September 13, 2018

Stocks opened higher today (Dow +142 pts; SPX +.5%). The tech sector (+1%) is leading the way, with semiconductor stocks up 2%. Remember, they’ll run with any optimism over the trade war with China. Consumer staples and financial sectors are down slightly in early trading. European markets will close mixed but China’s exchanges were up about 1% overnight. The dollar is a bit weaker today (and so far this month), probably in reaction to trade optimism as well as the CPI report (see below). WTI crude oil is down 2% to trade around $68.75/barrel. Bonds are trading up as interest rates fall back. The 5-year and 10-year Treasury yields are currently at 2.86% and 2.95%, respectively.

Yesterday, the Federal Reserve published its monthly “Beige Book” report, noting widespread labor shortages in the US, especially for retailers and restaurants. The labor market is very tight. Overall economic growth is still characterized as “moderate,” though GDP growth hasn’t been this high in a long time. The Fed mentioned a couple of risk factors. There is anecdotal evidence that some companies are postponing capital investment plans due to the threat of a trade war with China. And this factor is resulting in higher wholesale inflation.

The Consumer Price Index (CPI) showed an unexpected slowing of inflation in August. This is a big deal because it should take a little urgency out of the Federal Reserve’s interest rate hike plans. Consumer inflation slowed to 2.7% from year-ago levels compared with July’s 2.9%. Even “core” inflation—excluding food & energy—slowed to 2.2% from 2.4% in the prior month. Many economists expected to see higher inflation because trade tariffs are beginning to work their way through the system. But a stronger US dollar helped offset that effect.

At the same time, it appears that wages are rising modestly. According to the Bureau of Labor Statistics, inflation-adjusted weekly earnings for US workers rose .5% in August. This doesn’t sound like much, but it does suggest wage growth is outpacing inflation by a modest amount. Adding that .5% to CPI of 2.7%, you get nominal wage growth of about 3.2%.

Homebuilder stocks are taking a hit this morning after a third tier Wall Street research shop said profit margins throughout the industry will likely take a hit during the second half of 2018. Zelman & Associates believes softer demand for new housing and stormy weather on the east coast will likely prevent the homebuilders from growing their businesses in the near term. Longer term, the firm still likes the group and believes 2019 results will be better. The S&P Homebuilder ETF (XHB) is down 8% this year.

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