Manufacturing Expansion

U.S. manufacturing activity slowed modestly for the second straight month in November, but the reading still shows a favorable factory sector. On Friday, the Supply Management Institute said its manufacturing index fell to 58.2 in November, but remained solidly in growth mode. A reading above 50 indicates activity is expanding across the factory sector, while a number below 50 signals contraction.

The slowdown of the sector’s expansion was driven by a decrease in inventories and a slower rate of growth in deliveries from export order and suppliers. Employment growth cooled just slightly. On the other hand, other components of the index showed strength for manufacturing. Overall new orders are rising at faster rate, and production increased.

Recent data shows that the manufacturing sector is on a steady growth path heading into 2018. Furthermore, factories dealing with disruptions due to the impacts of the hurricane season are now back to full production.

According to the U.S. Commerce Department, orders for durable goods are advancing this year at the best pace since 2014. This comes as a result of stronger investment in machinery and equipment by U.S. businesses. The recent recovery in the Energy sector has fueled manufacturing demand as well as demand for capital machinery. The consumer-price index increased 2% from a year earlier in October.

“Currently, demand is prevalent in all sectors. Therefore, the following manufacturing performance should carry forward into the new year” said Keith Knutsson of Integrale Advisors.

UK Rate Hikes: The Market Pricing Differs from BoE Statements

The UK’s interest rate hike was viewed as a one-time move despite the statements of the Bank of England. The British pound fell and investors viewed the quarter-point rise as a dovish development. Going forward, will markets be swayed by hawkish talk from the BoE?

Factors that are depressing the possibility of another rate hike include a slowing economy, Brexit uncertainty and retreating inflation. So, despite Ben Broadbent’s stating, ‘We anticipate a couple more rate rises to get inflation back on track,’ markets are seemingly not pricing in more than two rate hikes. While several investors are expecting additional rate hikes to control the 3% year-on-year inflation figure, the high inflation number is mainly caused by a fall in value of the pound. The inflationary impact of a lower pound is transitory and will slowly dissipate in 2018. A better reasoning for more rate hikes should be derived from the tight labor market; the current unemployment rate is at the lowest level since 1975, which will drive future wage growth up.

Keith Knutsson of Integrale Advisors was rather skeptical of such an argument by stating, “while it is very well possible that wage growth picks up looking forward, it has been sluggish despite the shrinking unemployment numbers – real wage growth has actually decreased! What follows is a risk of the economy tilting downside.”

With fears of slowing growth hovering over the Bank of England, it seems unlikely that the rate hikes will occur as presented. An improper approach by the BoE could shift households and businesses towards panic.

The Emergence of “Agrihoods”

Millennials currently represent the largest segment of American homebuyers. Furthermore, there is a shift in the type of community’s millennials are looking to live in. Agrihoods, short for “agricultural neighborhoods” are rising in the U.S., especially among younger generations of home buyers.

The Urban Land Institute defines an “agrihood” as planned housing community with working farms. These neighborhoods have grazing lands, nutrient rich soil, barns, and outdoor community kitchens. In addition, the homes are built to high environmental standards featuring composting and solar energy. Agrihoods are designed to appeal to young, active families who love to eat healthy, enjoy spending time outdoors, and see the value in environmental awareness. According to the Urban Land Institute, there are about 150 agrihoods across the country. Some of these neighborhoods are just minutes outside of large urban hubs like Atlanta, Phoenix, and Fort Collins.

“Agrihoods represent a combination of economic profit, social benefit, and sustainability” said Keith Knutsson of Integrale Advisors.

The development company that coined the term “agrihood” was Rancho Mission Viejo, based in Southern California. The emphasis is on sustainable living, aiming to draw young families as and well as retirees to the communities. All residents of the community have access to communal farms with orchards, workshop space, raised planters, in-ground crops, and fruit trees. However, newer developments in these neighborhoods are not cheap. Homes in these communities typically range from the low $400,000s to over $1 million.

The involvement of the community makes it easy for residents to participate in local programs. In addition, the act of sharing harvest benefits with neighbors brings the community together, thus allowing it and its citizens to thrive.

South Africa’s economy struggles

In concurrence with macro research performed by Integrale Advisors two months ago, emerging markets are struggling. The rand and South African government bonds have endured their worst week since the ousting of its finance minister in March of this year. A combination of economic uneasiness and political tension causes investors to expect another credit-rating downgrade.

The implications of a weak rand include an increasing cost of imports and inflation. The 10-year Yields on the government’s benchmark rose as high as 9.3%, the highest level since June 2016.

The updates from ratings agencies S&P and Moody’s on South Africa’s debt are due in November. In the past year, both ratings agencies downgraded the government’s debt once. A further cut would see the local-currency debt fall into junk territory. This would implicate an expulsion from Citi’s widely-tracked World Government Bond Index.

The South African Reserve Bank continues to struggle against stagnant growth despite high inflation, with this development further amplifying fundamental issues. In August, the central bank employed quantitative easing through rate cuts, but the increasing inflation make it doubtful for such a measure in the future.

Political turmoil exists due to allegations that the renown Gupta family used connections with the president to influence and profit off government business.

Keith Knutsson of Integrale Advisors commented, “forecasts for South African growth exceeded rationality; a cautious eye on the developments hinted at such predicaments for quite some time now.”

The current Minister of Finance, Malusi Gigaba, reduced growth forecasts and issued a warning for higher than previously expected fiscal deficits until 2020.

Blockchain: a Revolutionary Real Estate Tool?

The surging blockchain market could prove itself to be a valuable tool in real estate purchases. With the abundance of government regulation and brokers, blockchain could increase the liquidity of the real estate market. The additional liquidity could foster demand and command a shift towards higher real estate prices.

Blockchain enables authentic purchases without physical presence. A shift in use from paper to blockchain for physical assets would improve time, security and transactions costs.

Keith Knutsson of Integrale Advisors commented, “even if the impact of blockchain dictates only a small percentage on the overall real estate market, we are talking about an over $200 trillion market; a fraction of a percentage could proof itself to be a valuable niche for investors.”

Currently a host of start-ups are tackling the blockchain real estate market with goals of providing simple transactions, such as a property in the Ukraine that was recently sold, or raising of funds for commercial and construction projects, an area the young company BitProperty focuses on.

Due to the blockchain ledger receiving updates on thousands of computers at the same time, exploitive attacks to alter an entry are mitigated. Even if an attack was possible, the blockchain is transparent and audible. A current hurdle is the digitization of previous records digitization, whose various formats and jurisdictions prove a challenge.

While transactions could see a revolutionary change, blockchain could also impact the ability to alter renting of land and airspace through automatic verification of property ownership in blockchain records, creating new forms of real estate ownerships.

German Industrial Orders On The Rise

The German economy is a highly developed social market economy. It is the largest national economy in the eurozone, fourth in the world by nominal GDP, and fifth by Purchasing Power Parity. According to the IMF, in 2017, the country is projected to account for 28% of the eurozone economy. In addition, Germany recently recorded the highest trade surplus in the world worth $310 billion in 2016, making it the biggest capital exporter globally.

In August, German industrial orders rose from the previous month, posting the biggest increase of 2017, showing signs of strong foreign and domestic demand. According to the German federal statistics office, new manufacturing orders climbed 3.6 % from the previous month on a seasonally and working-day adjusted basis.

Furthermore, domestic orders climbed 2.7%, exemplifying the strength of the eurozone’s powerhouse economy. International orders, outside of the eurozone are also up 7.7 %, proving a strong euro has made little impact on demand. Due to strong erratic monthly movements in the first eight months of the year, on average new orders increased by only 0.1%. The German economy is a big reason for the overall bullish performance by the eurozone economy in 2017.

Keith Knutsson of Integrale Advisors states “Combined with strong business data, showing production expectations as well as orders books close to record highs, the German industry is set to end the year at maximum speed. Thanks to the strong data provided by the German Economic Bureau, 2017 now looks as good as ever.”

Fiscal Year Comes To An End: Political Uncertainty Ensues

The end of September is a time where key political issues could increase volatility and shake up financial markets. With the Federal Emergency Management Agency (FEMA) running out of funds to deal with the aftermath of recent disasters, Congress went to work. A disaster relief bill was proposed. U.S. Treasury Secretary Steven Mnuchin saw the bill as an opportunity to add a provision stating a suspension of the debt ceiling until after midterm elections in 2018. Democrats, however, seeking to maintain political pressure on the U.S. budget, leaned towards a more timely solution to the problem.

In the end, a bill was passed that suspends the debt ceiling and extends government funding for three months. However, the passing of the bill does not solve the underlying issues causing political and financial uncertainty. The Republicans are eager and hoping to pass tax reform by the end of the year. Currently, the plan is to use reconciliation to prevent a filibuster and force it through the Senate by majority vote. However, a few of the president’s priorities, such as border wall funding and cutting the EPA budget, are increasing bipartisanship among leaders.

“As long as both sides of the aisle hold out hope of using the debt ceiling for political gain, it will be difficult to come to an agreement that would lead to a viable, long-term solution” said Keith Knutsson of Integrale Advisors.

Looking ahead to 2018, politicians will focus their efforts on the November election cycle, making it even harder to vote for anything controversial because of the need to preserve constituent support. As a result, a debt ceiling increase would be a tough provision to pass. On the other hand, delaying the bill could help separate the budget from the debt ceiling. Now that government funding for fiscal year 2018 was passed, Democrats could utilize their leverage on issues such as immigration reform and health care.

U.S. Household Net Worth Rises in Q2

The total net worth of U.S. households is currently higher than ever, helped by improving home values and stock prices. According to the Federal Reserve, the net worth of U.S. households, the total of all assets minus all liabilities, rose by $1.7 trillion in Q2 2017 to a record $96.2 trillion.

“The U.S. household balance sheet is healthy and continues to be one of the key themes of our view that the current economic expansion is far from over” said Keith Knutsson of Integrale Advisors.

Household wealth in the stock market climbed by $1.1 trillion in Q2. Despite a smaller increase than in the first quarter, the performance still reflects a steady trend in equity prices supported by business and consumer confidence around the world.

The value of real estate in the U.S. rose by $564 billion last quarter. Home prices are rising at a perfect time when there is a high demand for housing and a continuously low unemployment rate. One of the reasons for why we are seeing an increase in home values is due to a low inventory of homes for sale. Economists are estimating that a third of all homes in the U.S. have regained their pre-recession values.

During the recession, the equity and housing market both took some heavy losses. U.S. households lost around $12 trillion in wealth. However, total American net worth recovered by the second half of 2012, and has seen an increase in most quarters since.

Interest Rates and The Federal Reserve’s Reversal of The Stimulus Program

Federal Reserve chairwoman Janet Yellen stated Wednesday that rates are being held, but hinted of a possibility that a rate-hike is under consideration. Additionally, Yellen confirmed that through unanimous decision the Fed will reduce its balance sheet starting in October this year. The statement shows confidence that recent stagnant inflation measures are temporary. The dollar bounced back from losses earlier in the day as announcements were being made.

The balance sheet, which roughly quintupled in size to $4.5 trillion since before the financial crisis, is supposed to be reduced in October by $10 billion and $10 billion for every month after. One year later, on October 2018, the Fed is planning on approaching normalization at a rate of $50 billion per month.

Some investors are worried about the lack of precedent in reducing the balance sheet to this size. Keith Knutsson of Integrale Advisors argued, the Fed has undoubtedly been playing an increasing role in recent years in the US economy but it is to be noted that a misstep with its current size could send US markets in a frenzy.

The meeting did acknowledge recent damage attributable to natural disasters, but policymakers remain confident that long-term economic growth is not harmed by these events. The damage inflicted by recent hurricanes is solely affecting things near-term, with the New York Fed President even suggesting that rebuilding efforts could give a boost to the economy.

Despite already positive-looking economic developments, the Fed commented that consumers are continuing to spend, and business investments are picking up.  New GDP data has been adjusted and now projects a faster growth this year of 2.4 percent, an increase from the 2.1 percent previously forecasted. Unemployment projections have meanwhile been lowered to 4.1 percent, .1 percent lower than before.

Wall Street Does the Money Dance

A stellar performance by the major indices of the U.S. equity market serves as a sign of strong economic growth. The three major US equity indices; DJA, Nasdaq, and the S&P 500 finished the week with strong gains and new record highs.

The Dow Jones Industrial Average continued to gain traction, led by industrials. Aerospace giant Boeing, finished the day up 1.5 % and 4.3 % higher than the previous week. The Dow closed on Friday up 0.29 % to 22,268.34, the fourth consecutive day closing with a record high. This week, the Dow gained 2.16 %, marking the largest weekly gain since December 2016.

The Nasdaq Composite was up 0.3 % to 6,448.47, climbing back from a tough day on Thursday. For the week, the index gained 1.37 %, rebounding after a previous week of losses.

The S&P 500 surpassed the 2,500 mark for the first time. On Friday, the S&P 500 closed at 2,500.23, bringing its weekly gain to 1.56 %.  The industrial, telecommunications, and financial sectors all saw profits, while the healthcare industry lagged behind.

“The performance of the market is lifting the spirits of consumers, investors, and businesses, as well as raising confidence in U.S. equity” said Keith Knutsson of Integrale Advisors.

The positive performance comes despite lower than expected economic data released Friday morning, following a deadly terrorist attack in London and the recent North Korean missile launch over Japan. Wall Street investors are looking ahead to next week, when the Federal Reserve Board is set to meet. Economists are expecting the Fed to leave interest rates unchanged while proposing a new plan to unwind its massive balance sheet.