employment became less negative but shipments fell into contraction.

(-) Industrial production for August declined -0.4%, which was twice the drop expected. The manufacturing production component of the total matched the magnitude of the broader fall, which included weak results from business equipment but better from consumer goods, as well as a positive contribution from autos/auto parts. Utilities production fell over a percent, but that segment tends to be weather-related.

(0) The Producer Price Index for August came in flat on a headline level while core, sans food and energy, inched up +0.1%; this result was largely in line with expectations. Key factors included almost a -1% drop in energy prices during the month, similar to a decline for the trade services category. As implied by the broad results, individual segments were little changed for the month.

(0) The consumer price index experienced slightly more movement in August, with the headline measure gaining +0.2%, while core CPI ex-food and energy increased by +0.3% (rounded upward). Both were in line with forecast, although headline was a tenth higher than expected, if that matters at these minute levels. The primary changes included declines in energy and food prices during the month, while prices for medical commodities and services rose about a percent—their fastest pace in several decades. Otherwise, there was very little change in the steady low-inflation trend. Over the trailing 12 months, headline and core CPI showed gains of +1.1% and +2.3%, respectively. Interestingly, medical insurance costs are up +9% on the year, which appear to be due to adjustments upward related to Obamacare. Year-over-year, shelter is up 3.4%, which reflects both home prices and rents.

(0) Import prices for August fell by -0.2%, which was a tenth lower than expectations, based on a monthly drop in petroleum prices and some effect from autos. Excluding fuel prices, however, the result was flat.

(0) The preliminary Univ. of Michigan consumer sentiment survey for September came in at 89.8, unchanged from the prior report and slightly under the expected 90.6 reading. Consumer assessments of current conditions declined by a few points, while future expectations rose by a few, which is a positive component looking ahead. Inflation expectations for the coming year fell a few ticks to a 6-year-low of 2.3%, while 5-10 year forward expectations were steady at 2.5%, which equals an all-time low for this measure, believe it or not. Generally, this sentiment measure overall has remained fairly stagnant for well over a year, flattening out after strong gains made earlier in the post-recession recovery.

(0) Initial jobless claims for the Sept. 10 ending week ticked up a bit to 260k, but fell below the expected 265k. Continuing claims for the Sept. 3 week came in at 2,143k, which was below the forecast 2,150k. There were no special items, per the DOL, and claims levels continue to hover at very low levels signifying a lack of layoff activity.


Read the "Question of the Week" for September 19, 2016:

What would a Hillary Clinton or Donald Trump victory mean for financial markets?


Market Notes

Period ending 9/16/2016

1 Week (%)

YTD (%)

DJIA

0.25

6.13

 

S&P 500

0.59

6.34

Russell 2000

0.51

8.97

MSCI-EAFE

-2.48

-0.70

MSCI-EM

-2.63

11.50

BarCap U.S. Aggregate

-0.11

5.18

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

9/9/2016

0.35

0.79

1.23

1.67

2.39

9/16/2016

0.30

0.77

1.21

1.70

2.44

Following the prior week's rate scare, U.S. stocks continued their almost-immediate pickup in post-Labor Day volatility. On a broad scale, they ended up in the green, with strong gains from technology and utility stocks, while energy stocks declined several percent.

Foreign stocks generally lagged on the week, with Europe/U.K. and Japan performing the worst, down several percent, and emerging markets only suffering minimal losses. Following policy meetings, rates in both Britain (0.25%) and Switzerland (-0.75%) were kept unchanged, with QE continuing in the U.K., while the Swiss promised to intervene in currency markets if/as needed. They have a habit of this, as the Swiss franc is viewed as a global safe haven currency, but it's also a much smaller nation, so small dislocations can have a much larger domestic impact. Rates have risen somewhat in European markets as of late, in a reversal of recent trends, as some have questioned the ability of central banks to utilize such low rates as an effective policy tool. Therefore, the number of negative yielding bonds has fallen a bit globally. Russia also cut rates for the second time this year, by -0.50% to 10%, in response to the weak recovery yet also low inflation pressures.

U.S. bonds lost a bit of ground on the investment grade side, as rates ticked upward at the longer-end of the curve—perhaps due to minor inflation influences. The early part of the week was dominated by a speech given by another Fed governor, Lael Brainard, which tilted sentiment in a dovish direction, noting that stronger consumer spending and higher inflation trends would be desirable prior to any rate moves. Per the pattern in recent weeks, though, floating rate bank loans gained slightly, resulting in the best fixed income segment performance for the week, while the lower-quality and energy-dominated segment of high yield lagged. Munis also lagged a bit due to a glut of new supply entering the market last week ($12 billion, the highest volume week of the year thus far). Foreign bonds generally lost ground across the board, roughly equivalent to the strength in the U.S. dollar, which gained just under a percent on the week.

Real estate generally lost ground during the week, as interest rates perked up. However, U.S. names fared better than international, where losses were pronounced in the U.K. as well a Australia and Canada, who typically suffer when oil prices decline.

Commodities lost ground during the week, likely not helped by positive movement in the dollar. While the agriculture and industrial metals groups gained, precious metals lost ground, as did energy. The International Energy Agency reported an opinion that the current glut in oil supplies could well continue through at least the next year, or perhaps two, which served to lower crude oil prices by over -6% to $43/barrel for the week. Natural gas, on the other hand, rose by +5%, due to the opposite dynamics of supply tightening and expected warmer weather next week in parts of the country.

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 12, 2016.

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