May 4, 2017

Stocks opened mixed this morning (Dow -14 pts; SPX flat). Consumer staples (particularly ABC, CVS, GIS) are up .7% at the moment and financials & healthcare sectors are up modestly. On the other hand, telecoms & real estate—interest rate sensitive groups—are falling. The dollar is lower today but most commodities are down as well. Gold is down 1.5%. WTI oil is down over 4.8% to trade around  $45.50/barrel for the first time since November 2016. It just blew through the key short-term support level of $47; the next support level is around $45, and then $42. Bonds are selling off too, strangely, with yields moving sharply higher. The 5-year Treasury yield is up to 1.88% and the 10-year is up around 2.35%. 

Labor productivity fell .6% in the first quarter of 2017 while labor costs shot up 3%. The fact is that the labor is increasingly “tight,” meaning unemployment is low and wages are rising. We’ve heard CEOs in several industries (i.e. airlines) talk about rapidly rising labor costs. But we’re still waiting for business output to rise as a result of those new employees. Now, if you look at the year-over-year trend, productivity began to improve in the second half of 2016 and is up 1.1%. That’s not much growth, but it’s stronger than what we’ve seen over the past two years. Bloomberg Economics believes the seeds have been sown for higher productivity, which will show up later this year. 

US factory orders slowed a bit in March to a year-over-year growth rate of 5.8% (vs. 7.5% in the prior month). Economists were anticipating a stronger number, but factory orders are still at the high end the 2.5-year range. So this looks like a temporary pause in an otherwise very strong recovery. By the way, a closely-watched sub-set of factory orders, capital goods orders, are up 3.5% y/y and that’s the highest growth rate since late 2014. So there is a clear recovery in business capital spending. 

Apple (AAPL) is again preparing to raise more capital in a large bond offering. For the second time this year, the tech company will sell bonds to US investors in order to fund its massive stock buy-back program. The company has plenty of cash, but most of it is overseas and can’t be used to pay dividends and execute buy-backs. So this is a relatively cheap way to return cash to shareholders and offset the dilutive effects of huge stock-based employee compensation. Bloomberg says Apple will offer a 10-year bond that pays only about 1% over the current 10-year Treasury yield, so about 3.36%.

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