July 6, 2017

The major stock market averages sagged at the open (Dow -72 pts; SPX -.46%). This is become a familiar pattern; we may end the day in the green anyway. Real estate and telecoms are down more than 1.5% in early trading. The tech sector continues to slide and the PowerShares QQQ Trust ETF (QQQ) is now down 5.1% from its recent peak. WTI crude oil shot up over $46/barrel this morning as US oil stockpiles shrank more than expected. But the Energy Select SPDR Fund (XLE) is trading slightly lower at the moment. Chevron (CVX) and Exxon (XOM) are down after RBC Capital published a research report downgrading the integrated oil companies. Bonds continue to sell off and yields are moving higher. The 5-year Treasury yield ticked up to 1.96% and the 10-year is up to 2.38%. that’s good news for the bank stocks, which have been gaining momentum over the last 4-5 weeks. 

Payroll processor ADV estimates the US economy added 158,000 new jobs in the month of June. Unfortunately, economists were anticipating something closer to 190,000. Job growth has clearly slowed somewhat, probably because the economy is very close to full employment. Economist Mark Zandi at Moody’s says 158,000 is nothing to worry about—it’s still about twice the level needed to absorb natural growth in the labor force. We’ll get the official monthly job tally from the Bureau of Labor Statistics tomorrow.

ISM’s non-manufacturing index, which measures service sector business activity, shot up to 57.4 in June vs. 56.9 in the prior month. Economists expected the index to fall modestly, so this is a surprise. Of note, the index’s “new orders” component, a predictor of future business, hit 60.5. Recall that ISM’s manufacturing index also posted a very strong reading for June (57.8). Any reading above 50.0 indicates expanding business activity. I get the sense that economists don’t believe these reports. Barron’s comments that the ISM readings “have been pointing to unusually strong levels of activity all year long, acceleration that has yet to appear in actual data from the government.”  

Goldman Sachs’ senior US economist published a report saying that expanding drug abuse in America is beginning to affect the economy. The “opioid epidemic” kills about 90 Americans per day and the total cost to the economy was about $80bil in 2013. The Federal Reserve recently cited growing incidence of employee drug test failures in its recent Beige Book report. Economists are trying to figure out why the US labor force participation rate has fallen to 63% even as the economy has reached full employment. Goldman Sachs says part of the reason is increasing drug use.  
 


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