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July 2017

Economic Notes for the Week of December 24th

by Karl Schroeder for Finance, Real Estate

Manufacturing related news:

(-) Superstorm Sandy’s impact is still being felt in the manufacturing sector.  The December Empire State Manufacturing Survey came in at -8.1, weaker than the expected -1.0.  The general business conditions for New York manufacturers have been declining at a modest pace for five consecutive months.  The new orders index dropped to -3.7 from November’s +3.08.  The shipments index decreased six points from the prior month to 8.83.  Manufacturers in the New York City metro area reported roughly 7% lower revenues in October and about 5% revenue loss in November because of Sandy.  Indexes for the six-month outlook remained weaker than their levels earlier this year, though most future indexes were higher than in November.

(+) The Philadelphia Fed released its December 2012 business outlook survey.  The district’s manufacturing conditions beat market expectations.  The current activity index was up 8.1%, reversing the downward trend of -10.7% in October due to Sandy’s impact.  New orders, shipments and employment activities all improved.  The survey’s future indexes predict increased activity over the first half of next year.

Real estate related news:

(+) The National Association of Home Builders Housing Market Index rose by one point to reach 47 in December, marking its eighth consecutive rising month.  Yet the index trails the median forecast.  Meanwhile, builder confidence in the market for newly built, single-family homes grew to the highest level since April of 2006.

(-) Housing starts in November declined by 4.1% to an annual rate of 565,000 in the single-family category, lower than the October figure of 589,000.  In the multi-family category, November had an annual rate of 861,000 housing starts, 3% below October’s estimate of 888,000 but up 21.6% since November 2011.  The decline in starts was felt mostly in the West and to a lesser extent in the Midwest.  Data on housing starts were a little disappointing from month-over-month comparison but continued improving in terms of year-over-year reading.

(+) Overall building permits exceeded investors’ expectations.  Multi-family permits posted a solid 3.6% month-over-month gain with an annual rate of 899,000.  Single-family permits were at a rate of 565,000, 0.2% weaker than the October figure.

(+) Existing home sales for November rose 5.9% to an annual rate of 5.04 million, exceeding expectations by 3.8%.  Sales were 14.5% higher than last November’s 4.4 million-unit pace.  The South saw sales rise the most with a 7.9% increase and the West gained the least with a 0.8% increase.  Not only did the number of completed sales transactions pick up, but home prices also recovered due to the low supply in inventory.  The total housing inventory at the end of November fell 3.8% to 2.03 million, which represents a 4.8-month supply. This is the lowest inventory level since September 2005.  As a result, the national median existing home price was up 10.1% year-over year in November, marking the ninth consecutive monthly price increase.

Other major news:

(0) Initial jobless claims in the week ending Dec. 15 increased to a seasonally adjusted 361,000, in line with the expected 360,000.  The uptick in initial claims reversed the previous week’s unexpectedly large decline to 343,000 claims.  Despite the setback, initial claims are still slightly below the pre-Sandy four-week moving average of 367,750, signaling that the job market is slowly healing.  Continuing claims for the week ending Dec. 8 came in at 3,225,000, slightly higher than the expected 3,220,000 and the preceding week’s 3,213,000.  Without seasonal adjustments, the total number of people claiming benefits in all programs for the week ending Dec. 1 was 5.4 million, which is 1.75 million lower than the comparable week in 2011.

(+) Bureau of Economic Analysis (BEA) revised Q3 GDP up from 2.7% to 3.1%, exceeding consensus expectations of 2.8%.  The U.S. economy grew faster than both 2Q12 and 3Q11.  The main driver of economic growth came from government spending, nonfarm inventory investment and consumer spending for durable goods.  BEA estimated Q3 corporate profits rose sequentially by 2.4%, compared to 1.1% in Q2.  Profits of financial corporations rose 17.5% or $68.1 billion in Q3, while profits of nonfinancial corporations fell 1.3%.

 

(+) Personal income increased 0.6% to $85.8 billion in November, surpassing the median forecast of 0.3% growth.  Personal consumption expenditures (PCE) gained 0.4%, in line with investors’ median forecast.  The PCE price index declined 0.2%.  Excluding food and energy, the core PCE price index was up by 0.06%, slightly lower than the median forecast of 0.10%.  Given the muted price changes, real disposable income rose 0.8% versus a 0.15% decline in October.  The personal savings rate inched higher by 0.2% to 3.6% in November.

(+) The November durable goods report came in stronger than expected.  New orders for manufactured durable goods grew 0.7%, ahead of the consensus number of 0.3%.  Excluding transportation, new orders jumped 1.6%.  New orders for machinery had the largest increase, up 3.3%.  Shipments of durable goods grew 1.5%, much stronger than the 0.1% increase in October.

(-) The ongoing political gridlock surrounding the so-called fiscal cliff has clearly damaged consumer confidence.  The final reading of the University of Michigan’s Consumer Sentiment Index was much weaker at 72.9 in December, lagging the consensus expectation of 75.0.  Although the index was up 4.3% year-over-year, the December index fell 11.9% compared to November’s 82.7 level.  The biggest decline came from a 17.8% plunge in the Consumer Expectations Index, which fell from 77.6 in November to 63.8.  The majority of surveyed consumers expected a decline in real income, a slowdown in economic growth and a softer job market without a fiscal deal.

Market Notes

Period ending 12/21/2012

1 Week (%)

YTD (%)

DJIA

0.47

10.97

S&P 500

1.21

16.28

Russell 2000

2.98

16.07

MSCI-EAFE

1.29

17.45

MSCI-EM

0.02

13.82

BarCap U.S. Aggregate

-0.07

4.12

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2011

0.02

0.25

0.83

1.89

2.89

12/14/2012

0.04

0.24

0.70

1.72

2.87

12/21/2012

0.06

0.26

0.75

1.77

2.93

Not being able to garner enough support, U.S. House Speaker John Boehner canceled Thursday night’s vote on his “Plan B” to avert the fiscal cliff.  The lawmakers then went on recess for Christmas and will come back on Dec. 27 for a last try to arrive at a deal.  Diminishing optimism for a resolution to the fiscal crisis weighed on the market.

Domestic small cap stocks outperformed mid cap and large cap stocks last week.  Economic cyclical sectors such as financial services stocks beat defensive sectors such as consumer staples stocks.  Last Thursday, the major derivatives and commodity exchange Intercontinental Exchange, announced its $8.2 billion offer to acquire NYSE Euronext, the 220-year-old iconic equities exchange.  Shares of NYSE Euronext surged more than 30%.

Stocks in other developed countries did better than emerging country stocks.  Many European stock markets have hit 18-month highs as investors shifted money into the markets.  The German market is trading at its highest level in nearly five years.  For the YTD, the German market returned 31%.  In Japan, newly elected Prime Minister Shinzo Abe will take office on Dec. 26 with a pro policy-easing agenda.  Abe is expected to push the Bank of Japan to target at least a 2% annual rate of inflation versus the current 1% rate, which would weaken the Yen and help export sectors.  For the MTD, the MSCI Japan Index produced a 4.6% total return, 1.3% ahead of the MSCI EAFE index.

In general, it was not a strong bond week.  As the new year approaches, bond markets have become quieter with lighter volume and less activity.  As a result of illiquidity, spreads got widened.

Last week, precious metals declined in reaction to the stronger Q3 GDP number.  Gold fell $35 to $1,657, a 2% decline.

I wish you a Merry Christmas.

Karl Schroeder, RFC

Investment Advisor Representative

Schroeder Financial Services, Inc.

480-895-0611

Economic notes key:  (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development. 

Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, 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.  Schroeder Financial Services, Inc. is a registered investment advisor.

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