June 5, 2017

Stocks opened a bit lower this morning. At the moment, the Dow is down 8 pts and the SPX is down .12%. Oil producers and semiconductors are higher in early trading. Most other groups, however, are modestly lower. The VIX Index is hovering around 10, considered very low, and the VXTLT (long-term Treasury bond volatility) is trading at 10.8. So expected volatility on both stocks and bonds is down quite a bit this year. European markets are down about .3% after last weekend’s terror attack in the UK. Most of Asia was down about the same percentage overnight. 

The dollar is also down about 5% on the year, roughly matching the decline in the Bloomberg Commodity Index. Most of that is due to a roughly 16% drop in both oil and iron ore. Gold, on the other hand, is up 11%. Bonds are mostly unchanged today. The 5-year Treasury yield is hovering around 1.73% and the 10-year is trading at 2.18%. The decline in rates and the dollar speak to softening economic data over the course of the year. Citigroup’s US Economic Surprise Index has fallen to -40 over the past two months as most data have begun to disappoint economists. Today, we got a raft of fresh data to pore over. 

First,, the ISM Non-manufacturing Index fell to 56.9 in May from 57.5 in the prior month. This is a widely-regarded gauge of business activity in the service sector. Despite the decline in key components like new orders and current business activity, economists are pleased that the employment component of the report posted a strong rebound. Bloomberg says “hiring weakness seen in the service sector in the past few months may not last.” Also, the report’s various components still point to continued modest expansion. 

Second, factory orders and shipments were a slight disappointment in April. Year-over-year growth in new orders for manufactured goods slowed to 3.8% in the month and shipments decelerated to 4.6%. But here again, growth is still positive and we can characterize this as a lull after a very strong rebound from real weakness in 2015 and the first part of 2016. 

Next, labor productivity (that is, output per hour worked) continued to improve during the first quarter. Productivity is important to the country’s long-term economic health, and while productivity growth is still rather sluggish, it has recovered a lot from the 2015-16 swoon. The report also revealed a dip in labor costs. On a year-over-year basis, US worker productivity is up 1.2% and the cost of labor per unit of output is up 1.1%. So this report corroborates other data suggesting wage inflation hasn’t picked up as anticipated. 

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