Here is the updated chart of Net Worth as a percent of disposable income that includes last week’s flow of funds statement. Seeing this chart helps to put Friday’s selloff in the biggest of the big cap into perspective in measuring how stretched valuations have gotten. The Fed will come out of their meeting tomorrow not worried about consumer inflation but inflation is always in the eye of the beholder if one looks at a broader set of prices which includes assets. Of course this gap can also close by an improvement in wage growth. Let’s hope.
The NFIB small business optimism index in May held steady at 104.5. It printed 94.9 in October, 98.4 in November and peaked at 105.9 in January. Plans to Hire improved by 2 pts to 18, matching the level seen in January but it keeps getting more difficult in finding workers as Positions Not Able to Fill was up by 1 pt to the most since November 2000. Capital spending plans rose by 1 pt but still remains stuck in a tight range and still can’t break out to the upside. Plans to Increase Inventory slowed to 1 from 3 and that is the lowest since September so with all the headline optimism, this is somewhat disappointing. More to the optimism, those that Expect a Better Economy rose 1 pt to 39 vs 12 in November but peaked at 50 in December. Those that Expect Higher Sales was up by 2 pts to 22, also well off the October level of 1 but off the 31 print in December. Those that said it’s a Good Time To Expand fell 1 pt and is right in line with the 6 month average. Earnings Trends weakened by 1 pt. On inflation, current compensation rose 2 pts after falling by 2 pts last month while future plans remained flat for a 3rd month. Those expecting Higher Selling Prices were unchanged, holding at the highest level since late 2014.
The bottom line continues to be that small businesses remain hopeful for positive policy changes out of the Administration. The NFIB CEO said “The remarkable surge in optimism that began last year right after the election shows no signs of slowing down. Small business owners are highly encouraged by the President’s regulatory reform agenda, and they remain optimistic there will be tax reform and health care reform. This is a policy driven phenomenon.” The underline is mine and highlights that at least right now the optimism is based on hope not on any notable change in current economic activity. Companies are still hiring but not really increasing investments in their business. On the former, a growing issue is the dearth of supply for qualified workers which we keep talking about. NFIB Chief Economist Dunkelberg said “the tight labor market has been a persistent problem for small business owners for the past several months, and the problem appears to be getting worse. It’s forcing small business owners to increase compensation, which we’re seeing in this data, to attract new workers and keep the ones they have.” Again, the underline is mine.
I’ve harped enough that 2017 marks peak easing and the broadest reversal (or slowdown) of central accommodation, however gradual, since the easing kicked off 10 yrs ago. At 1:20pm est yesterday we can add the Bank of Canada who now seems to be interested in raising rates. Senior Deputy Governor Carolyn Wilkins said “The adjustment to lower oil prices is now largely behind us, and we are looking for signs that the sources of growth are broadening across sectors and regions. The signs are encouraging.” She gave an analogy to the importance of not waiting so long to raise rates: “If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly. You do not want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead.” In immediate response, the Canadian $ spiked to $1.333 from $1.346 and is now trading at $1.325. The Canadian 2 yr note yield jumped by 10 bps to .835%, the highest in 3 months and today is higher by another 5 bps.
Investor confidence in the German economy cooled a bit in June. The ZEW index fell 2 pts to 18.6 and that was 3 pts below expectations. For perspective, this index was as high as 62 in December 2013 but I pay more attention to the IFO index which surveys actual businesses. The current conditions component was much better as it rose 4 pts to 88, the best since July 2011. The ZEW said “The prospects for the German economy remain favorable. This is not least due to the positive GDP growth in the European Union in the first quarter of 2017.” The euro didn’t respond to the data as its flat while we’re seeing a .50% bounce in the DAX and a slight uptick in bund yields.
German Finance Minister Wolfgang Schaeuble, never shy to give his 2 cents, gave a bit of a nudge to the ECB by saying “We need to exit the current monetary policy in a timely manner and return to a more normal curve.” Not a surprise and he felt some sympathy for them in terms of their exit, “it’s not easy for the ECB, with all due respect” in part because of “a very difficult construction of the monetary union.” I’ll ask again, when, not if, the European bond market blows up when the ECB further tapers and eventually gets out of the poison that is negative rates, will it be all worth it?
Two days before the Bank of England gets together, headline CPI in May was higher by 2.9% y/o/y, two tenths more than expected, up from 2.7% in April and matches the quickest pace of inflation since April 2012. The core rate was also faster than forecasted as it was up 2.6% y/o/y vs the 2.4% estimate and up from 2.4% in April. The retail price index, another measure of inflation, jumped 3.7% y/o/y, a level last seen in February 2012. The only respite in the inflation data was a slowdown in the pace of gains for wholesale input inflation which fell 1.3% m/o/m and moderated to 11.6% y/o/y increase which were both below estimates. Bottom line, Mark Carney and the BoE are really in a tough spot which I’ve been talking about for a while. Price stability is their supposed only mandate and the average UK citizen is getting screwed because the BoE has lost sight of that in their fear of upsetting the economy post Brexit vote. Now we can throw in the political unknowns and they are even more stuck. The pound is getting a lift in response and gilt yields are jumping. The 10 yr gilt yield is up by 6 bps, the biggest one day move since February. The 2 yr yield is higher by 5 bps to .14%, a one month high. The FTSE 100 is flat because of the pound bounce.