June 2, 2017

The major US stock market averages are higher in early trading (Dow +55 pts; SPX +.2%). Energy stocks are down 1.2% or more and banks (-.4%) have wiped out year-to-date gains. But most everything else is trading modestly higher. The Nasdaq Biotech Index is up over 3% in the past few days. The dollar is lower today in the wake of the jobs report (see below). WTI crude oil is trading down 2% to $47.20/barrel. Bonds are rising in price as yields fall. The 2-year Treasury yield, which is sensitive to Fed rate hike expectations, is down slightly to 1.28% (exactly where is was back in mid-December). The 10-year Treasury, which is more sensitive to long-term inflation expectations, is down to 2.15%. That’s the lowest since right after the presidential election.  

According to the Bureau of Labor Statistics the US economy generated 138,000 new jobs in May. This is quite a bit lower than ADP’s payroll estimate of 253,000, and economists’ consensus forecast of 180,000. In addition, job tallies for the prior two months were revised down a bit. Job growth has slowed in 2017, but the positive labor market trend is still intact and the unemployment rate should remain at very low levels. Speaking of unemployment, the headline U-3 rate fell to 4.3% and the U-6 under-employment rate fell to 8.4%. That’s the lowest U-6 since November 2007 and keep in mind the 30-year average rate is about 10.6%. Part of the reason for lower unemployment is that the labor force participation rate fell to 62.7% from 62.9% in the prior month. Average hourly earnings held steady at 2.5% y/y growth and that is a bit surprising. We’re all waiting to see wage growth accelerate but despite a very tight job market wage growth remains about where it was in late 2015. 

US auto sales continued to slow in May. The rolling 3-month average sales volume is the weakest since July 2014 and the annualized sales rate has slowed from 18 million units last year to about 17.1 million at present. We have heard that banks are tightening lending standards because loan losses on sub-prime auto lending have begun to rise. This has impacted sales volumes, which have peaked for this economic cycle. By the way, the average annual sales volume over the past 30 years is about 15 million. 

David Kelley of JP Morgan says recent economic data (auto sales & job report) have been softer and he wonders if second quarter gross domestic product (GDP) will rebound as strongly as economists expect. The real issue: “We need stronger investment spending.”  He’s referring to the fact that both business investment and government spending have been dragging on US economic growth. 

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