August 10, 2017

Stocks opened lower this morning (Dow -101 pts; SPX -.9%). All eleven major market sectors are down, led by consumer discretion, financials & tech (down more than 1%). The spot VIX Index spiked to 14 this morning and VIX September futures rose to 14.1. So volatility expectations for the near-term are rising, but the VIX isn’t predicting any panic, either. The dollar is a bit weaker today and commodities are higher. That’s what you would expect with geopolitical tensions. WTI crude oil is, however, trading flat around $49.50/barrel. Bonds are higher in early trading, owing to continued North Korea tensions as well as a weaker than expected inflation report (see below). The 5- and 10-year Treasury yields ticked down to 1.79% and 2.22%, respectively. 

Barron’s says despite “escalating tensions with North Korea…there aren’t any real problems on the charts—at least not yet.” The market has an excuse to pull back, and bonds yields are dipping with utilities stocks gaining a little momentum. But investors should be watching the charts for clues about how serious the situation is becoming. One S&P level to watch is around 2,400, which is near-term support. In addition, the 200-day moving average is down around 2,350. And then there is long-term trend-line support around 2,100. 

The Producer Price Index (PPI), which measures wholesale price inflation, slowed a bit to 1.9% year-over-year growth in July. Economists were expecting inflation to accelerate to 2.2%. “Core” PPI, which excludes the more volatile categories of food & energy prices, slowed to 1.8% y/y. Inflation is currently at low absolute levels and any hint that it is falling will raise concerns about economic growth going forward. On the other hand, let’s remember that PPI has recovered from extremely low (and negative) levels back in 2015 & early 2016. So this is no cause for panic.  

US worker productivity in the second quarter rose a better than expected .9%. That’s a big jump from anemic .1% growth in the prior quarter. Productivity is simply worker output divided by the cost of that output, and over time rising productivity is what drives corporate profit margins and then higher wages. So this is really a long-run gauge of how fast our standard of living is improving in this country. Productivity has really lagged during this economic cycle. From 2007 to 2016 the average productivity growth was about 1.2% per year. And it actually declined during the fourth quarter of 2015 and first quarter of 2016. Since then, we’ve seen some improvement, but it’s still an area of concern for economists. During the second quarter, total worker output rose at a 3.4% rate, faster than any other quarter since the beginning of 2015. Total hours worked are rising again. But the report confirmed that wage growth is still modest.  

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