The Markets (as of market close December 16, 2016)Monday, December 19th, 2016
The fallout from the increase in the federal funds rate saw bond yields rise, with the yield on 10-year Treasuries hitting a 2-year high. Bond prices tend to fall (and yields rise) when interest rates increase. Lender rates from financial institutions are also expected to climb, pushing consumer loans (e.g., credit card rates) higher. Interest rates on bank deposits may not rise as quickly, however. Equities closed last week with little change in value from the week before.
BWFA will monitor the interest rate movements to help with long term strategic investment decision making–focusing on our allocations and the sectors that will benefit going forward given the political and economic changes taking place.
Last Week’s Headlines
- As expected, the Federal Open Market Committee raised the target range for the federal funds rate to 0.50%-0.75%. This is an increase of 0.25% – the first such increase since last December. In its press release, the Committee cited continued strengthening of the labor market and expanding economic activity as reasons for increasing the federal funds rate. The Committee noted that job gains are solid and the unemployment rate has declined. Household spending has been rising moderately, but business fixed investment has remained soft. While inflation has increased since earlier in the year, it remains below the Committee’s 2.0% longer-run objective, partly reflecting earlier declines in energy prices and in the prices of non-energy imports. FOMC forecasts project three rate increases in 2017, with the median federal funds rate anticipated to be 1.4% by the end of 2017, 2.1% by the end of 2018, and 2.9% by the end of 2019. Ultimately, as Chair Janet Yellen noted, “In making our policy decisions, we will continue – as always – to assess economic conditions relative to our objectives of maximum employment and 2 percent inflation. As I have noted on previous occasions, policy is not on a pre-set course.”
- Pushed by increases in housing and gasoline, the Consumer Price Index rose slightly in November over the prior month. Indexes that rose faster over the last year included motor vehicle insurance (6.7%), medical care (4.0%), and shelter (3.6%).
- Consumer retail purchases slowed in November, despite Black Friday and the stock market surge. Some have suggested that slow sales in the early part of the month were due to cautious consumers who were awaiting the results of the presidential election. Advance estimates of U.S. retail and food services sales for November increased a bit, retail trade sales were virtually unchanged from October 2016, online retail sales were up 11.9% from November 2015, while health and personal care store retailers were up 6.2% from last year. Department store sales fell 6.4% from last November, and appliance and electronic store sales dropped 3.8% over the same period. The latest figures also suggest that online retailers are snagging more of the holiday purchases.
- Producer prices increased slightly in November, according to the Bureau of Labor Statistics’ Producer Price Index and are up 1.3% for the last 12 months – the largest gain since the 1.3% increase over the 12 months ended November 2014. Over 80% of the November increase is attributable to a 0.5% increase in services. A quarter of the November increase in prices for services can be traced to apparel, jewelry, footwear, and accessories retailing, which advanced 4.2%.
- New home construction retreated in November. According to the latest Census Bureau report, housing starts fell 18.7% from October’s revised estimates. The number of building permits decreased 4.7%. Compared to November 2015, both housing starts and building permits are down 6.9% and 6.6%, respectively. Privately owned housing completions in November were 15.4% above the revised October estimate, with single-family housing completions up 3.3%.
- The latest report from the Federal Reserve shows that industrial production declined 0.4% in November after edging up 0.1% in October. Manufacturing output moved down a bit, mining posted a modest gain. The index for utilities dropped 4.4%, as warmer-than-normal temperatures reduced the demand for heating. Total industrial production in November was 0.6% lower than its year-earlier level. The output of consumer goods decreased 0.5% in November. The production of consumer durable goods dropped 1.6%, with all of its major components recording decreases. Both consumer durable goods and its largest major category, automotive products, posted their first declines since May. Falling industrial output may signal slower consumer and business spending down the road.
- U.S. import prices fell 0.3% in November, the U.S. Bureau of Labor Statistics reported last week, following increases of 0.4% and 0.1% the two previous months. This is the largest monthly decrease in import prices since the index fell 0.5% in February. The drop in November was primarily led by decreasing fuel prices (-4.7%). U.S. export prices also declined in November, edging down 0.1%, after a 0.2% increase the previous month.
- In the week ended December 10, the advance figure for seasonally adjusted initial unemployment insurance claims was 254,000, a decrease of 4,000 from the previous week’s unrevised level of 258,000. The advance seasonally adjusted insured unemployment rate increased to 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended December 3 was 2,018,000, an increase of 11,000 from the previous week’s revised level.
Eye on the Week Ahead
Following the Fed’s decision to raise interest rates for the first time in a year, several key economic reports are out this week that may shed some light on the direction of the economy moving forward. This week includes reports on the gross domestic product, durable goods orders, and consumer personal income and spending.
At BWFA we continue to monitor the activities in the market. We have conservatively reduced our exposure internationally over the past two years and moved towards global exposure including US securities. We have reduced to some extent our exposure to bonds with longer duration as they will lose the most principal in a rising interest rate environment. We are focused more now on financials, technology and healthcare, and niche areas that can grow for 2017. Happy Holidays to all!