Economic Update 3-06-2017

• Economic data for the week was led by strength in both manufacturing and non-manufacturing indexes, strong consumer confidence and jobless claims, and mixed housing results.

• Equity markets gained in the U.S. and abroad in foreign markets, while emerging markets fell back for the week.  Bonds lost ground as interest rates rose in response to Fed rate hike comments.  Commodities lost ground, mostly due to oil and precious metals.

U.S. stocks gained for another week.  Early in the week, speeches from several member of the FOMC alluded to the fact that March a march rate hike was ‘still in play’, then later, ‘would likely be appropriate’, which raised the odds significantly for a rate hike this month, but not necessarily the number of hikes in 2017 in total.  President Trump’s state of the union address was largely taken positively by the market on Wednesday, as rhetoric was toned down from prior commentary, and took on a more positive and conciliatory tone than did one delivered at the inauguration.  From a sector standpoint, financials, energy and healthcare led the way, with sharp gains, while more defensive utilities and consumer staples lagged with minor losses.

Foreign stocks in Europe experienced decent gains, along with more positive sentiment and business activity readings, yet mixed earnings results, while Japan and the emerging markets group lagged, when translated to U.S. dollar terms.  China was a detractor on the EM side, despite several manufacturing and service indicators showing better-than-expected expansionary readings.  Expect election polling and rhetoric to continue to play a role in developed Europe market results in the weeks moving forward, notably the numbers for populist candidates like Marine Le Pen in France.  The implications here are obviously significant, with an increased chance for a eurozone breakdown, that could lead to a subsequent messy financial and political unwinding.  Markets care because it threatens trade linkages and growth, as well as inflation influences if the euro currency is removed—essentially the same reasons markets were and are concerned about Brexit.

U.S. bonds lost significant ground on the week, as Fed comments about interest rates pushed yields up across the yield curve, notably at the short end, but longer bonds suffered as well.  As expected, long treasuries lost the most ground, while high yield and floating rate debt actually end the week positively.  Foreign bonds in both developed and emerging markets were off slightly in local terms, due to higher inflation readings in Europe mostly, but a stronger dollar resulted in worse results in USD terms.

The interesting story in foreign, notably European bond markets is the divergence in yield between what are considered ‘low risk’ issues (Germany) and ‘higher risk’ (France and the periphery), due to back-and-forth polling uncertainty in regard to the upcoming French election.  Basically, investors had been buying German bonds, pushing yields lower and back toward zero, while selling off riskier bonds and driving yields higher.  The result is real yields moving further into the negative for desired bonds in Europe.  The ECB is also beginning to pare back on QE purchases by 25% beginning this month, which could adjust the demand component for bonds overall and removing some of the depressant that’s kept yields low.  This has not been a problem while inflation’s remained tempered, but it has ticked higher, and if it continues to move, bond investors may demand more yield to lock up longer maturities.

Real estate lost a bit of ground on the week, in coordination with higher rates, as is to be expected.  Healthcare and industrials held up a bit better, while retail and Asian REITs declined most dramatically.

Commodities fell back on the week, due to declines in energy and especially precious metals, which reacted negatively to interest rates rising.  Agriculture was the sole positive group for the week, led by higher corn and wheat prices.  Crude oil prices continued to bounce around in the low 50’s range, ending off just over a percent to $53.30—with the driving news being the Saudis cutting oil price per barrel by $0.75 for Asian consumers in an effort to retain market share.  A large amount of world supply continues to be problematic for producers hoping for higher prices beyond the current tight range.

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.