In the markets:
Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time
highs. The smaller-cap indexes, typically more volatile, performed the best. The Dow Jones Industrial
Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6%
to 5,321. The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Midbrethren: the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained
+2.59%.
In international markets, Canada’s TSX rose +2.12%, a second week of gains. Across the Atlantic, the
United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%. On
Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%,
and Italy’s Milan FTSE fell -3.25%. In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%.
Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s
economic policies may benefit Japan—more on that below.
In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to
$1208.70, down -1.27%. Silver plunged even further down -4.36%. Precious metals typically respond
negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped
higher since the election all the way to a 14-year high. The industrial metal copper gave back some of
last week’s gains by falling -1.65%. Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel
to end the week at $46.36, a weekly gain of +6.8%.
In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for
unemployment benefits last week fell by 19,000 to 235,000. Initial claims have now remained under the
key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970. The U.S.
unemployment rate also remains near an 8 year low of 4.9%. Continuing jobless claims, the number of
people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million - the first
time that number has been below 2 million since mid-2000.
Sentiment among home builders remained unchanged in November, according to the National
Association of Home Builders’ (NAHB) index. The latest reading of 63 matched the median forecast
among economists. Current sales conditions and sales expectations were at 69, while the index of buyer
traffic rose a point to 47. Readings over 50 signal improving conditions. Robert Dietz, the home builder
trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive
mortgage rates are supporting demand in the single-family housing sector. This will help keep housing
on a steady, upward glide path in the months ahead.”
Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in
multi-family units. Housing starts climbed to an annual rate of 1.32 million from 1.05 million in
September, according to the Commerce Department. Economists had expected only 1.17 million new
starts. Higher prices and a shortage of properties for sale have encouraged builders to step up
construction. New construction accelerated in all regions of the country, surging by more than +44% in
the Northeast and Midwest. Construction of apartment buildings, condominiums, and multi-unit
dwellings were up +75% last month. Single-family home starts rose almost +11%, the fastest pace since
October, 2007. Future building activity also looks promising as permits are running about +5% above
year-ago levels.
Retail sales surged for a second consecutive month for the best two-month performance since early
2014. October retail sales jumped +0.8% last month, following a +1% rise in September. Economists
had forecast a +0.7% gain. With consumer spending a main driver of economic growth, the increase in
retail sales suggests that the U.S. economy got off to a good start in the 4th quarter. Alan MacEachin, an
economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes
and boosting spending power.” A large portion of the gains were due to auto dealers where sales hit an
11-month high following strong incentive programs. Even ex-autos and gas, sales were still up a healthy
+0.6%.
The New York Fed’s Empire State Index turned positive for the first time in four months following
improvement in new orders and shipments. The Empire State Manufacturing sub-index rose back into
expansion by rising +8.3 points to 1.5. New-orders surged +8.7 points to 3.1, and shipments jumped
+9.1 points to 8.5. Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear
low.
Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia
Fed’s manufacturing index. The index slowed slightly to 7.6, down -2.1 points from September. The
index has remained above the 0 level, indicating improving conditions, for four consecutive months.
Most sub-indexes remained positive with general activity, new orders, and shipments all recording
strong results.
Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows
several years of weaker prices. Higher costs for natural gas and gasoline were offset by declines in food
and services. Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the
highest one-year change since the end of 2014. Stripping out the volatile food, energy, and trade
margin categories yields the so-called core producer prices. That measure is rising at an even faster
rate, up +1.6% over the past 12 months, the fastest in 2 years. If these trends continue, higher
wholesale prices will eventually lead to higher prices for consumer goods and services.
Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index
(CPI) reading. The Labor Department reported that the index rose +0.4% last month, after rising +0.3%
in September. On an annualized basis, the CPI is up +1.6% - the biggest year-over-year increase since
October of 2014. The increase was in line with economists’ forecasts. Core inflation, which strips out
potentially volatile food and energy costs, climbed +0.1% last month. Annualized, core inflation is
currently 2.1% - right in line with the Federal Reserve’s 2% inflation target. The firming inflation along
with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve
will have the green light to raise interest rates at its December 13-14 policy meeting.
Industrial production—a measure of output from America’s factories, utility plants, and mines—was
unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by
modest gains in factory output. Economists had forecast a +0.2% gain. In the details of the report,
manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged
2.6%. High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through
the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led
plunge in mining seems to have ended.” Capacity utilization, a gauge of slack in the industrial economy,
ticked down 0.1 percentage point to 75.3% last month in line with expectations.
In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the
Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely
expected. Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context
of Canadian economic conditions—and in particular, we do not need to move in step with the Federal
Reserve” in a speech in Waterloo, Ontario. Mr. Lane pointed out that Canadians will no doubt feel the
reverberations from whatever the U.S. does. Higher U.S. interest rates will likely push the Canadian
dollar lower, boost exports, and push up some Canadian rates. As a net importer of foreign capital,
Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.
In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s
election, ending months of speculation. The 38-year-old former economic minister and protégé of
President Francois Hollande left his government post in August saying he wanted more freedom for his
ideas to repair France’s ailing economy and growing social divisions. Macron created his own political
movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political
figure. His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine
LePen, the current front-runner.
German economic growth slowed in the third quarter of the year, hampered by weaker exports.
Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first
quarter’s +0.7% advance. Germany’s Federal Statistics Office stated "Exports were slightly down while
imports were slightly up compared with the second quarter of 2016. Positive impulses on the quarter
came mainly from domestic demand. Both household and state spending managed to increase further."
Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have
counteracted the country’s solid domestic activity. In addition, worries of a more protectionist U.S.
economy added to fears. ING Bank economist Carsten Brzeski said, "If Germany's single most important
trading partner, the US, really moves towards more protectionism, this would definitely leave its mark
on German growth."
In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the
Pacific Rim. A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of
Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific
Partnership. Donald Trump had taken a strong anti-TPP stance during his campaign. Leaders are looking
to resurrect the Free Trade Area of the Asia Pacific (FTAAP). Completion of the deal would hand Chinese
President Xi Jinping the reins in a most important geopolitical shift.
In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S.
dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic
outlook. The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit
nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy. Tilton told the
Reuters Global Investment Outlook Summit in Hong Kong, "More Fed tightening and a stronger dollar is
probably good for Japan. Japan is a very low-inflation country that is trying to stimulate the economy...
but can't really lower rates feasibly much further. So if the U.S. can raise rates and raise the currency
versus the yen, then yen can depreciate without Japan having to do anything else. For Japan, this is
great news."
Finally, treasury yields have soared following the surprising election of Donald Trump for President of
the United States. Theories abound regarding the causes and consequences of the move, but as always
it is good practice to step back and take a look at the big picture. Veteran technical analyst Louise
Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our
attention to a few points. First, according to Ms. Yamada, is that interest rates are most likely to only go
up from here. Yamada refers to an apparent “bottoming formation” that has been forming over the last
several years. On the 10-year Treasury note, a move above 3% would confirm her assessment because
that’s the “level at which we can definitively say that rates have reversed”, Yamada states. Yamada
predicts that higher rates will boost equity prices in the near term, as in past cycles. However, she will
be watching the roughly 5% level where “you’ll start having problems.” 10-year Treasury notes finished
this past week at 2.34%, so we’re a long way away from her danger zone.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)