Monday Update: U.S. Good, Abroad Not So Good

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Dec 21, 2015 12:06:07 PM

and tagged In the News

Leave a comment

Monday UpdateLast week’s releases included consumer prices, sentiment in the housing industry, housing starts, and industrial production. Plus, of course, there was the most important one: the decision by the Federal Open Market Committee to start raising interest rates.

Last week’s numbers

On a headline basis, consumer prices met expectations by remaining flat for the month and showing a 0.5-percent increase over the previous year. Core prices, excluding food and energy, also did as expected by increasing by 0.2 percent for the month and 2 percent for the year. By coming in exactly as expected, there was essentially no policy or market impact. Looking forward, the continuing decline in energy prices has kept inflation low. But as that starts to roll over, we will see headline inflation start to increase to match core inflation—something that is already happening, as that figure increased from 0.2 percent to 0.5 percent last month.

Housing industry sentiment, as shown by the National Association of Home Builders survey, unexpectedly declined slightly, from 62 to 61, as opposed to an expected increase to 63. Although this was a bit of a surprise, the absolute level still remains quite high, signaling continued strength. Housing starts were accordingly strong, with an increase to 1.173 million from 1.06 million the previous month, beating expectations of 1.14 million. Building permits also rose by more than expected, to 1.289 million from 1.161 million, when they were expected to remain flat. This is a forward-looking indicator and, therefore, also suggests continued strength. Based on these numbers, the small decline in builder confidence does not look like a problem.

Industrial production, on the other hand, substantially disappointed, with a drop of 0.6 percent, much worse than the drop of 0.2 percent last month and worse than expectations of another drop of 0.2 percent. Although the headline number was very weak, details were less discouraging. Much of the loss came from a decline in utilities output, of 4.3 percent, due to weather over the past month that was much warmer than usual, for example. And, while mining and energy continued to decline, by 1.1 percent, manufacturing output was actually stable and much better than expected. Overall, this was not a great number, but it was not as bad as the headline suggests and, in some respects, indicates that this sector may be starting to stabilize.

Big news of the week. The Federal Reserve (Fed), as widely expected, started to raise interest rates by increasing its target rate by 25 basis points, or 0.25 percent. The statement was more constructive on the economy than expected, suggesting the Fed expects the current recovery to continue, although (again, as expected) it said that future increases would be “gradual.” Market reaction was positive on the day of the announcement, although markets pulled back later in the week.

Overall, the split remains between the consumer and domestic economy (which is about seven-eighths of the whole and is doing just fine) and the industrial economy (which is focused more on the rest of the world and is suffering). Although growth should continue here in the U.S., it will be slower and more fitful due to the strong dollar and weakness elsewhere.

The week ahead

This week’s data releases will give a look at both the consumer and business sectors going into the Christmas holiday. Existing and new home sales will be reported on Tuesday and Wednesday, respectively. Existing home sales are expected to decline slightly, due at least in part to a lack of inventory. New home sales, on the other hand, are expected to increase as builders have upped production in response to greater demand, as shown by last week’s building permit data.

On Wednesday, we also get the personal income and spending report. Income is expected to grow more slowly than last month, by 0.2 percent versus 0.4 percent, as average hours worked declined. Spending, on the other hand, is expected to increase, from a gain of 0.1 percent to 0.3 percent. Given current savings rates, faster spending growth is reasonable and sustainable even as income growth slows and, for the moment at least, is a positive sign in that it may reflect rising consumer confidence.

Business confidence is not expected to be as positive, with the durable goods orders report on Wednesday likely to show a small decline for the headline number and be flat for the core (excluding transportation) number. After a strong October, these are not terrible results—although not encouraging—and reflect the continuing headwind from a strong dollar.

Have a great week!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®