February 7, 2017

Stocks opened higher this morning (Dow +47 pts; SPX +.1%). And by the way, the Nasdaq just touched a new record high. Gains are fairly widespread: retailers, transports, semiconductors, biotechs, REITs. But again today, the energy sector isn’t participating in the rally. WTI crude oil is down 1.4% to trade around $52.20/barrel. The VIX Index is down around 11.2 suggesting very little fear among traders. The dollar has been rising for the last week or so and all else equal, that should put some downward pressure on commodity prices. Bonds aren’t doing much today. The most likely direction for yields over the long-term is upward, but when the Fed passed on a chance to raise rates last week, that had a settling effect on bonds across the curve. The 5- and 10-year Treasury yields are trading at 1.85% and 2.41%, respectively. 

The US trade deficit shrank to -$44.3bil in December vs. -$45.7bil in the prior month. Both imports and exports increased in the month, and that’s really good news. And of course, exports (up 2.7%) outpaced imports (up 1.5%) to produce the narrower trade gap. But what is more impressive is improvement in the overall level of trade flow and that suggests strengthening economic activity. One final point: recall that before the Financial Crisis our trade deficit was more like -$60bil. One key reason the deficit is much lower today is that we are importing roughly 30% less crude oil than we did in 2006. 

Bloomberg ran an article this morning arguing that while the job market is pretty strong, sustained wage growth remains elusive. Last week’s Employment Situation Report showed wage growth decelerated to 2.5%, the slowest y/y pace since August. Another measure, personal disposable income, has recently decelerated to 2.1% growth. And a third, completely different measure derived from the Employment Cost Index suggests wages and benefits are growing at a 2.2% annual pace. All three of these gauges showed some slowing in wage growth toward the end of 2016. These data points suggest a few things: 1) that inflation isn’t skyrocketing higher; 2) that while we are at full employment, the job market isn’t yet over-heating; 3) that the Fed isn’t yet behind the curve in term of rate hikes.

Speaking of wages, CNBC reports housing affordability is at a 7-yr low because wages aren’t keeping pace with home prices. According to a Black Knight Financials Services report picked up by CNBC, “It now takes 22.2% of median income to make the monthly principal and interest payment on the median priced home.”

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