Growing frustration with the political drama and fatigue in DC was reflected in the NFIB June small business optimism survey. This index fell .9 pts to 103.6 which is the lowest since November when it printed 98.4 and vs 94.9 in October. There was a 10.9 rise in this index in November and December to 105.9 and that was pretty much it with the response to the US election where regulatory, health and tax reform were the obvious hoped for wishes of small business. The labor market components were out last week and which saw mostly softness but here is a quick repeat. Plans to Hire fell 3 pts to 15%, matching the lowest since October. Positions Not Able To Fill (also known as job openings) fell 4 pts. It was at 28 in October. Unfortunately Net compensation fell 4 pts which is now below the 25 level it was in October. The offset was Net Compensation Plans in coming months held at 18%, the most since December but it was 19 in October before the election. The NFIB simply said “Small business optimism has been flying high for months based on the expectation that Congress will cut taxes and reform healthcare. Washington has not delivered on the small business agenda yet, and small business owners are paying attention.”
The forward looking answers also fell m/o/m. Those that Expect a Better Economy was lower by 6 pts to 33, down from the December peak of 50 but still well off the -7 it was at in October. Those that said it’s a Good Time to Expand fell by 2 pts and those that Expect Higher Sales dropped by 5 pts. The price inflation component fell sharply as it was down 6 pts to 1%, the lowest since September. There were two positives within the report. Capital spending plans rose 2 pts to 30%, the best since September 2007 and after a big Q1 drag seen in GDP, Plans to Increase Inventory rose 3 pts to 4%, matching the highest since February 2015.
Bottom line, it’s clear that the rise in business confidence whether from small, medium or large businesses post election has just not translated into a pick up in business activity as seen in the actual data. What’s also clear, businesses are deservedly pissed off at the sclerosis in Washington. The NFIB also said, “I hope every Senator is paying attention, because small business owners are paying attention to them… Gridlock is driving down small business optimism, which will eventually drive down the economy.”
For those watching ag prices as I am, in case you didn’t see it yesterday, a bushel of corn had a 4 handle for the first time since June 2016 in the September futures contract. I need to show this chart for Wheat whose price is just off the highest level also in 11 months. It reflects an all time record low dating back to 1919 in the amount of acres in the US dedicated to the production of wheat. Now the productivity of land has of course been tremendous over the past 100 years and why we can still produce so much on less acres but it also provides context to the recent jump in wheat prices. That if anything such as weather disrupts a harvest, price responds sharply.
USDA US WHEAT ANNUAL ACREAGE PLANTED DATA
I remain bullish on ag and the fertilizer stocks.
The only thing of note economically speaking overseas was a better than expected industrial production print in Italy in May where it rose by .7% m/o/m vs the estimate of up .5%. The y/o/y gain was 2.8% and the rise was led by manufacturing. The IMF has a 1.3% GDP forecast for Italy this year. Considering the huge debt load that this country carries, it will be a poster boy for how its sovereign bonds trade as the ECB gets deeper into tapering. Today its 10 yr yield is higher by almost 3 bps to 2.31%, 5 bps from the highest in about 2 years. Politics will also be focus but not until next year.
It continues to be a snail’s pace rise but that describes the completely broken JGB market. The 40 yr yield, my favorite maturity to watch because it’s the furthest from ‘yield curve control,’ rose another 2 bps overnight to 1.10%, the highest since February 2016. This yield closed at 7 bps in the two weeks after Brexit. I reiterate my belief given last August/September that that was the top in the 35 year global bond market.
40 YEAR JGB YIELD