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• S&P 500 up 0.25% to $2,404.39
• DJIA up 0.36% to $21,012.42
• U.S. 10-yr down 4 bp to 2.25%
• WTI Oil down 0.33% to $51.30

U.S. equities traded higher today, especially following the release of the FOMC’s minutes from its meeting earlier this month. According to the minutes, the Fed plans to further wind down a balance sheet that consists of approximately $4.5 trillion in mostly government debt accumulated in the years following the financial crisis. Investors seemed to generally approve of the Fed’s approach, but Treasury yields slipped after the announcement. Also driving the day was the announcement that Moody’s made the decision to downgrade China’s credit rating for the first time in 1989 from A1 to Aa3 because of mounting concerns pertaining to the country’s slowing economy and rising debt.

Economic Data

• Existing Home Sales: 5.570M
• EIA Petroleum Status Report, Crude Oil Inventories: -4.4M Barrels

April’s report on existing home sales was a disappointment, showing a month-over-month decline of 2.3%. Despite the lower headline numbers, the report showed a modest year-over-year increase of 1.6%. Also increasing was the median sale price, which increased by 3.5% to $244,800 – a year-over-year gain of 6.0%. This report, coupled with yesterday’s new home sales report, indicate that the housing sector is beginning to show signs of slowing.

Today’s weekly report on domestic crude oil inventories showed a week-over-week decline of 4.4 million barrels, which is a larger drop than expected and is the seventh straight weekly drawdown. Despite the notable decline, inventories of gasoline and distillates saw lesser-than-expected decreases. Analysts attribute the disappointing report on gasoline inventories to the 0.33% drop in oil prices today.

Stock Moves

Stocks comprising the telecommunication services and energy sectors led decliners in the S&P 500 today, while notable gainers included the materials, real estate, and utilities sectors. Well-known companies seeing declines today included Tiffany & Company (TIF), which saw its shares fall by 8.71% by the close of trading, and Advanced Auto Parts (AAP), which experienced a drop of 5.44%. Analysts attribute these declines to weaker-than-expected earnings reports. Also having a lousy day was Lowe’s (LOW), which released an earnings report showing lower-than-expected EPS and revenue growth. Shares of Lowe’s were down 3.02% today.


Major anticipated catalysts: International Trade in Goods – Prior $-64.8B; Jobless Claims – Prior 232K

All estimates come from Econoday’s survey of economists/analysts. Earnings per share estimates are from Factset, are set against year ago results, and represent adjusted earnings.

At the time, the May jobs report was a major source of hand-wringing. Consider these worries as passed. Over the past three months, establishment payrolls have risen by a very healthy 190,000 monthly average. Based on current population growth projections, the job market needs to generate just 75,000 jobs per month to improve the employment ratio and drive down the Unemployment Rate.

The data was fully verified by the Household survey, which reported a massive 420,000 jump in payrolls. Although the Household survey is a particularly volatile indicator as compared to the more popular Establishment survey, it is also more inclusive, factoring in those who are working odd jobs or are otherwise self-employed, a growing segment of the “sharing economy.” One way to think of the Household survey is as a gauge of the strength and accuracy of the headline, Establishment data. For July, the giant Household number certainly verifies the also very strong headline Establishment gains.

Versus the prior month, average hourly earnings rose 0.3 percent, above expectations of 0.2 percent, and above the June growth rate of just 0.1 percent. This amounts to an excellent annualized rate of growth of 3.8 percent. As reported on Tuesday last week, month-over-month Core PCE Inflation was a meager 0.1 percent and just 1.6 percent year-on-year. These two factors amount to real annualized wage gains of 2.2 percent. This is a great sign as real wages have been flat or falling for decades.

The main U-3 Unemployment Rate held at 4.9% while the broader U-6 Unemployment measure ticked higher to 9.7%. Ordinarily, this would be an issue, however, both of these indicators were pushed higher by an estimated 420,000 persons entering the labor force. As a result, the labor force participation rate moved up to 62.8%. So long as the labor force expansion outpaces job gains, the various unemployment rates will be pressured higher. This is necessarily a good thing.

In the aggregate, the labor force has been shrinking for twenty plus years now. If this were indicative of structural shifts, such as retiring baby boomers, then perhaps it could be explained.

However, the Civilian Labor Force Participation Rate of 25-54 year old persons, a measure that should adjust for demographic changes as it measures only prime age workers, is 81 percent, down from a historic high of 84.5 percent last seen in April 2000. With the exception of an increasing number of graduate-level students, there are few explanations for this phenomenon. Assuming this ratio has room for some mean reversion, then it follows that there exist up to several percentage points of labor force slack should the economy become strong enough to pull these persons into the workforce.

The job market has made huge strides since 2008, but there is still plenty of room for improvement.


Wednesday, May 24, 2017

  • Featured today on The Financial Exchange: Zain Akbari of Morningstar
  • Blue Buffalo (BUFF)

The opinions and forecasts expressed may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.


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