Monday Market Review February 10, 2020
Economic data for the week featured an unexpected rebound in manufacturing sentiment, continued strength in non-manufacturing/services sentiment, as well as an upside surprise for the employment situation report for January.
Global equity markets recovered last week, with progress noted on virus containment as well as financial stimulus from the Chinese government. Bonds lost ground as investors moved back into risk assets, pushing interest rates higher. Commodities were mixed, with crude oil prices seeing continued pressure from demand concerns and high inventories.
U.S. stocks bounced back last week, with the S&P earning its strongest weekly gain in over six months—due to hopes for containment and a possible vaccine for the mysterious Chinese coronavirus. By the end of the week, China announced it would cut tariffs on $75 bil. of U.S. goods in mid-February, which also raised market spirits. Conditions remained choppy, however, to end the week.
By sector, a reversal of fortunes took place with every asset other than utilities ending in positive ground for the week. Technology, materials, communications and health care all ended with gains close to or over 4%. Leaders on the week included Microsoft and recent darling Tesla, which earned exceptional gains in recent weeks upon hopes for an upward swing in sales.
Foreign stocks recovered by several percent last week, despite the headwind of a strong dollar. The headline global story about the coronavirus has taken the place of trade uncertainty as the key worry about what has the best chances for derailing already-meager global growth, with sentiment tracking that of U.S. markets largely. Earnings results also improved in Europe, in addition to dovish comments from the ECB alluding to a continued need for accommodative policy.
Upon reopening after the Chinese New Year, the Shanghai stock market fell by nearly -8% on Monday, the worst day in over four years, upon the coronavirus impact concerns. The Chinese have been injecting short-term stimulus/liquidity/lending capacity into the system quickly in order to stabilize concerns, which appear to have been effective thus far.
U.S. bonds fell back a bit, with interest rates rising up to 10 basis points along the treasury curve, as investors revisited risk assets last week. High yield bonds performed best, with gains of nearly a percent, followed by investment-grade corporates. Treasury indexes, with little coupon cushion to help returns, lost ground on net. The dollar rose a percent and a half, which punished foreign developed market sovereign bonds, while emerging bonds were little changed.
Commodities were mixed last week, with no help from the sharply stronger dollar. While agricultural and industrial metals contracts rose (with an unsurprising impact from eased trade conditions with China), precious metals and energy fell back. The price of crude oil declined by over -2% to a shade over $50/barrel, as threatened Chinese demand due to the coronavirus and a continued global oversupply has created more downward than upward pressure as of late.
(+) The ISM manufacturing index for January offered a surprise increase of 3.1 points to 50.9 level—back above the 50 neutral level that indicates expansion. This surpassed expectations of a mere improved slowdown to 48.5. The details were similarly positive, with production and new orders showing signs of a sharp pickup in to expansion, while employment also improved, yet stayed in contraction. Supplier deliveries fell a few points, but also expanded, as did prices paid. This result helped buoy overall market sentiment that at least the near-term trade woes are behind us and the recent slowdown in manufacturing represents more of a mid-cycle soft patch than the beginning of a deeper end-of-cycle trough.
(+) The ISM non-manufacturing index rose by 0.6 points in January to 55.5, beating expectations calling for 55.1. Underlying components showed varied results. On the positive side, business activity rose 4 points to a very expansionary 60 reading, and new orders gained a point to remain in the mid-50’s. The segments of employment, supplier deliveries, new export orders, and prices paid all fell at least a point—but all remained in expansion. This continues to point to solid growth on in the services segment—the predominant part of the U.S. economy.
(-) Construction spending for December declined by -0.2%, disappointing relative to an expected increase of 0.5%. However, revisions for the two prior months were positive. Private spending for residential rose by over a percent, but was offset by a decline in non-residential building. On the public side, residential spending rose by over 2%, while non-residential expenditures fell by nearly a half-percent.
(0) Initial jobless claims for the Feb. 1 ending week fell by -15k to 202k, below the 215k level expected. Continuing claims for the Jan. 25 week rose by 48k to 1.751 mil., which ended far above the 1.720 mil. expected by consensus. No anomalies were reported, and overall levels remain low. Some seasonal bias may still be present, which has appeared to affect other winter data as well.
(+) The ADP employment report for January showed a rise of 291k, well above the 157k expected. Services jobs rose by 237k, with strength in leisure/hospitality. Goods-producing jobs rose by 54k, led by a 47k increase in construction. This continues to point to robust underlying job growth on the private sector side.
(+) The employment situation report for January came in stronger than consensus expectations. However, the first report of the year features some annual benchmark revisions, seasonal affects, such as a reversal of temporary holiday employment, as well as 30k or so of likely weather impacts, which perhaps cause the data to be less meaningful than in other months. Nevertheless, it continued to reflect consistent conditions in employment markets.
Nonfarm payrolls rose by 225k, surpassing expectations calling for 165k, and the average of 175k for the twelve monthly reports in 2019. These included several upward revisions for recent months. Highlights included strong showings in construction (44k jobs, due to drier weather in the NE) and health care (36k). Services jobs continued to fare well, in education/health (72k), transportation/warehousing (28k), and leisure/hospitality (36k). On the other hand, manufacturing jobs fell by -12k, as did retail, down -8k.
The unemployment rate was up slightly, at a rounded 3.6%, while the U-6 underemployment rate ticked back up by 0.2% to 6.9%—both remaining at generationally low levels. The labor force participation rate ticked up by 0.2% to 63.4%. The household survey showed a job decline of -89k, with heavy impacts from population adjustments. Average hourly earnings rose by 0.2% to $28.44, a tenth below expectations and affected by the hours worked component, but represented a 3.1% increase over the prior year. The average workweek was flat at 34.3 hours, and average weekly earnings fell a bit to a year-over-year gain of 2.5%.
In a report from earlier in the week, unit labor costs also rose 1.4%, a tenth faster than expectations, which brought the year-over-year level of growth to 2.5%. Nonfarm productivity rose 1.4% in Q4, -0.2% below expectations, bringing the year-over-year rate to 1.8%. Mixed productivity results continue to be a difficult-to-account-for metric that has baffled economists and statisticians attempting to integrate the impact of faster and more pervasive technology. Compared to past eras, when productivity could be more easily counted by the number of physical items manufactured per unit of worker input, efficiency gains through technology—particularly in the services sector—obviously presents more nuanced challenges.
(0) The Federal Reserve’s Senior Loan Officer Opinion Survey for Q4 of last year showed little change on a broader level from the prior quarter, although there were a few tweaks on the edges. The survey results are generally shown as changes in lending standards compared to the prior quarter—this provides a snapshot of how tight or easy banks are acting in providing credit for various types of loans. Standards for commercial and industrial loans were little changed for the period, while it appeared terms were eased in some cases for larger companies. Demand for such loans fell, while at a less dramatic pace than in Q3. Commercial real estate loans saw similar minimal change, although standards and demand for more speculative construction and land development loans tightened a bit. Residential mortgage loan demand stayed robust, in keeping with tempered interest rates, while lending standards for such loans were little changed. Installment loan standards were similarly little changed broadly, although those for credit cards specifically appeared to tighten a bit, as did those for auto loans; demand for loans broadly was little changed, although auto loan demand picked up.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, 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.