November 4, 2016

Stocks opened modestly higher this morning (Dow +25 pts; SPX +.25%). The healthcare sector is rebounding (+1%) on strength in biotechs. Banks, transports and telecoms are also in the green. The dollar is a bit weaker today and WTI crude oil is holding steady around $44.70/barrel. Bonds are rising in price this morning. The 5- and 10-year Treasury yields are back down to 1.24% and 1.78%, respectively. 

We got October’s Employment Situation Report today. The economy generated 161,000 net new jobs in the month, which is slightly below economists’ consensus forecast of 173,000. Importantly, however, September payrolls were upwardly revised from 156,000 to 191,000. The unemployment rate (U-3) edged down to 4.9% and the under-employment rate (U-6) fell to 9.5%. That U-6 figure is the lowest since the spring of 2008. As a reminder, U-6 includes not only those out of work and looking for a job, but also those who are working part-time because they can’t find a full-time position. By the way, pre-recession levels for U-6 were in the range of 8% to 8.5%, so it’s still a bit elevated. The biggest news in the report, however, is that wages are rising. Average hourly earnings accelerated by 2.8% y/y in the month. That’s the highest y/y rate of growth since mid-2009. Wage growth is typically a leading indicator of rising inflation, so the Federal Reserve is watching this metric carefully. This report is fairly positive and clearly gives the Fed some ammunition to consider an interest rate hike next month. Make no mistake, the labor market is tightening. If there is some bad news in the jobs report, it is that the labor force participation rate ticked down to 62.8% from 62.9% in the prior month. This rate has been falling pretty steadily since 2000 and we’re now back to levels last seen in the 1970s. Economists don’t generally agree on the cause(s) for this long-term structural trend in the labor market. 

The US trade deficit fell to a 1 ½ year low as exports climbed 0.9% y/y in September. Total imports fell 1.3% y/y. US dollar strength has been a huge headwind for exports over the last couple of years, but as the dollar weakens a bit we are seeing modest recovery. US exports to the European Union rose 6% and the total value of exports to China rose 1.8%. 

Starbucks (SBUX) reported third quarter results, beating both sales and earnings estimates. For the quarter, global same-store-sales grew 4% vs. Wall Street’s estimate of 4.8%. Americas sales rose +5%, meeting expectations, but China/Asia-Pacific sales rose only 1%. Unfortunately, the sales gains were driven mostly by pricing, not customer traffic. Management issued detailed guidance. Fourth quarter revenue is expected to be slightly higher than current Wall Street estimates. Fiscal 2017 revenue growth should be double-digits with global same-store-sales up mid-single digits. Earnings guidance was slightly lower than expected. The stock is up 2.8% this morning.  

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