Weekly Economic Update

Economic Update 2-22-2016

  • Economic data on the manufacturing side showed some improvement over the prior month, although several key metrics remained in the negative.  Housing numbers released were weaker than expected, although weather could have played a role.  Inflation figures were slightly higher than expected, showing strength in the non-energy side, although conditions remain tempered overall.
  • Equity markets recovered globally, while the higher inflation numbers caused bond yields to tick slightly higher.  Oil prices experienced some stabilization as several nations discussed the idea of production cuts.

Equities recovered with positive gains for the first time in several weeks with industrial numbers improving as did energy sentiment somewhat.  From a sector standpoint, consumer discretionary and information technology led with returns near or above +4%, while more defensive utilities and telecom lagged with gains just over a percent.

Foreign stocks outperformed domestic, and were led by strong returns in Asia, notably Chinese markets, which had been closed the prior week on holiday.  Emerging markets Brazil and Mexico sharply outperformed with some stabilization in commodity prices; Japan lagged with minimal gains on the week and perpetuating returns that are among the weakest globally this year.  Japanese exports fell almost -13% on a year-over-year basis in January, capping off several straight months of declines—due to slower demand from China and other key trading partners—and representing the weakest export results since the global financial crisis.  The U.K. struck a deal with the European Union to give it a ‘special status’, essentially concessions given to the British in an effort to keep the nation within the EU and prevent what’s been termed the ‘Brexit’, for which a referendum has been planned for mid-year.  As a powerful economic growth engine in a union that needs growth, particularly with London as a key if not the key global banking hub, an exit of Britain from the union would leave uncertainties for both sides.

While equities didn’t reflect it on the week, other recent worries in Asia have carried over to other markets this year.  These surround Chinese growth levels as well as the drawdown of Chinese foreign currency reserves, which is used directly to keep the loose ‘peg’ in place to the broader world currency basket government officials are using.  Anything that causes pain to the Chinese government is seen as weakening the pillars used to keep stimulus intact, which is used to smooth out the recent lackluster growth and prevent a hard landing.  Unfortunately, for Chinese policymakers, implied selling of the yuan due to weaker perceived prospects in that part of the world (resulting in the yuan’s market devaluation), defending the currency has required selling more and more reserves.  As defending a currency can be difficult, the Chinese have let the yuan devalue by 6% since last August; it would have no doubt fallen further without the $500+ billion spent last year to prop up the currency.  Reserves are still high, but not what they once were.  In other odd news from that part of the world, data from the People’s Bank of China regarding capital flights out of the country seems to have ‘disappeared’ during a trend of outflows—unfortunately these types of inconsistencies with the sharing of bad news doesn’t tend to help government credibility with outside investors.

U.S. bonds ticked slightly upward, particularly with the release of CPI that showed inflation a bit higher than expected.  With risk assets performing well on the week, high yield corporates outperformed with gains, while long duration Treasuries lagged.  Despite a gain in the U.S. dollar, foreign bonds outperformed domestic issues, with emerging market debt and Japanese bonds showing the largest gains—in the case of the latter with rates falling into negative territory (the only way existing bond investors really make money).

Real estate returns were led by more cyclically-sensitive lodging/resorts, which gained upwards of +5% on the week, followed by strong returns in other U.S. categories.  Foreign real estate lagged the group with minimal gains.

Commodities fell slightly on the week, in a rare change from the recent volatility.  Crude oil bounced up from the $29 level to near $32, as Saudi Arabia, Russia and Venezuela agreed on a production reduction in an attempt to stabilize prices; while Iran showed support for the freeze, it was unclear whether they would participate, leaving energy markets still uncertain.

Period ending 2/19/2016 1 Week (%) YTD (%)
DJIA 2.75 -5.47
S&P 500 2.91 -5.85
Russell 2000 3.93 -10.95
MSCI-EAFE 4.44 9.08
MSCI-EM 4.18 -6.69
BarCap U.S. Aggregate 0.15 1.93
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
2/12/2016 0.30 0.71 1.20 1.74 2.60
2/19/2016 0.31 0.76 1.24 1.76 2.61

Sources:  LSA Portfolio Analytics, 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. 

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