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U.S. stocks began 2017 on a positive note as investors received encouraging economic data and awaited upcoming quarterly earnings reports with optimism.  On Friday, the Dow Jones Industrial Average got within 1 point of the closely-watched 20,000-level before backing away.  For the week, the Dow added 201 points to end the week at 19,963, up +1.02%.  In a reversal of recent trends, the NASDAQ Composite outperformed the broad market and surged +2.56%, to close at 5,521.  By market cap, large caps edged their smaller cap brethren.  The S&P 500 LargeCap index gained +1.7%, while the S&P 400 MidCap index tacked on +1.29% and the SmallCap Russell 2000 added (just) +0.75%. 

International markets were as strong or stronger than U.S. markets.  Canada’s TSX neared its all-time high set in 2014, rising +1.36%.  The United Kingdom’s FTSE scored its fifth straight week of gains, rising +0.94%.  On Europe’s mainland, major markets were green across the board with France’s CAC 40 rising +0.98%, Germany’s DAX gaining +1.03%, and Italy’s Milan FTSE surging +2.36%.  In Asia, China’s Shanghai Composite Index rose for a second week, up +1.63%, along with Japan’s Nikkei which reversed last week’s drop by rising +1.78%.  Hong Kong’s Hang Seng Index had a second week of strong gains rising +2.28%.  As a group, emerging markets (as measured by the MSCI Emerging Markets Index) rose +2.66%, while developed markets as a group (as measured by the MSCI Developed Markets Index) gained +2.29%.

In commodities, precious metals continued to rebound from last year’s sell-off.  Gold gained +$21.70 an ounce, ending the week at $1,173.40, up +1.88%.  Silver was likewise bid up, adding +$0.53 to close at $16.52 an ounce, up +3.31%.  The industrial metal copper, seen by some as an indicator of global economic health, gained +1.62%.  Oil continued to slowly breakout of last year’s trading range, adding another +0.5% to end the week at $53.99 a barrel.

In U.S. economic news, initial claims for unemployment fell by -28,000, back to near a 43-year low of 235,000.   Initial claims have been under the key 300,000 threshold for 96 straight weeks, the longest stretch since 1970.  Claims numbers can be volatile around the holidays, so analysts frequently turn to the Labor Department’s smoothed four-week moving average of initial claims.  The smoothed number also declined by -5,750 to 256,750.  The number of people already receiving benefits, known as continuing jobless claims, rose +16,000 to 2.11 million.  Those claims are reported with a one-week delay.

According to the Bureau of Labor Statistics’ Non-Farm Payrolls report (NFP) for December, the U.S. added 156,000 new jobs and worker pay rose at the fastest pace since 2009.  The increase in hiring was led by health-care providers, financial firms, manufacturers, restaurants and shipping companies.  The unemployment rate, though, edged up +0.1% to 4.7% as more people entered the work force in search of work than were hired.  Despite the optimism, employers continued to complain about the shortage of skilled labor.  Jim Baird, chief investment officer at Plante Moran Financial Advisors remarked, “Employers are simply having a harder time filling open positions as the economy nears full employment.”  The steady gains in employment have finally started to push worker pay higher over the past year, drawing the attention of the Federal Reserve.  Analysts note that rising wages will keep the Fed on a gradual rate hike path if they infer that inflation is about to accelerate.

In a separate report, employment in the private-sector slowed last month according to payroll processor ADP.  ADP said employers added +153,000 private-sector jobs last month, missing economists’ expectations and down from November.  Mark Zandi, chief economist at Moody’s Analytics which prepares the report from ADP’s data stated “Job growth remains strong but is slowing.”  In the report, large private-sector businesses added +63,000 jobs in December, mid-sized businesses added +71,000, and small businesses accounted for only +18,000.  All of the gains were in the service sector, where +169,000 jobs were added.  Unfortunately, goods producers lost ‑16,000.  On average, the private sector generated +174,000 jobs a month in 2016, down from the average ‑209,000 a month generated in 2015.

Spending on construction reached its highest level in more than a decade as outlays for U.S. construction projects rose +0.9% in November, according to the Commerce Department.  The increase, which equates to $1.18 trillion, was the highest level since April of 2006.  Both private and public construction spending gained.  Private spending was up +1%, while public construction projects increased by +0.8%.  Economists had expected a gain of only +0.6%.  The better-than-expected increase could prompt economists to raise their estimates of the Gross Domestic Product for the fourth quarter.

Manufacturers in the United States finished 2016 the most optimistic in two years, according to the Institute for Supply Management’s (ISM) manufacturing index.  The index climbed to 54.7 last month, an increase of +1.5 points.  In the details, new orders and production surged in the final month of the year to their highest levels in almost two years.  New orders rose by +7.2 points, the biggest single-month increase in more than seven years.  Employment plans also rose to their highest level since mid-2015.  Eleven of the eighteen industry groups surveyed by ISM reported growth.  However, the report was not all good news.  Of concern, the prices companies pay for their raw materials surged to their highest level in five years as the price index component increased +11.1 points to 65.5. 

Supporting the manufacturing data was another new record in annual auto sales.  Sales of autos were stronger than expected on the heels of robust demand for trucks and hefty year-end incentives.  Data provider Auto Data reported it was the seventh year of growth, with full-year sales rising +0.4% to 17.55 million, exceeding 2015’s record of 17.5 million.  Deirdre Borrego, general manager of J.D. Power’s automotive data and analytics, stated "This year will be remembered for strong retail sales and record transaction prices."

In another manufacturing report, Markit Economics’ Purchasing Managers Index (PMI) rose to +54.3, the highest level since spring of 2015.  Manufacturers reported an uptick in their clients’ willingness to spend following the November election and multiple surveys have shown that executives are expecting lower taxes and fewer regulations under the new administration.  Chris Williamson, chief business economist at Markit stated, “The manufacturing sector ended 2016 on a buoyant note, with promising signs that growth could pick up further in 2017.” 

In the service-sector, activity expanded at a solid pace according to the Institute for Supply Management’s (ISM) service-sector index.  The index registered an 83rd consecutive month of growth with a reading of 57.2.  The details of ISM’s report were mixed.  Of the 15 nonmanufacturing industries tracked by ISM, 12 reported growth while 3 were in contraction.  The new-orders component improved +4.6 points to 61.6, however the employment index fell -4.4 points to 53.8.  Joshua Shapiro, chief U.S. economist at MFR Inc. wrote in a note, “With three of the most recent four readings from this index at a very solid level, including the last two, the message is one consistent with about a 3% pace of growth in overall economic output.”  Analysts had expected the index to decrease to 56.6. 

At the Federal Reserve, minutes of last month’s meeting showed that the central bank may have to raise interest rates faster than the “gradual” pace that they have stressed for some time.  By a unanimous vote on December 14, the Fed raised its federal-funds range by a quarter-percentage point to 0.5-0.75%, the second rate increase in a decade.  In the so-called “dot plot”, Fed officials penciled in three quarter point rate increases for this year, rather than the two predicted in September.  Fed officials stated that the biggest risk was that the unemployment rate might drop sharply below the 4.5% jobless rate seen as the “longer-run normal”, which could lead to inflation.  In the latest report, mentioned above, the unemployment rate rose +0.1% as more workers entered the workforce than could be absorbed by new job creation.

In international economic news, Canada’s economy ended the year on a high note with a surge in full-time employment and the country’s first trade surplus in two years.  Employers created a surprising +54,000 net new jobs last month prompting Avery Shenfeld, CIBC Chief Economist to remark, “A stunner, there were jobs, jobs everywhere, and this time, they were offering a full day’s work.”  The economy added +81,000 full-time positions and lost -27,000 part-time spots.  In addition, a jump in exports pushed Canada to a $526-million trade surplus in November, following the previous month’s $1-billion deficit.

France’s far-right leader Ms. Marine Le Pen has outlined plans for France to leave the euro should she win this year’s presidential election.  Current polls suggest that conservative candidate Francois Fillon will face the National Front (FN) leader Ms. Le Pen in the second round of voting.  Le Pen has vowed to pull France out of the euro for years, but in remarks last week she broadened that vision suggesting that Europe could return to a basket of recognized national currencies linked through a common currency system.  Under this model, France could revive the franc, while maintaining economic relationships in the Eurozone.

In Germany, industrial orders fell in November following a surge in October, but the monthly drop was widely expected and the broader economic picture for Germany remained bright.  The Economic Ministry reported that contracts were down -2.5% for the month for German goods, slightly weaker than the initial forecast of -2.3%.  But revised figures for October showed that bookings rose +3.5% over the past 2 months, and industrial orders from countries outside the Eurozone surging +6.4%.  Together, the results point to a “very favorable development” for German manufacturing in the final quarter, according to the ministry.

In Asia, China intensified its efforts to support its currency known as the yuan.  The yuan has come under increasing selling pressure exacerbated by the rising dollar following Donald Trump’s U.S. election win.  Last Friday, the People’s Bank of China (PBOC) took steps to increase the offshore yuan-lending rate—the cost of borrowing the currency in overseas markets—to a near record high.  After hitting an eight-year low in November, the yuan fell nearly 1% against the dollar and ended down 6.6% for the year.  It was its worst annual performance against the dollar since 1994.

Japanese officials were quick to defend Toyota’s contribution to the U.S. economy after Donald Trump threatened to impose a “big border tax” on the carmaker if it went ahead with plans to build a new plant in Mexico.  Japan’s chief cabinet secretary Yoshihide Suga defended the role of Japanese manufacturers in the U.S. economy saying, “Toyota has been aiming to be a good corporate citizen for the United States.”  The automaker did not directly address Trump’s reference to the Mexico plant, but pointed to its contribution to the health of the US economy. “With more than $21.9bn direct investment in the US, 10 manufacturing facilities, 1,500 dealerships and 136,000 employees, Toyota looks forward to collaborating with the Trump administration to serve in the best interests of consumers and the automotive industry,” Toyota said in a statement.