Summary
Economic data for the week was highlighted by a decent government employment report, as well as strong results from other labor measures, and stronger consumer confidence, yet weaker manufacturing data.
Equity markets in both the U.S. and abroad bounced back last week, gaining several percent. On the other hand, fixed income markets ended the week negatively due to flows back toward risk and rising interest rates. Commodities lost several percent solely due to the higher crude oil supplies, which drove prices down sharply.
Economic Notes
(-) The October ISM manufacturing index fell by -2.1 points to 57.7, below the 59.0 reading expected and the lowest level in six months. By component, new orders, production and employment all pulled back, as did inventories, while supplier deliveries improved. Prices paid also rose by several points. These readings, however, all remained well above 50, which signifies expansion, while the overall index remains solidly in expansionary territory—albeit not at the same frenetic pace of recent months. Respondents to the survey continued to note concerns about the potential impact of tariffs on manufacturing activity—especially on input costs.
(0) The Chicago PMI fell -2.0 points to an October reading of 58.4, the lowest level since April. Business activity decelerated but continued to expand at a healthy rate. Orders declined, which offset gains in output, delivery times and employment. Prices paid also increased, along with further import tariffs being imposed. Overall, the index remains in expansionary territory, although at a slower pace than a year ago.
(0) Construction spending for September was unchanged, as was expected, although the prior month numbers for August were revised up by almost a percent. In September, the offsetting results originated from gains in private residential construction offset by a large decline in public residential.
(0) Personal income for September rose +0.2%, several notches below the +0.4% growth expected; personal spending grew at the expected pace of +0.4%. Spending for the prior month was also revised up by several tenths. The personal savings rate fell by two-tenths to 6.4%. The PCE headline price index rose just over +0.1% in Sept. on a headline level, while the core measure was a few hundredths higher, to a rounded +0.2% gain. Year-over-year, the headline and core PCE indexes each increased at a rate just under +2.0%.
(-) In the September trade balance, the deficit increased by -$0.7 bil. to $54.0 bil., which was a bit wider than the -$53.6 bil. expected. Imports and exports both rose by +1.5% during the month, which, for imports, represented the first gain in several months.
(0) The S&P/Case Shiller home price index for August rose +0.1%, meeting expectations. Prices rose in all but three of the 20 cities, with Las Vegas leading the way with a +1% gain, followed by Cleveland, while prices in Seattle fell by -1% to lag the pack. The year-over-year increase has remained strong, at +5.5%, but has continued to decelerate in recent months, as housing metrics overall have struggled.
(+) The Conference Board consumer confidence index rose by +2.4 points to 137.9 for October, an 18-year high, and beating expectations for a lesser increase to 135.5. Household assessments of current conditions and future expectations both increased by a few points, as did the labor differential, which measures the ease in finding employment. It appears a stock market correction and other geopolitical/trade issues have not stifled confidence as much as expected.
(+) The ADP employment report for October showed a gain of +227k jobs, outpacing the +187k expected; however the September number was revised down by -12k. Service jobs gained +189k, led by the areas of trade/transports/utilities, as well as leisure/hospitality; goods-producing jobs were up +38k, which was almost entirely a combination of construction and manufacturing. Interestingly, it appears that recent hurricane activity has not played a large role in affecting job growth.
(+) Initial jobless claims for the Oct. 27 ending week fell by -2k to 214k, almost reaching the 212k expected. Continuing claims for the Oct. 20 week declined by -7k to 1.631 mil., which came in under the expected 1.640 mil., achieving another milestone of being the lowest continuing claims level since 1969. Claims rose in the Midwest primarily, and continue to appear higher in hurricane-affected areas, to no surprise. Overall, as noted by the multi-decade lows, claims levels point to a very strong labor market.
(+) The government’s employment situation report for October came in stronger than expected, with activity from recent hurricanes affecting the results at the margin somewhat. Regardless, the underlying fundamentals continue to appear strong enough to warrant a Fed rate hike in December, which has remained at a high probability for months.
Nonfarm payrolls rose by +250k for the month, surpassing the +200k level expected. The hurricanes over the last several months have no doubt played a role in declines, followed by rebounds, in various jobs data; the difficult part is determining how much of a role these have played. Estimates for this last month are likely in the 40-50k range, following a decline of about the same amount the prior month from the hurricane in the Carolinas. Overall, service jobs rose +179k, with the largest gains in leisure/hospitality and healthcare (the former being largely weather-sensitive, historically), while retail only gained a few thousand jobs along with several high-profile bankruptcies in the space. (Sears continues to employ a surprisingly large number of U.S. workers.) Manufacturing employment grew by +32k, and construction added +30k—largely in the specialty trade area, which has experienced a problem locating a sufficient number of qualified workers and is likely responsible for part of the bump in wage growth.
The unemployment rate remained at 3.7% on a rounded basis, as expected. The household employment measure showed a gain of +600k jobs; additionally, the size of the labor force grew, despite greater weather impacts than the payroll number. The U-6 underemployment measured again ticked down to 7.4% after moving up a tenth last month.
Average hourly earnings rose +0.2% in October, in line with consensus, bringing the year-over-year pace up +0.3% from last month to +3.1%—a high point for this business cycle and pointing to some inflationary pressures in labor markets that have been well-anticipated. Average weekly hours worked inched back up again to 34.5 after dropping a tenth for a month.
Earlier in the week, estimates for nonfarm productivity in Q3 showed a gain of +2.2%, a tenth better than expected, with the trailing 12-month rate hovering around +1.3%. Unit labor costs rose by +1.2%, which was also a tenth higher than expected, gaining +1.5% on a year-over-year basis, which was down almost a half-percent from the prior quarter.
Market Notes
| Period ending 11/2/2018 | 1 Week (%) | YTD (%) |
| DJIA | 2.36 | 4.05 |
| S&P 500 | 2.45 | 3.45 |
| Russell 2000 | 4.35 | 1.82 |
| MSCI-EAFE | 3.36 | -8.17 |
| MSCI-EM | 6.08 | -13.96 |
| BlmbgBarcl U.S. Aggregate | -0.73 | -2.65 |
| 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 |
| 10/26/2018 | 2.33 | 2.81 | 2.91 | 3.08 | 3.32 |
| 11/2/2018 | 2.33 | 2.91 | 3.04 | 3.22 | 3.46 |
U.S. stocks rebounded last week, following a painful October, during which many indexes reached -10% correction territory (some might argue they were long overdue). The improvement in sentiment appeared to be due to hopes, alluded to by the President, that a trade deal with China was in the works—showing how desperate the market appears to be for more trade certainty—as well as a positive employment report. In keeping with more cyclically-sensitive assets outperforming during the week, the materials and consumer discretionary groups led with the strongest gains, while defensive stalwart utilities lagged with a slight decline, as interest rates moved higher. Tech also underperformed due to a poor response to Apple’s earnings report on Friday, which included cautious comments about holiday sales as well as their decision to no longer individually report on sales for various phone, tablet and computer products (which many analysts have come to rely on as an economic bellwether of sorts).
Earnings season is coming to a close, with somewhat mixed results. Earnings growth on average came in above expectations (close to +25%), but less than a third of companies outperformed on the revenue side. This could be an inflection point between the tax-cut fueled mid-cycle burst of high growth and a later cycle trend of positive but decelerating growth. This is still being hashed out, but a few items have risen to the surface in terms of concerns, including ongoing tariff uncertainty, difficulty in finding quality workers and higher wage growth as a byproduct, and the rising cost of financing due to higher rates. All affect input costs, which can put pressure on underlying corporate profit margins, which are now running at peak levels (meaning they can likely only deteriorate from here). As discussed last week, these same items no doubt played a role in the recent negative investor sentiment towards equities as well.
Foreign stocks also recovered in line with U.S. names, with Europe and the U.K. outperforming Japan by a bit, and emerging markets leading the way among regions. Hopes for a resolution to U.S.-China trade issues continues to drive global sentiment, particularly as European earnings growth has not kept up with that in the U.S. Additionally, third quarter EU GDP decelerated to a mere +0.6% increase, down over a percent from the prior quarter, as well as manufacturing PMI falling below an expansionary 50 level—demonstrating weaker momentum overall and greater sensitivity to trade concerns. Rumors of a Brexit deal continue to swirl, with several outstanding issues remaining, such as treatment of the Ireland (EU) and Northern Ireland (U.K.) border. Emerging market stocks were generally positive, with improved sentiment in China regarding potential progress toward a tariff agreement; in Brazil, following the election of a populist presidential candidate who’s promised an agenda of reforms, a friendlier business environment and smaller government; as well as in India, along with declines in oil prices, which represent a key input cost.
U.S. bonds pulled back as flows moved back toward risky assets and interest rates moved higher. Due to spread movements, corporates outperformed treasuries slightly, although both groups were negative, while high yield and floating rate bank loans ended with gains for the week. Foreign bonds in developed markets performed similarly to U.S. debt, while emerging market local bonds continued to recover with gains and a return to risk-taking during the week.
Commodities lost several percent during the week, due almost exclusively to the energy sector, while other segments were little changed. Crude oil prices fell almost -7% to just over $63/barrel, due to ramped up U.S. and Russian supply, coupled with several exemptions granted by the U.S. for upcoming Iranian sanctions.
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.