Beige Book

The Federal Reserve released its monthly “Beige Book” report, which portrays an economy where the same economic tide is rising from east to west and north to south.  It’s a very impressive and encouraging period for an economy that was plodding along without hope of ever regaining old glory.

Economic activity continued to expand across the United States, with 10 of the 12 Federal Reserve Districts reporting moderate or modest growth. The outliers were the Dallas District, which reported strong growth driven in part by the energy sector.

Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies.

All Districts reported that labor markets were tight and many said that the inability to find workers constrained growth.

Consumer spending was up in all Districts with particular strength in Dallas and Richmond.

Six Districts specifically mentioned trucking capacity as an issue and attributed it to a shortage of commercial drivers. Contacts in several Districts reported slow growth in existing home sales, but they were not overly concerned about rising interest rates. Commercial real estate was largely unchanged.

Employment and Wages

Employment continued to rise at a modest to moderate pace in most Districts. Labor markets were described as tight, with most Districts reporting firms had difficulty finding qualified labor. Shortages were cited across a wide range of occupations, including highly skilled engineers, specialized construction and manufacturing workers, IT professionals, and truck drivers; some Districts indicated labor shortages were constraining growth.

Prices

Prices increased in all Districts at a pace that was modest to moderate on average; reports showed upticks in inflation in several Districts. Tariffs contributed to the increases for metals and lumber. However, the extent of pass-through from input to consumer prices remained slight to moderate.

Message of the Session

After meandering for most of the session yesterday, all major equity indices gained traction in what I think was the first panic buying we’ve seen since early January.

Financials continue to lead the way this week, initially getting a boost from Morgan Stanley earnings results but later inspired by Berkshire Hathaway, which was the best performing name in the S&P Financial Sector (XLF) posting its best session in almost seven years. 

The company amended its buyback program, which previously capped purchases to 20% of book value.  The new system allows “flexibility” for Warren Buffett and Charlie Munger to buy the company stock at higher valuation levels.

This brings up the debate over how businesses are using their new tax rates and repatriated cash.  While we should also keep in mind this money comes from the earnings of corporations, it’s their cash and not part of the public domain.   There is evidence the cash is going to more than stock buybacks, although its being applied there to be sure.

Buy Backs

• 1Q 2017 $114.6 billion
• 2Q 2018 $165.5 billion

But cash is also being used for capital expenses representing large financial investments.  Coming into the year, manufacturing companies were forecasted to hike cap ex by 3.8%, now that number is 10.1% and non-manufacturing companies’ forecasts have leaped from 3.8% to 6.8%.

 

 

The last thirty days has seen the market stumble out of June and surge in the month of July.  In that time, utilities have been the best performing sector reflecting investor anxiety.  On the other hand, two sectors I love are lower. 

One Month Performance

S&P 500 Index	+1.08%
Consumer Discretionary (XLY)	+0.78%
Consumer Staples (XLP)	+2.72%
Energy (XLE)	+1.23%
Financials (XLF)	+0.07%
Health Care (XLV)	+2.21%
Industrials (XLI)	-1.84%
Materials (XLB)	-1.44%
Real Estate (XLRE)	+3.52%
Technology (XLK)	+1.66%
Utilities (XLU)	+5.87%

Today’s Session

Earnings reports are mixed, but two Dow components are looking lower pressuring the index out the gate. 

Initial jobless claims

The number of folks filing first time unemployment claims continues to spiral lower.  In the week that ended on July 14, 8,000 fewer Americans filed for benefits, taking the total to 207,000; the lowest in decades. 

Biggest Declines

• New York 9,722
• Michigan 9,389
• New Jersey 4,847
• Kentucky 2,288
• Massachusetts 2,279

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