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Weekly Review - September 21, 2015

Weekly Review - September 21, 2015

Guest Post - Monday, September 21, 2015


  • The week was highlighted by the Fed’s decision to keep interest rates at zero for yet another meeting, despite growing expectations for an increase. Retail sales results were stronger, as did jobless claims, but several regional manufacturing surveys came in weak. CPI was little changed, as expected, and remained at low levels.
  • Large-cap U.S. equities were largely negative on the week, while small cap and foreign equities turned in positive results. Investment-grade bonds offered slight positive returns as rates declined upon no action from the Federal Reserve.

Economic Notes

(0) As we noted in the mid-week note, the Fed held things steady on the interest rate front. With a few more days to digest the outcome, the clear message is investor and economist disappointment in the Fed’s lack of action. The key question: with labor prospects and the economy improving, and with inflation (core, at least) heading back toward target levels, why not raise rates now? Based on the official FOMC statement, it does appear events outside of our borders have affected committee sentiment somewhat, with the outcome being that raising rates might do more harm than good (although we’re talking about a mere 25 basis points). No doubt in an increasingly globally integrated world, foreign events and currency vacillations play a greater role in domestic economic affairs than in decades past, but ‘purists’ question any policy decisions based on anything other than domestic considerations. Interestingly, one member (assumed to be the highly-dovish Narayana Kocherlakota from the Minneapolis Fed) slated year-end fed funds rates in the negative, a la Europe. While unlikely, and other operational complications notwithstanding, the committee certainly appears more cautious than optimistic at this point in time.

This chart provides a good summary of what has happened to equities when rates have been hiked for the first time over the last few decades (not a lot of examples). This is no future promise, naturally, but it stands to reason that in the past, rate increases have occurred during periods of stronger economic growth, which is the core rationale for the increase. This time, it’s a little different with the emergency zero rate policy, but then again, every period is a little unique in some regard.

Months after initial hike
Source: Morningstar data, FocusPoint solutions calculations.

The impact on bonds is a little more nuanced, and can be dependent on starting yields. Over time, the bulk of bond returns have originated from coupon income, which makes sense intuitively. If starting yields are higher, there is more ‘cushion’ to provide some return even if rates change, while lower starting yields offer less of this. The initial duration effect has tended to be negative as existing bonds suffer from a price standpoint, which can be offset by the rising yields eventually as these bonds are replaced with the higher-yielding variety—helping returns. However, much of bonds’ mid-term reaction to rate changes is dependent on the speed and magnitude of increases.

(+) Retail sales for August grew at +0.2% at a headline level, which lagged expectations by a tenth, while the core/control variety gained +0.4% and surprised by a tenth on the upside (the latter being relevant in some respects as it’s the input into GDP). There were some revisions higher for prior months, and that was perhaps the even more positive news. For August, expansion was broad with several key areas ending higher, including general merchandise, apparel and non-store/online sales.

(-) The NY Empire manufacturing survey for September came in little changed from the prior month at -14.7, but far weaker than the expected -0.5. Components within the index were also lower, but to a differing degree—new orders and shipments remained in negative territory but improved several points from the prior month, while employment components worsened.

(-) The Philly Fed index fell by -6.0 in September, which looked quite lackluster compared to last month’s +8.3 reading and the +5.9 expected. This fell in line with some other regional survey disappointments, like NY. Under the hood, things were a little better than the headline figure, with new orders and employment looking stronger, while shipments declined but stayed positive.

(0) The consumer price index for August fell by -0.1% on a headline level, and removing energy and food, rose just under +0.1% (rounded upward) on a core measure. Both of these were in line with expectations. Declines in energy by about -2% remained the primary difference-maker between the two, while owners’ equivalent rent rose but at a lower rate than prior months, airline prices fell while apparel rose slightly. Year-over-year, headline and core CPI were higher by +0.2% and +1.8%, respectively, with a -15% energy decline (broad sector, not just oil) being the key differentiator. Overall, a flattish report but the same deflationary pressures from energy and lack of core inflation pressures persist.

(-) Industrial production for August fell by -0.4%, twice the level expected. This was mostly driven by a decline in motor vehicle production, which declined by -6% after a +10% month the prior month, so normalization of some noise, as other manufacturing areas were flat. The other weak area included mining (which encompasses energy exploration/drilling), while utilities gained and picked up some of the slack. Output of business equipment fell by -0.4%, while retail inventories rose +0.6 due to autos. Capacity utilization came in at 77.6% in August, which was two tenths below expectations.

(0) Housing starts for August fell -3.0%, which was a bit better than the expected -3.8% decline. But a few earlier months were revised downward a bit, tempering the ‘positivity,’ and taking the final number under expectations. It appeared that some of this was a typical reversion from sharply higher results over the summer, which is not uncommon in this space. Building permits rose +3.5% on the month, which bested estimates by a percent; in addition, some positive revisions for earlier months added to the strength.

(+) The NAHB homebuilder index for September rose to 62, a point better than forecast, and representing the highest level in a decade. Current sales of single-family homes and prospective buyer traffic represented the two key areas of improvement, while expected single-family sales fell a bit.

(+) Initial jobless claims for the Sept. 12 ending week fell to 264k, compared to expectations for a little-changed 275k. Continuing claims for the Sept. 5 week fell a bit to 2,237k, below the 2,258k expected. No special factors appeared to be at play, although shortened weeks due to events like Labor Day play a role from time to time in assumptions.

Market Notes

Period ending 7/10/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks started decently on the week but ended lower after the FOMC statement alluded to worries about non-U.S. conditions—which fed global economic growth fears. Small caps, which tend to have less foreign exposure, bucked the trend by finishing in the positive. From a sector standpoint, more defensive utilities (which also reacted to a lack of interest policy change), consumer staples and healthcare actually gained ground on the week, while financials and materials lagged.

The dollar weakened, which acted as a positive for foreign stock and bond returns. Coming in negative, on par with domestic equities in local terms, developed market returns in Europe and the U.K. turned positive when translated to dollar terms. Japan remained negative, affected by a credit downgrade noted in further detail below. Emerging market stocks rallied on the week, in fact over a percent in the hour after the FOMC meeting, which is unsurprising considering the possibly exaggerated fears of a rate hike being detrimental to EM.

U.S. bonds performed positively on net with threats of higher interest rates being put off for at least another month or three, if not longer, with most conventional investment grade sub-sectors gaining up to a half-percent. Emerging market debt was also higher in price (again, with alleviated fears about the impact from Fed tightening) while high yield fell back a bit upon continued concerns over the energy sector component and global economics, which widened out spreads.
Interestingly, on the foreign bond side, S&P cut traditionally well-regarded Japan’s long-term credit rating from AA- to A+ based on the perception of continued difficult economic growth and fiscal reform headwinds and government decision to not step up additional QE-style asset purchases. Japan’s debt-to-GDP ratio of over 200% is one of the highest in the world, not thought of as a major concern due to the fact that the ‘character’ component has never been questioned, and the bulk of Japanese debt is domestically-owned. However, the ‘capacity’ to service such debt over the long run can also play a key role in credit ratings.

Real estate in the U.S. performed significantly better than other equities, likely assisted by the lack of Fed rate increase, as healthcare, retail and industrial/office all performed well. Domestic names all outearned European and Asian REITs, which were positive but to a lesser degree.

Commodities were generally lower despite the weaker dollar. Brent crude lost several percent more than West Texas intermediate, while natural gas also declined sharply. Industrial metals lost ground on global economic concerns, while gold and silver gained a few percent with a respite from rising rates which tends to pressure the precious metals group.

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 14, 2015.

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