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Weekly Review - December 4, 2017

Weekly Review - December 4, 2017

Website Administrator - Monday, December 04, 2017

Summary

Economic data released last week included an upward revision in 3rd quarter GDP, a dip in the ISM manufacturing index, a recovery in various housing metrics and higher levels of consumer confidence.

U.S. equity markets rose sharply during the week, outperforming foreign stocks, which lost ground. Bonds were little changed on net with interest rates mixed across the yield curve. Commodity prices fell, with declines in several key segments, including oil and metals.

Economic Notes

(0) The 2nd ‘advance’ estimate of U.S. GDP for the 3rd quarter was revised up by +0.3% to an even more robust +3.3%, which was stronger than the revision to +3.2% anticipated. Interestingly, the inherent details of the growth were less promising than in the first edition, with personal consumption revised down by a tenth, with inventory growth taking up the slack. In addition to corporate profits rising, business fixed investment was also revised higher, from +1.5% to +2.4%, due to an over-10% increase in equipment. A lack of capex had been a weak spot in economic growth for several years. Corporate profits also rose at an annualized +18% for the quarter, which is the highest rate in three years. Core PCE inflation was amended slightly higher to just under +1.4% on both a core and headline level, so tempered. Overall, the effect was mixed, but a 3%+ report isn’t terrible.

(0) Personal income for October rose +0.4%, which beat expectations by a tenth, bringing the year-over-year gain to +3.4%. Personal spending rose +0.3%, which was closer to consensus, but revised down for September—this brought the year-over-year increase to +4.2%. Combined, these pushed the personal saving rate a bit higher, to +3.2%, which is just above the low for the recovery cycle of +3.0%. The PCE price inflation index rose a rounded +0.1% on a headline level and +0.2% for core, led by financial services while healthcare gained less than expected, but primarily by a -1% decline in energy. This took the year-over-year rates of PCE increase to +1.6% and +1.5%, respectively—levels below the Fed mandate.

(-/0) The ISM manufacturing index fell a half-point to 58.2, which was just a tenth of a point below consensus expectations. In the underlying data, new orders and production both experienced gains, with results continuing in the strongly expansionary low-60’s range, while employment lost slightly to fall just below 60. Supplier deliveries and inventories represented the weak metrics for the month. Despite the drop in the headline number, the underlying result reflects strong manufacturing activity.

(+) The S&P/Case-Shiller home price index for September rose +0.5%, beating forecasts calling for a rise of +0.3%. All 20 cities experienced gains, with Atlanta, San Francisco, Las Vegas and Tampa coming in at +1% or better for the month. Year-over-year, the pace of increase ticked up by almost a half-percent to +6.2%.

(-) The FHFA house price index, which includes a broader national sample beyond the 20 large cities, experienced the opposite result, rising +0.3% for September, lagging the forecast of a +0.5% gain. Regionally, prices rose in all but two of the nine areas, with the upper Midwest, Mountain states and the Pacific region experiencing gains just under +1%. Year-over-year, the national index rose +6.3%, which is indicative of well-above-average gains.

(+) New home sales for October rose +6.2% to a seasonally-adjusted annualized rate of 685k, beating estimates calling for a decline of nearly -3%. This was in addition to revisions downward for several prior months, but did represent a new cycle high point and a +19% gain compared to a year ago. Sales increased in all regions, although the Northeast and Midwest led the way. Market inventory tightened by a month to 5.0 months supply, which has perhaps played a role in keeping activity contained somewhat and prices higher.

(+) Pending home sales rose +3.5% for the month of October, far surpassing expectations calling for a +1.0% gain. Three of the four national regions gained ground, with the South bouncing back most strongly with an increase of over +7%—presumably due to hurricane recovery impact—while the West declined slightly.

(+) Construction spending rose +1.4% in October, which outperformed estimates calling for a +0.5% gain. Additionally, results for two prior months were also revised higher. For October, private residential and non-residential showed gains of under a percent, while public non-residential gained +4%, which offset a -3% decline in public residential construction spending. Overall, this appeared to be a decent report, which could positively impact Q4 GDP.

(-) The advance edition of the trade balance report showed that the deficit widened to -$68.3 bil. for October, compared to an expected level of -$64.9 bil. The change was primarily due to a drop in exports overall by -1%, led by a drop in food/feed by -11% and capital goods. Imports rose by +1%, led by the ‘other’ category, which also includes military items.

(+) The Conference Board’s index of consumer confidence rose +3.3 points to 129.5 for November, compared to an expected decline to 124.0. This actually represents a new recovery high point, and, in fact, the best result in 17 years. While consumer assessments of present conditions gained nearly +2 points, expectations for the future were nearly twice as strong, and the labor differential ticked just slightly higher. When it comes to confidence, more positive is generally better than negative, although there are limits. When you reach continual peaks in strong sentiment, it could begin to signify a more persistent optimism by the general public, which eventually has a reversal effect—although that can be a bit down the road, based on historicals.

(0) Initial jobless claims for the Nov. 25 ending week ticked down by -2k to 238k, coming in better than the estimate of 240k. Continuing claims for the Nov. 18 week rose by +42k to 1,957k, which is the highest level in almost three months, and far higher than the 1,890k expected. Initial claims changes were moderate, with hurricane effects declining with time but the continuing claims jump was a bit of a surprise—although overall levels for both remain quite low.

(0) The Fed Beige Book, which outlines various regional conditions, showed continued economic expansion at a modest to moderate pace in all 12 districts. This was little changed from the prior report, although it appeared slightly more optimistic. Some of this differential could have been weather-related, with hurricane effects abating, and replaced by recovery efforts and rebuilding in those areas—which naturally spurs economic activity. Consumer spending was mixed by area, but steady overall, while manufacturing saw expansion. Labor markets continued to show strength, with ‘tightness’ in certain segments where it’s been increasingly difficult to find qualified workers—requiring higher wages and incentive bonuses in some cases. Otherwise, wage growth continued at a modest/moderate pace, which was the same description used for overall inflation.

In other Fed news, Marvin Goodfriend, a professor of economics at Carnegie Mellon and former director of research at the Richmond Fed, was nominated to fill one of the other vacancies on the Fed’s Board of Governors. He also served on President Reagan’s Council of Economic Advisers, and is seen by markets as well-qualified for the appointment. From a policy standpoint, he falls in the camp of mainstream economists, albeit on the hawkish side of center in some cases, with a view that Fed credibility is a paramount consideration in any actions taken. Interestingly, he also appears to favor normalize the Fed’s balance sheet at a quicker pace, if given the choice, although it’s not clear that consensus on the committee would shift in this direction. He’s also shared views that the use of negative interest rates might be preferable to QE, although there can be undesirable byproducts to that approach on the financial and other sectors (as seen in Japan), as well as the abandonment of paper currency (as seen in Sweden recently), although the latter is a much more controversial view.

It’s important to keep in mind that views of economists, as with anyone else, are shaped by their practical experience. Serving during the Reagan administration would have exposed policymakers to a period of very high inflation (prior to Paul Volcker’s extreme-at-the-time policy of hiking interest rates to the point of inflation’s submission), which explains a natural weariness to monetary policies such as QE that have the potential of generating significant inflation. The decades after this extreme period have been quite benign, but it’s not surprising that those closely involved during that period remain especially vigilant.

Market Notes

Period ending 12/1/2017

1 Week (%)

YTD (%)

DJIA

3.00

25.49

S&P 500

1.60

20.25

Russell 2000

1.22

14.59

MSCI-EAFE

-0.94

22.06

MSCI-EM

-3.32

29.42

BlmbgBarcl U.S. Aggregate

-0.03

3.36


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

11/24/2017

1.29

1.75

2.07

2.34

2.76

12/1/2017

1.27

1.78

2.13

2.37

2.76

U.S. stocks rose sharply on the week, with the Dow experiencing its best weekly return for the year, and reaching the milestone 24,000 mark. From a sector standpoint, telecom and financials rose by over +5%, while technology fell back by -2%. Sentiment was strengthened by a market-friendly (regulation-lite) confirmation hearing of nominated Fed Chair Jerome Powell, as well as the final steps and committee passage of the Senate’s version of the tax bill. However, further negotiations will be required to rectify differences between the House and Senate bills, with several individual amendments controversially added during the process. This week will be focused on the continuing resolution to continue government funding that currently expires on Friday, Dec. 8, and, without an extension, could result in a government shutdown. While not likely catastrophic from a market perspective, it certainly erodes political sentiment which could drag into tax reform passage efforts.

Interestingly, holiday sales stats have come in strong on a preliminary basis, notably Cyber Monday, which has been billed as the highest-volume internet purchase session of all time. Despite fears of its slow and agonizing death, brick-and-mortar activity appears to also be outperforming expectations, even with nearly 7,000 store closings in 2017, which is triple the level of last year.

Foreign stocks declined for the week, in almost all primary developed market regions. Despite European manufacturing PMI coming at over 60—the highest result in 17 years—inflation came in lower than expected, which lowered sentiment. Additionally, concerns were raised by the Bank of England regarding continuity of certain financial contracts if certain Brexit concessions aren’t granted. Emerging markets suffered sharper losses, with similar results in the larger BRIC nations. As much as anything, tax reform efforts in the U.S. appear to also be affecting sentiment abroad to as great a degree as their own internal dynamics as of late.

U.S. bond returns were flattish on the week, with minimal rate changes on net—short rates fell, intermediate rates rose, while long-term treasuries were unchanged. Credit outperformed slightly, by a few basis points. Developed and emerging market foreign bonds performed similarly in local terms, but weakened when translated due to a stronger dollar. Rates in the U.K. continued to rise as Brexit negotiations have been faring decently, and odds of another central bank rate hike have increased.

Real estate assets declined both in the U.S. and abroad. In domestic markets, retail/regional malls gained a few percent along with better-than-expected prospects for the holiday shopping season, while apartments fell back.

Commodity indexes declined for the week, led by drops in the prices for industrial and precious metals. Crude oil also fell back by a percent to $58.36, firming on Friday as OPEC extended production cuts through the end of 2018; this offset a rising U.S. rig count which boosts overall crude supply. In the energy segment, this was partially offset by a +5% in the price for natural gas.

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 November 27 2017.

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