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Weekly Review - September 26, 2016

Weekly Review - September 26, 2016

Guest Post - Monday, September 26, 2016

Summary

Economic data for the week was largely focused around the FOMC meeting, where no interest rate policy action was taken. Several housing metrics came out during the week, to mixed results, with stronger pricing and homebuilder sentiment, but weaker sales volume and starts/permits.

Stock markets rose globally with Fed policy holding steady, and Japan going a bit further, although gains were stronger abroad than domestically. For similar reasons, bonds fared well on the week with the decline in interest rates. Commodity indexes gained, led by a rise in oil prices.

Economic Notes

(0) The non-eventful FOMC meeting, as we discussed earlier in the week, did raise questions about the tee-up for December action. We've had false starts before, and since the Fed has remained 'data dependent', upcoming meetings continue to remain up for grabs. The committee has not been transparent about exactly what additional data is needed, but it's assumed to be manufacturing and business capex, as consumer spending and jobs have been fine. The hesitancy has lasted for such a long stretch that the anticipation for a rate increase may have surpassed the drama of the actual event. However, all else equal, the path appears laid for December hike, which could/should raise market probabilities as well.

Behind the scenes, other factors have altered the tightening landscape as well. LIBOR has steadily increased by over 0.25%, not due to credit or structural factors, but by the unique element of changes in money market regulation (removing a significant component of buyer demand for debt priced at LIBOR, such as commercial paper). When such funding rates rise to that degree, it has a tightening effect without the Fed having to do anything. Interestingly the 'dot plot' and other projections for growth, inflation and rates have all steadily declined over the course of time.

(+) The FHFA house price index for July gained +0.5%, marginally outperforming expectations of a +0.3% increase. Prices rose in all nine national regions, led by KY/TN/AL/MS and the upper Great Plains states, which rose about a percent. Year-over-year, the index is up +5.8%, which demonstrates a continued healthy clip.

(-) Existing home sales for August fell by -0.9%, which was below the +1.1% gain expected. Single-family sales dropped by over -2% for the month, which offset a stronger result of multi-family gaining +11%, although the latter tends to be more sporadic month-to-month. Regionally, the South and West declined by the greatest degree (2-3%) while Northeast sales rose +6%. Anecdotally, it appeared sales were affected negatively by both lower inventories and higher home prices (although the median price fell a bit to $240,200).

(-) Housing starts for August fell by -5.8%, which was far worse than the expected -1.7% decline. Both single- and multi-family starts fell to nearly equivalent degrees, resulting in the headline decline. Building permits also fell for the month, to -0.4%, compared to an expected gain of +1.8%. In that series, the results were more bifurcated with single-family permits gaining +4%, while multi-family fell -7%. Year-over-year, this series was up just under +1% from a year ago.

(+) The NAHB index of homebuilder sentiment rose sharply for September, by +6 points to 65, compared to an expected 60 reading. Current sales, future sales expectations and prospective buyer traffic all rose similarly, contributing to the overall number. All regions of the U.S. also saw improvement, with the West leading the way. This index has tended to be a precursor for residential building activity, so is useful and a positive sign in that regard.

(0) The Conference Board index of leading economic indicators for August fell by -0.2%, which broke a string of positive months. This result was led by a drop in manufacturing hours and ISM new orders, while financial elements (represented by interest rate spread, stock prices and credit) were positive contributors. Overall, the underlying data appeared relatively balanced, as noted by the Conf. Board in their press release. On the positive side, the last six months gained at a +1.8% annualized rate, better than the previous six-month annualized rate of +0.3%. By contrast, the coincident index rose +0.1% and lagging economic index gained +0.2%—strong labor markets and low inflation contributed to better results for the latter two measures.

(+) Initial jobless claims for the Sept. 17 ending week fell to 252k, better than the expected 261k estimate. Continuing claims for the Sept. 10 week came in at 2,113k, which was under the 2,140k consensus estimate. Interestingly, while no special factors were reported, the drop in claims was due to a -10k decline in California. The series continues to show a high degree of strength.

Market Notes

Period ending 9/23/2016

1 Week (%)

YTD (%)

DJIA

0.76

6.94

 

S&P 500

1.20

7.62

Russell 2000

2.45

11.65

MSCI-EAFE

3.15

2.43

MSCI-EM

3.62

15.53

BarCap U.S. Aggregate

0.52

5.73

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

9/16/2016

0.30

0.77

1.21

1.70

2.44

9/23/2016

0.18

0.77

1.16

1.62

2.34

U.S. stocks largely gained ground on the week, with the lack of FOMC action and dovish Yellen press conference causing interest rates to fall and sustaining positive sentiment for risk assets. From a sector standpoint, all ended up in the positive, led by several-percent gains in utilities and industrials, while energy and technology experienced only slight gains; the latter was affected by a bearish sales report for Apple's new iPhone and measurement discrepancies in Facebook user data.

Foreign stocks outperformed domestic for the week, led by Japan and Europe, and emerging markets close behind. The Bank of Japan held their policy rate steady at -0.10%, but did make some other interesting announcements related to bond market purchases, including changing the goal from the quantity of bond it will purchase to targeting yields directly instead (like keeping the Japanese 10-year government bond at a stated 0%), as well as keeping at it not only until the 2% inflation target is hit, but until it 'stays above the target in a stable manner'. This is referred to as letting inflation 'run hot'. Consider this a fine-tuning, even a bit of a deepening of QE, and a more flexible method for achieving yield monetary goals, and offers the benefit of longer rates of not falling below zero, which is a benefit to financial firms that have difficulty under negative rate conditions. Markets seemed to approve. The problem is coming more from the demand side of things.

U.S. bonds gained ground with the aforementioned decline in interest rates, notably at the longer end of the yield curve, thus helping longer duration debt more than shorter. Credit, both on the investment-grade side as well as high yield, outperformed governments as credit spreads contracted a bit. A weaker dollar and Fed sentiment helped foreign bonds outperform U.S. debt, which was more pronounced in the more volatile emerging markets space as credit spreads also tightened.

Real estate experienced a solid week, helped no doubt by a decline in interest rates. The U.S. outperformed other regions, with gains in healthcare and residential.

Commodities rose slightly, with a tailwind of a weaker dollar and gains almost all groups, including energy, industrial and precious metals as well as agriculture, to a lesser degree. Oil gained a few dollars a barrel during the week before ending up just +2% at $44.50. This appeared to be due to an inventory draw down, and more 'dramatic' news surrounded the upcoming OPEC meeting, with a rumor of Saudi Arabia offering to cut production if Iran would agree to doing the same. Such rumors have a tendency to boost prices higher in the short-term, but often fizzle out based on how valid and probable their occurrence ends up being. Whether these reports end up being legitimate or not longer-term remain up for debate, especially considering the reluctance of Iran to enter into any deals with its Middle Eastern neighbors, or even cut production to begin with, as it would like to capture as much revenue from oil as it can following the recent reduction in sanctions.

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 19, 2016.

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