April 27, 2018

Stocks gapped up at the open but quickly faded. The Dow is currently flat and the SPX is up .2%. Traders are pumping up the defensive sectors—utilities, consumer staples, real estate, telecom—because interest rates are falling back. Oil is trading flat around $68/barrel but energy stocks are down about 1% in early trading. The exception is Chevron (CVX), which reported a pretty good quarter. Bonds are rising in price, down in yield today. The 5-year Treasury yield fell back to 2.80% and the 10-year yield declined to 2.95%. 

First quarter economic growth—called Gross Domestic Product—rose 2.3%, a bit higher than economists expected. The personal consumption component of GDP rose 1.1% as expected. So consumer spending moderated after a pretty strong holiday shopping season. A lot of news media headlines are focused on that piece. But that’s not the real story. The fact is that economic growth has been seasonally weak for years now. And delayed tax returns could have impacted the numbers. No, the real story is inflation. The GDP report’s inflation index decelerated to 2.0% from 2.3% in the prior quarter. And the so-called Core PCE Index, which excludes food & energy prices, actually accelerated to 2.5% growth from 1.9%. That’s the highest core inflation growth since 2011 and remember, this is the Federal Reserve’s preferred inflation gauge. Trouble is, no one is talking about this today. 

That could be because the Employment Cost Index really upstaged the GDP report. Total compensation (both wages and benefits) rose 2.7% in the first quarter, the highest rate of wage growth since 2008. Leaving out government employees, private sector wages & salaries are up 2.9%. Could this be the wage inflation we’ve been waiting for? The Federal Reserve is clearly on a path toward higher interest rates because they firmly believe inflation is rising. 

Corporate earnings season is progressing with real strength, but the resulting price action isn’t necessarily inspiring. Financials and industrials in particular have reported good numbers only to see their stock prices fall. Tech stocks are up to bat, however, and we’ll see how that goes. 

Facebook (FB) announced very strong first quarter results, with advertising revenue up 43%. Capital spending to insulate the platform against fake accounts and user data leakage increased as expected. That will drag down profit margins somewhat, but this comes as no surprise to investors. Results suggested little negative effect from the recent data privacy scandal. The stock shot up 9% after the announcement. 

Amazon (AMZN) really surprised investors with not only strong sales growth (43%) but also the highest y/y earnings-per-share growth in 6 quarters. Subscription services (i.e. Amazon Prime) posted revenue of $3.1bil vs. $2.8bil expected. AWS (cloud computing infrastructure) generated sales of $5.44bil, up 49% y/y. Bloomberg ran an article titled, “Amazon Surges as Wall Street is Stunned by Near-Perfect Quarter.” You don’t see that very often. The stock is up 4.7% this morning. 

Intel (INTC) far outpaced Wall Street expectations with 9% revenue growth and 32% earnings growth. Sales of chips that power personal computers rose 3%, a small victory since that business has been in slow decline for years. Data center chip sales shot up 24%. Just as important, the CFO said data center strength should continue into the second quarter. In fact, management raised guidance across the board and noted that corporate capital spending for technology is strong. The stock rose 3.25% yesterday and is flat today.

Raytheon (RTN) reported 4% revenue growth from year-ago levels, which was in line with Wall Street expectations. Earnings-per-share rose 27%, a little better than expected. Management noted continued strong demand for missile defense systems around the world, and that the “threat environment” is higher. That drove new product orders up 10.5% from year-ago levels. Finally, management boosted revenue & earnings guidance for the full year. The stock fell 2% yesterday and another 3% today. The entire defense/aerospace sector is going through its own correction, no matter the good news. 

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