Category: US & Canada

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Is the US labor market tightening?

I wouldn’t read too much into weaker US job gains of 138 thousand for May 2017. Job gains seem to be tapering in 2017, with February highest at 232 thousand, but this could also be a sign of tightening labor conditions.

Monthly Nonfarm Payroll: Job Gains

Comments from respondents in yesterday’s ISM report showed hints of a tightening labor market:

  • “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
  • “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
  • “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)

Unemployment continues to fall, reaching 4.3% for May 2017. The dip below the natural rate of unemployment also warns of tighter labor market conditions.

Unemployment and the Natural Rate

But there are no real signs of a tight labor market in hourly wages. In fact, hourly wage rate growth in the manufacturing sector is slowing.

Hourly Wage Rate Growth and Core CPI

Employee compensation as a percentage of value added (Q1 2017) is starting to rise and the percentage of profits (after tax) is declining. The lines tend to invert, with employee compensation peaking and profits dipping ahead of a recession. This still seems 12 months away.

Profits and Employee Compensation as % of Value Added

In summary, declining unemployment and rising employee compensation as a percentage of value added both indicate a tight labor market. But soft wage rate growth and falling core CPI suggest the Fed will be in no haste to apply the brakes. At least for the next three quarters.

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ISM May 2017 Report

After a setback in April, activity in the manufacturing sector is again expanding:

MANUFACTURING AT A GLANCE
May 2017
Index Series
Index
May		 Series
Index
Apr		 Percentage
Point
Change		 Direction Rate
of
Change		 Trend*
(Months)
PMI® 54.9 54.8 +0.1 Growing Faster 9
New Orders 59.5 57.5 +2.0 Growing Faster 9
Production 57.1 58.6 -1.5 Growing Slower 9
Employment 53.5 52.0 +1.5 Growing Faster 8
Supplier Deliveries 53.1 55.1 -2.0 Slowing Slower 13
Inventories 51.5 51.0 +0.5 Growing Faster 2
Customers’ Inventories 49.5 45.5 +4.0 Too Low Slower 8
Prices 60.5 68.5 -8.0 Increasing Slower 15
Backlog of Orders 55.0 57.0 -2.0 Growing Slower 4
New Export Orders 57.5 59.5 -2.0 Growing Slower 15
Imports 53.5 55.5 -2.0 Growing Slower 4
OVERALL ECONOMY Growing Faster 96
Manufacturing Sector Growing Faster 9

Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.

*Number of months moving in current direction.

Notable comments from respondents:

  • “Business conditions are steady, and with competition increasing, it’s making negotiations even more intense to reduce costs.” (Machinery)
  • “Business is booming, and getting direct employees is increasingly difficult.” (Fabricated Metal Products)
  • “Difficult to find qualified labor for factory positions.” (Food, Beverage & Tobacco Products)

Read the full report at ISM May Report

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Weekly Investment Commentary from Bob Doll | Nuveen

Key points from Bob Doll’s weekly investment summary:

  • We believe U.S. economic growth should rebound in the second quarter and corporate earnings will remain solid.
  • Investors remain uneasy about global macro conditions, but we believe the backdrop remains supportive for equities.
  • We may be seeing a transition in global equity leadership from the United States to Europe and select emerging markets.

Contrast this with Philip Parker’s outlook at Altair Investments.

Read more at: Weekly Investment Commentary from Bob Doll | Nuveen

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S&P 500: Tall shadows warn of selling pressure

The S&P 500 is recovering after Wednesday’s sharp fall but tall shadows on the last two candles indicate selling pressure. This is supported by a bearish divergence on 21-day Twiggs Money Flow, signaling medium-term selling pressure. Respect of resistance at 2400 is likely and would warn of another test of primary support at 2330.

S&P 500

Bellwether transport stock Fedex [FDX] has consolidated in a broad rectangle over the last six months. Bearish divergence on 13-week Twiggs Money Flow indicates long-term selling pressure. Breach of support at 185 would signal a primary down-trend, warning that economic activity is slowing.

Fedex

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Sell in May and run away?

Markets fell sharply today. But before we look at the charts, let’s examine three fundamental measures of market stress.

A yield differential near zero indicates bank margins are being squeezed. Lending normally slows, leading to a recession. But the current yield differential of 1.45%, calculated by subtracting the yield on 3-month T-bills from the yield on 10-year Treasuries, is reasonably healthy.

Yield Differential

The yield spread between the lowest investment grade corporate bonds (Baa) and 10-year Treasuries is a useful measure of market risk. The risk premium widens in times of uncertainty. Since 2016 the Baa spread has fallen by more than one percent, to 2.25%, indicating low market risk.

10-Year Corporate Bond Spreads

The above indications are supported by the St Louis Fed Financial Stress Index which is at a record low of -1.451 since its commencement in 1994.

St Louis Fed Financial Stress Index

The St Louis Fed Financial Stress Index measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.

The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress.

Real GDP growth dipped to 1.9% for the first quarter 2017, compared to 2.0% for Q4 2016. While growth is modest, hours worked by nonfarm employees improved to 1.55% in April 2017 from a low of 1.03% in February, suggesting that growth is likely to continue.

Real GDP & Hours Worked

There is little sign of stress in financial markets other than the latest Trump turmoil.

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Trump Turmoil

Discussion of a possible impeachment action against President Donald Trump is rife in the media and seems to have spooked financial markets.

The Dollar Index fell through support at 98.50, signaling another decline. The long-term target is 93.00.

Dollar Index

Gold rallied, breaking through resistance at $1250/ounce. Follow-through above $1300 would signal another advance, with a target of the 2016 high at $1375.

Spot Gold

Dow Jones Industrial Average retreated from resistance at 21000. Expect a test of medium-term support at 20400. Reversal below 20000 would be cause for concern.

Dow Jones Industrial Average

The S&P 500 is headed for a test of medium-term support at 2320. Breach would likewise signal a strong correction.

S&P 500

We are likely to get a secondary correction but I expect the bull market to continue. Impeachment of Trump would be a temporary setback and would make me more bullish on the long-term outlook.

It’s probably better to have him inside the tent pissing out,
than outside the tent pissing in.

~ President Lyndon Johnson on FBI Director J. Edgar Hoover whom he mistrusted

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The Only Question Investors Have Is About Trump | Bloomberg

Barry Ritholz sums up the impact President Donald Trump will have on your investments:

….We start with an overlooked truth: Presidents, regardless of party, get too much credit for when things go right and too much blame when they go wrong.

….Yes, Donald Trump can and will affect the economy and the markets. But we should not put all of our focus on the marginal impact of the president while giving short shrift to more important things such as corporate revenue and earnings, the Federal Reserve, interest rates, inflation, congressional spending, employment, retail sales, Supreme Court decisions, and, of course, valuations.

Quite right. Janet Yellen probably has more power over your investments than Trump does.

….I think we all hoped that once the election was over, we could go back to our normal lives without the incessant parade of campaign news.

No such luck.

Investors need a way to sequester the noisy news flow out of the White House. It is too easy to let the relentless and disturbing headlines throw off long-term financial plans. Investors must read the news, but not let it interfere with thinking clearly.

Look, let’s be honest about the commander-in-chief: He is the world’s leading Twitter troll, a man whose main goal is to interrupt your thinking, misquote and insult other people, engage in rhetorical sleight of hand, and impugn the integrity of those trying to do honest work. What all trolls want is a reaction, something Trump has achieved to great success.

Rule No. 1 on the internet is “Do not feed the trolls.” No one can really ignore the president of the United States, but it’s probably best to view much of what he says or tweets as minor background noise.

The President is not a conciliatory figure who is going to govern from the middle. The acrimonious feud with Democrats and the media is likely to continue for most of his term. So long as the GOP have a majority in Congress and the Senate, Trump has a fair shot at tax reform and infrastructure programs. If that should change, expect Obama-style gridlock.

Source: The Only Question Investors Have Is About Trump – Bloomberg

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US inflation falls, Personal Consumption grows

A dip in the latest consumer price index (CPI) growth figures brings the inflation measure back in line with the Fed target of 2.0%. Inflationary pressures appear contained, easing Fed motivation to implement restrictive monetary policy.

Consumer Price Index

Personal consumption continues to grow at a modest pace. The down-turn in expenditure on services would be cause for concern — this normally precedes a recession — if not for a strong rise in expenditure on durables.

Personal Consumption

Manufacturers new orders for capital goods display a similar recovery.

Manufacturers New Orders: Capital Goods ex-Defense

The housing recovery continues at a modest pace.

Housing

Construction spending as a percentage of GDP remains soft, suggesting that the recovery still has plenty of room for improvement.

Construction/GDP

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S&P 500 Price-Earnings Ratio rises

With 84.4% of S&P 500 index constituents having reported first-quarter earnings, 302 (73.84%) beat their earnings estimates while 77 (18.83%) missed. Forward estimates for 2017 contracted by an average of 4.6% over the last 12 months but not sufficient to raise the forward Price-Earnings Ratio above 20. That is the threshold level above which we consider the market to be over-priced.

Forward Price Earnings Ratio for S&P 500

Comparing the forward estimates for 2017 to actual earnings for 1989, we see that the market is expected to deliver a compound average growth rate of 6.0% over almost three decades.

With a dividend yield of 2.16%, that delivers a total return to investors of just over 8 percent.

Price-Earnings ratios fluctuate over time, so any improvement in the ratio should be considered temporary.

Buybacks have averaged just over 3 percent since 2011. The motivation for buybacks is that they should accelerate earnings growth but there is little evidence as yet to support this. As Reported Earnings grew at an average rate of 3.2% between December 2011 and 2016, below the long-term average.

A spike in earnings is projected for 2017 and 2018. Hopefully this continues. Else there will be a strong case for restoring dividends and reducing stock buybacks.

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