Economic Update 4-10-2017
- Economic reports for the week came in mixed, with slightly weaker ISM manufacturing and non-manufacturing data, although both remained strongly expansionary. While the ADP employment report was quite strong, the government nonfarm payrolls report was far less so, while the unemployment rate declined.
- Equity markets were mixed with flat to lower results in the U.S., with large-caps holding up much better than small, and better results from emerging markets than developed. Bonds gained a bit with interest rates ticking downward a bit, but foreign assets of all kinds held back by a stronger dollar. Commodities edged upward along with higher prices for crude oil.
U.S. stocks came in a bit lower on the week for most indexes, with large-caps losing less ground than small-caps. Volatility picked up a bit with U.S. missile strikes in Syria (which pushed oil prices higher), Trump’s meeting with Chinese leadership, and comments from Speaker Ryan and others about the increasing potential timetable for tax reform and frustration with lack of progress. A mixed jobs reports added some volatility towards the week’s end as well, in addition to the uncertainty surrounding the Fed’s balance sheet as noted in the released FOMC minutes—as discussed above. With a gain in oil prices, energy stocks experienced the strongest gains, followed by materials; consumer cyclicals and technology ended up as the only losing industries for the week.
Interesting Fed news surfaced that Jeffrey Lacker, President of the Richmond Fed, had leaked sensitive information in 2012 about the Fed’s stimulus plans to an analyst. No charges are expected, but Lacker resigned. As a non-voting FOMC member this year, this doesn’t play a role in Fed policy, but this could bring more scrutiny by Trump and others who want more Fed accountability and moves to a more ‘systematic’ process.
In foreign markets, emerging market stocks performed best in local terms, followed by flattish results in Europe and negative returns from Japan. A stronger dollar generally took all returns lower, with the exception of Japan, where the dollar weakened. Chinese stocks gained as it appeared foreign currency reserves rose again, as outflows seem to have subsided.
U.S. bonds were largely flat to slightly positive as interest rates ticked downward a bit, after a round of some volatility later in the week, where the 10-year Treasury fell below 2.3% before reflating higher. Longer treasuries fared slightly better in that environment, with investment-grade governments and credit performing similarly, as did high yield. Safe haven assets such as treasuries have tended to fare well under news of military action, in conjunction with a frequent sell-off in riskier assets.
Foreign bonds in developed markets gained some ground due to a flight to quality in areas such as Germany, but were negatively affected by a strong U.S. dollar, which gained nearly a percent. This also pushed USD-denominated emerging market bonds higher, but negatively affected local debt.
The big news of the foreign market this week was a major downgrade in the debt/currency of South Africa by S&P, from investment-grade to below-investment grade (BB+), while Moody’s kept the rating just a notch into investment-grade. These dramatic changes were set in motion by recent cabinet reshufflings and political uncertainty—all of which can cast doubt on the ability or willingness to pay outstanding sovereign debt (even if still likely more than not). This is one of the larger nations in the emerging market space, and the issue with such a downgrade is that buyers who are typically forced to only operate in investment-grade debt can be forced to unwind positions when this occurs, exacerbating the pricing problems. At the same time, it is a reminder that EM nations are still often wildcards, with very unique, hard-to-predict risks.
Real estate generally fared well, with gains domestically around the one-percent range and a bit better abroad.
Commodities experienced a solid week, with the energy sector leading the way, followed by precious metals which also rose. West Texas crude gained a few dollars to about $52.25, which represented roughly a 3% increase, due to reports of stronger refinery demand and U.S. missile attacks on Syria. Historically, any military action in the Middle East has boosted oil prices (and precious metals to a certain degree) due to a ‘conflict premium’ of sorts, and is one of the reasons commodities are a useful diversifier in a portfolio. Gains there offset losses in agriculture and industrial metals on net.
|Period ending 4/7/2017||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||0.16||0.98|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.