The ISM manufacturing index in May was .5 pt above the forecast at 58.7, up 1.4 pts m/o/m. It does though come after a 2 pt drop in April. The context for these internals should be a combination of things, 1)major supply constraints (trucking predominantly) being felt and thus companies trying to get whatever product they can and likely over ordering, 2)tariff worries and some industries trying to source as much steel and aluminum as they can.

New orders rebounded to 63.7 from 61.2 and puts it back near the 6 month average of 64. Backlogs rose 1.5 pts to 63.5, the highest since 2004. Coincident with all this, inventories at the manufacturing level fell to a 5 month low and at the customer level is down to 39.6, the lowest since 2010. Employment rose 2 pts after falling by 3 last month. The negative with the data was export orders which fell 2.1 pts to the lowest level since October.

Lastly, reflecting the capacity issues, Supplier Deliveries (the higher it goes, the more difficult it is to deliver product in time) rose .9 pts to 62, the 2^nd highest print since 2010.  Along with this, prices paid rose a touch to 79.5, the highest since April 2011.

Of the 18 industries surveyed, 16 saw growth vs 17 last month.

ISM said “Demand remains robust, but the nation’s employment resources and supply chains continue to strong. Respondents say price pressures at their companies is causing price increase discussions as we prepare to enter H2.” Underline is mine.

“The increases in prices across all industry sectors continues. The Business Survey Committee noted price increases in metals (all steels, steel components, aluminum and copper), corrugate, freight, electronic components, wood and some chemicals. Shortages continue in electronics components, with steels, steel-based products, electrical components, aluminum and freight added to the list this month.”

Read these quotes directly from companies:

“We are currently overselling our forecast and don’t see an end to the upswing in business. We are very concerned, however, about the tariffs proposed in Section 301 and are focusing on alternatives to Chinese sourcing.” (Transportation Equipment).”

“Very difficult to hire skilled and unskilled labor.” (Food, Beverage & Tobacco Products).”

“Sales remain strong. Lead times and direct material costs are soaring.” (Machinery).”

“Suppliers are seeing price increases and trying to pass them on.” (Miscellaneous Manufacturing).”

“Continued talk around steel tariffs has resulted in price increases for domestic line pipe, while HRC seems to be moving sideways. Temporary exemptions for allies and an agreement with South Korea have not calmed the market.” (Petroleum & Coal Products).”

“Industry demand is causing price increases. Fuel prices are also on the rise, and there have been (price) increases associated with that.” (Primary Metals).”

“Severe allocation, long lead times and upward price pressure, particularly in the electronic components market, continue to hamper our ability to meet customer demand and our shipping schedule.” (Computer & Electronic Products).”

Payrolls expanded by 223k in May, 33k more than expected and the two prior months were up a revised 15k. The unemployment rate fell another tenth to just 3.8% as the household survey showed a job gain of 293k at the same time the size of the labor market rose just 12k. Within this, of those aged 55+, 327k saw new jobs. The more comprehensive U6 unemployment rate is now down to 7.6% which is the lowest since May 2001. Rising wages were evident as average hourly earnings rose .3% m/o/m and 2.7% y/o/y. Average weekly earnings, which I prefer as a stat, rose .3% m/o/m too and 3% y/o/y which is near the best in 7 years. Average weekly hours were unchanged at 34.5.

Reflecting the ever shrinking bench of willing labor, the pool of available workers fell by another 213k and the chart says it all. If we compare this to the number of job openings, the ratio between the two is the lowest in 18 years.

POOL OF AVAILABLE LABOR

While the participation rate did tick down one tenth to 62.7%, matching the lowest level since May 2016, the employment to population ratio was up one tenth to match the best since January ’09 at 60.4%. The average duration of time of those unemployed is just shy of the lowest since 2009.

It was a rebound in hiring in the services sector that led to the upside in the headline number as the goods producing side saw a modest m/o/m decline in the pace of job gains.

There was another record high in the number of those not in the labor force and I can’t necessarily square that circle with the tightening labor market.

Bottom line, while it’s great to see the upside surprise in job growth, it does come after more modest gains in the two prior months. Smoothing out the monthly volatility in the data has the 3 month average at 172k vs the 6 month average of 199k, the 2017 average of 182k, the 2016 average of 195k and 2015 of 226k. On the upside and the clear tightening with rising wages along with the rally in Europe has the 2 yr yield up by 5.5 bps to 2.48%. The 10 yr yield is back above 2.90%. The Fed will keep on keeping on with a hike this month and another one in September. That will leave them flexibility going into the press conference meeting in December.

Now that we actually have the 65th Italian government since WWII, Italian bonds and banks are rallying. The 2 yr yield is down 27 bps and below 1% at .80%. The 10 yr is lower by 23 bps to 2.56%. What a wild ride but take note that these yields are still well above where they were just two weeks ago. The MIB index is higher by 2.6% with Intesa and UniCredit up about 6% and the smaller banks up 7.5-10%. I’m not worried at all about Italy leaving the euro as most citizens don’t want to. //www.reuters.com/article/us-italy-euro-poll/polls-show-most-italians-want-to-stay-in-euro-idUSKCN1IW0MT. Italy’s challenge remains the lack of stronger growth, a huge sovereign debt pile, and the end of ECB QE.

ITALIAN 2 yr YIELD

In Spain we now have a socialist as the new PM. Talk amongst yourselves. 

But following Italy, the Spanish IBEX is rallying as are Spanish bonds. The flight to safety bonds of the UK, Germany, France and the US are all selling off as to be expected. At some point, the ‘safe’ European sovereign bonds will start to digest the May inflation data and the soon to be end to QE.

Ahead of the US ISM report today we saw a bunch of PMI’s overseas that were mixed. Japan’s index fell 1 pt m/o/m to 52.8, matching the lowest since August. Taiwan and India also saw m/o/m declines. There were gains for South Korea (though is still below 50), Vietnam, Thailand (back above 50) and the Philippines. Markets in Asia were mixed as well as who knows where the US trade tactics are going. If you do, please let me know.

The eurozone manufacturing PMI for May was left unrevised at 55.5 but that’s down from 56.2 in April and is at the lowest level since February 2017. Markit said “Some of the weakness may have been related to higher than usual number of holidays during the month, but risks appear tilted towards growth remaining subdued or even cooling further in coming months.” I’m not sure if trade tariff worries are the reason but “slowing export sales have been a key drag on both production and order book growth.”

On inflation in the eurozone in light of yesterday’s data, “May saw the rate of input price inflation faced by eurozone manufacturers remain strong and quicken for the 1st time since January. In contrast, output price inflation eased to a 5 month low but nonetheless remained well above its historical average. Germany registered the sharpest increase in both input costs and output prices during the latest survey month.”

The UK PMI rose .5 pt to 54.4, better than the estimate of 53.5. It follows 5 straight months of m/o/m declines. Markit was not impressed with the rebound. “A slowdown in new order inflows meant the expansion in production was achieved only by firms working thru their backlogs of work. Weaker than expected sales meanwhile led to the largest rise in unsold stock in the survey’s 26 yr history.” Cost pressures rose and “average vendor lead times, a bellwether of supply side constraints, deteriorated to the greatest extent during 2018…May saw output charges rise for the 25th successive month, with solid increases across the consumer, intermediate and investment goods sectors. That said, the rate of selling price inflation eased to its weakest since last August.”

While the BoJ has been in a subtle taper ever since they shifted to yield curve control, I don’t think that we should take any signs just yet that they are increasing the taper after cutting the amount of 5-10 yr paper they bought overnight. JGB yields are only up slightly and the yen is down. But, we’ll keep a watch out.

Here are key headlines from the just released Beige Book:

“Economic activity expanded moderately in late April and early May with few shifts in the pattern of growth. The Dallas District was an exception, where overall economic activity sped up to a solid pace.”

“Manufacturing shifted into higher gear with more than half of the Districts reporting a pickup in industrial activity and a third of the Districts classifying activity as “strong.” Fabricated metals, heavy industrial machinery, and electronics equipment were noted as areas of strength.”

“Rising goods production led to higher freight volumes for transportation firms.”

“By contrast, consumer spending was soft. Nonauto retail sales growth moderated somewhat and auto sales were flat, although there was considerable variation by District and vehicle type.”

“In banking, demand for loans ticked higher and banks reported that increased competition had led to higher deposit rates. Delinquency rates were mostly stable at low levels.”

“Homebuilding and home sales increased modestly, on net, and nonresidential construction continued at a moderate pace.”

Here are some regional comments on employment, wages and inflation:

Boston: “Some firms, including staffing firms, cited pick-ups in wages; most noted ongoing difficulty finding workers. One retailer cited vendor-price increases of about 3 percent, which they intended to pass along to customers; manufacturers noted no unusual price pressures although some were concerned about future effects on prices of tariffs or other changes in trade policy.”

“One retail firm, which noted that prices were largely flat in 2017, reported recently seeing higher prices from manufacturers and wholesalers that it is passing through as higher retail prices; the increases averaged 3¼ percent. Most of these vendor price increases were attributed to higher steel prices and to high oil prices. Two retail contacts specifically noted that higher fuel prices and a shortage of truck drivers were contributing to higher shipping costs.”

NY: “The labor market has shown further signs of tightening, with some reports of accelerating wages. Input price increases have become increasingly widespread, and consumer price inflation appears to have picked up slightly.”

Philly: “On balance, wages also continued growing modestly, although reports have risen of firms losing skilled employees to competitors and struggling to attract and retain new qualified workers. Increasingly, firms are responding by adjusting their wage structures. The share of nonmanufacturing firms reporting increases remained greater than 40 percent… Staffing firms continued to report steady demand for temporary workers and direct hires in several local labor markets, with increased wage pressures in the tightest markets. According to one contact, clients are hiring faster now compared with a few years ago when they were indecisive about whether to hire and whom…”

Cleveland: “Contacts continue to report difficulty finding qualified candidates in a broad array of occupations. Employers are raising wages to attract talent, but the increments are moderate and in line with recent trends in the District. Rising commodity prices, especially for lumber and steel, are pressuring goods producers. Construction firms and transportation companies were generally successful at raising their selling prices. Also, retailers managed to increase their prices to cover higher fuel costs.”

Richmond: “Trucking demand remained robust, and driver shortages have led some trucking companies to turn some business away. As a result, some shippers turned to rail… The demand for labor continued to strengthen while supply remained tight across industry sectors. Prices rose moderately; firms reported rising steel and aluminum prices and increasing transportation costs.”

Atlanta: “District firms still report difficulties finding candidates across a broad range of industries and skills, and reports of wage pressure varied widely based on geography and job type. Most nonlabor input cost pressures were subdued; however, there were reports of rising steel and aluminum prices as a result of the new tariffs… Some companies reported the ability to pass along these commodity input cost increases due to expectations of rising costs related to tariffs.”

Chicago: “Employment growth remained at a moderate pace over the reporting period, and contacts expected gains to continue at that rate over the next 6 to 12 months… As they have for some time, contacts indicated that the labor market was tight and reported difficulties filling positions at all skill levels. There continued to be reports from manufacturing and construction firms that they had delayed or turned down projects because of difficulties in finding workers. There were also reports of firms choosing not to lay off workers during production lulls so that they would not have to find new workers when activity picked up again. Wage growth remained modest overall, though a number of contacts noted that wage pressures had intensified in recent months, and there were more reports of pay increases for production workers. Most firms reported rising benefits costs… Numerous contacts noted that freight costs had increased dramatically.”

St Louis: “Firms reported slight increases in employment despite continued difficulties finding workers. Wages and nonlabor costs increased at a moderate pace. Prices and price pressures grew modestly… On net, 31 percent of contacts reported that prices were higher than a year ago. This is higher than three months ago, indicating an increase in growth from earlier this year.

Minneapolis: “Employment grew modestly and continued to be restrained by a tight labor supply. Wage growth was moderate… but with some signs of stronger growth…price pressures increased slightly, while certain input prices were growing more rapidly

KC: “Employment and employee hours continued to rise modestly, and contacts reported modest wage growth with moderate increases expected in coming months. Input prices were up moderately compared to the previous survey period, while selling prices rose modestly.”

Dallas: “Hiring was solid across most sectors, and widespread labor shortages continued. Wage and price pressures remained elevated, and several contacts noted a sharp rise in the cost of steel and aluminum. Outlooks remained fairly optimistic, but tariffs and trade-related concerns were creating uncertainty.”

SF: “Contacts continued to report tight labor market conditions across all sectors, leading to an uptick in wage pressures and to labor-retention challenges… Price inflation increased moderately over the reporting period. Recent oil price increases spurred price inflation in a variety of sectors. Food and beverage businesses passed along a jump in transportation costs to consumers. Persistently brisk activity in the construction sector continued to exert upward pressure on prices for building materials.”