Summary
Economic data for the week was highlighted by the Federal Reserve raising rates by a quarter-percent as expected, final GDP data for the second quarter coming in unchanged yet strong, mixed results for housing, and decelerating but also strong industrial data.
Global equity markets lost ground for the week, with the U.S. outperforming foreign regions generally. Bonds were little changed in keeping with a flattish yield curve, despite the Fed raising rates. Commodities gained several percent due to the continued momentum of rising crude oil prices.
Economic Notes
(0) As we touched on earlier in the week, the FOMC meeting ended with a quarter-percent increase, and removal of ‘accommodation’ in the official statement, which many took as significant but not overly surprising. The expectations for total GDP growth this year rose by 0.3%, unemployment three years out was downgraded, while the anticipated long-term fed funds rate ticked up a bit to 3.0%.
Interestingly, this is the first time in a decade that ‘real’ short term rates (nominal rates minus inflation) have turned positive. This is a very unique situation in history, where, although real rates have run at negative rates in the past, the decade since the financial crisis and accompanying QE has been a first-time event. Getting rates back to ‘normal’ in a gradual way, is a bit different than a normal ‘restrictive’ raising rates policy, but if taken too far, could have similar effects. For this reason, the Fed moving slowly is not surprising.
(0) The final edition of Q2 GDP came in again at +4.2%, unchanged from the second edition, with private inventory investment falling a bit but other areas offsetting with higher readings, but nothing overly significant. GDP for Q3 is expected to be in the 2.5-3.5% area, with a lower impact from tax cuts and regulatory changes, but perhaps weaker business investment due to higher uncertainty from potential upcoming disruptions in trade. Naturally, a trade war environment would (and has) caused company managements to reevaluate and/or delay business decisions that could be hampered under such a scenario.
(0) The advance edition of August’s trade balance report showed an increase in the deficit by -$3.6 bil. to -$75.8 bil., wider than the -$70.6 bil. level expected—in fact, this was one of the deepest deficits of the past ten years. Goods exports fell by -1.6%, or -$2 bil., in the areas of food/beverages and industrial supplies primarily; however, consumer goods exports rose by +10%. Imports of goods rose by +$1.5 bil., led by autos and other consumer goods. Year-over-year, though, both categories are up—exports by +8% and imports by +11%.
(0) Personal income for August rose +0.3%, a tenth of a percent below expectations. Personal spending rose by the same amount, which was as expected. Minimal changes in the two kept the personal savings rate at 6.6%. The PCE price index, which is the Fed’s preferred method for evaluating inflation, rose +0.1% on a headline level and barely budged above zero for core for the month. This brought the year-over-year change in the headline and core PCE indexes to +2.2% and +2.0%, respectively—almost spot on to the Fed’s target.
(0) Durable goods orders for August rose by +4.5%, surpassing the median forecast calling for a gain of +2.0%, bringing the year-over-year change to just under +12%. The headline figure was led by a +13% in the lumpier category of transportation equipment. Core capital goods orders, consequently, fell by -0.5%, relative to estimates of a +0.4%. Core capital good shipments rose +0.1%, also falling below an expected +0.5% increase, with inventories rising by just under a half-percent for the month.
(-) The Chicago PMI fell by -3.2 points in September to 60.4, a five-month low. Despite the still-very expansionary headline number, several components moderated, including output, new orders and production; however, backlogs and supplier deliveries rose. It appeared that the recent hurricane in the Southeast may have played a role in disrupting logistics, along with ongoing tariff concerns that lie in the background, other than pushing prices higher. The anecdotal question for the month centered on expected delivery times in the upcoming quarter, where over half of firms are anticipating these to lengthen, with almost all other not foreseeing a change.
(0) The S&P/Case Shiller home price index rose +0.1% in July, meeting consensus expectations. Prices increased in nearly three-quarters of the 20 cities covered, led by percent gains in Las Vegas and San Francisco, while prices in New York declined by a half-percent. The year-over-year increase slowed by a half-percent to a still-robust +5.9%.
(0) The FHFA house price index, featuring a wider non-urban geographic area, rose +0.2% in July, just short of the +0.3% level expected. Just over half of the national regions experienced price improvement, led by the South Atlantic region (everywhere on the East Coast from MD on south) Atlantic, which gained a percent, while the KY/TN/AL/MS region fell by a half percent. The year-over-year rate for this measure slowed as well, to +6.4%.
(0) New home sales in August rose by +3.5% to a seasonally-adjusted annualized rate of 629k units, just a -1k short of expectations. However, this growth was tempered by downward revisions of -40k from the past several months. Regionally, the sales in the West rebounded by +9%, while the South declined by -2%. Year-over-year sales are up +12.7%, but Inventory fell a tenth to 6.1 months supply, which remains high on a multi-year basis. It also appears the ‘homes not started’ are quite a bit higher than last year, while ‘homes completed’ are barely so.
(-) Pending home sales for August fell by -1.8%, surpassing an expected smaller decline of -0.5%. Sales fell in all regions, with the West down -6%, while the South and Midwest declined approximately a half-percent. Hence the name, this series points to weaker actual home sales in coming months, in keeping with mixed housing results as of late.
(+) The Conference Board’s index of consumer confidence rose +3.7 points to 138.4 in September—the highest reading in 18 years—beating expectations calling for a slight decline to 132.1. Assessments of current conditions increased slightly, as did future expectations to a greater degree, but both were surpassed by the labor differential, which measures the ease of finding a job and reached a new cycle high.
(-) The final Univ. of Michigan consumer sentiment report for September showed a decline of -0.7 points from the earlier report to 100.1, relative to expectations of little change to 100.6. Assessments of current conditions and expectations for the future both declined during the period in roughly equal amounts. Inflation expectations for the coming year fell a tenth of a percent to 2.7%, while those for the next 5-10 years rose by a tenth to 2.5%. Compared to trend, however, sentiment continues to run at a high level.
(0) Initial jobless claims for the Sep. 22 ending week ticked higher by +12k to 214k, a bit higher than the 210k level expected. Continuing claims for the Sep. 15 week also rose, by +16k, to 1,661k, but below the 1,678k anticipated. In terms of anomalies, Hurricane Florence resulted in sharply higher claims in North Carolina and South Carolina to some extent, which explains the bulk of the week’s change. That aside, though, claims levels remain at otherwise low levels.
Market Notes
| Period ending 9/28/2018 | 1 Week (%) | YTD (%) |
| DJIA | -1.07 | 8.83 |
| S&P 500 | -0.51 | 10.56 |
| Russell 2000 | -0.86 | 11.51 |
| MSCI-EAFE | -0.88 | -1.43 |
| MSCI-EM | -0.34 | -9.54 |
| BlmbgBarcl U.S. Aggregate | 0.17 | -1.60 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2017 | 1.39 | 1.89 | 2.20 | 2.40 | 2.74 |
| 9/21/2018 | 2.18 | 2.81 | 2.95 | 3.07 | 3.20 |
| 9/28/2018 | 2.19 | 2.81 | 2.94 | 3.05 | 3.19 |
U.S. stocks lost ground for the week due to trade uncertainty (again), as new Chinese tariffs took hold, hopes of talks to pull back on further tariff escalation broke down (again), as well as
perhaps some political wrangling around Supreme Court nominee Kavanaugh. Well after market close for the week, the U.S. and Canada did reach an agreement on Sunday to revise NAFTA (now renamed the U.S.-Mexico-Canada Agreement), which included updated terms to address specific issues with financial services and digital business considerations that weren’t in the picture in the early 1990’s when NAFTA was first introduced.
From a sector perspective, technology, energy and health care ended in the positive for the week, while materials and industrials suffered the most severe losses, with the former down -4%. Speaking of sectors, as was initially announced several months ago by S&P and MSCI, the new ‘Communications Services’ sector was unveiled at quarter-end. Intended to replace the narrower Telecom Services sector (which held a market cap of less than 2% of the index), the newer, more expansive sector definition contains media, entertainment, and interactive tech—including such heavyweights as Google, Facebook, Disney, Netflix and Comcast, in addition to the older telecom names including Verizon and AT&T—with the total now at a more substantial 10% index weight. Proportionally, weightings in the consumer discretionary and information technologies sectors have been reduced. Being more of a reshuffling than anything else, the change isn’t likely to result in any major disruption, but will alter sector composition reports, etc. for various managers and products.
Foreign stocks fared worse, especially in Europe, with the U.S. dollar strengthening by a percent, and an Italian budget deal creating a deficit several times wider than expected and could be the catalyst for more conflict with European leaders as well as ratings downgrades. Japan, on the other hand, gained ground. Emerging markets were also down for the week, with sharp recovery rebounds in Russia and Turkey not able to fully offset losses in China and India. Shares in Argentina, however, continued to plummet downward upon reports that the government may need additional stabilizing funds from the IMF as well as strikes and other signs of some increasing social unrest.
U.S. bond indexes ended the week just slightly higher, as initial gains in the 10-year treasury yield moved up towards 3.1% as the Fed raised rates, but fell back as the commentary following remained more dovish than expected—resulting in minimal changes in the treasury yield curve on net for the week. Investment-grade corporate, bank loans and high yield bonds fared largely in line with treasuries. Foreign bonds were severely hampered by a +1% rise in the U.S. dollar, equating to a near -2% loss for developed market debt, while emerging markets fared positively due to lower spreads—ending the week with the best performance of any fixed income segment.
Commodities gained several percent, despite the headwind of a stronger dollar. While agricultural products and industrial metals lost ground slightly, the energy sector gained sharply on the back of crude oil continuing its run, up +3.5% on the week to over $73/barrel.
Sources: Ryan M. Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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.