The Market Today
Small Business Confidence Dips As Worker Shortage and Rising Prices Continue
by Craig Dismuke, Dudley Carter
Small Business Confidence Dips As Worker Shortage and Rising Prices Continue: May’s Small Business Optimism Survey results were disappointing but consistent with the current narrative of supply-side issues and rising prices holding back some activity. Overall, small business confidence cooled unexpectedly last month, from 99.8 to 99.6, disappointing expectations for an increase to 101.0. The drop broke a three-month streak of higher readings and occurred despite increased hiring plans and expectations for higher sales in the near-term. Neutralizing those improvements, businesses’ struggles to find workers intensified. The number with job openings they could not fill hit a new record. The number saying there were few or no qualified applicants for those positions also jumped, matching its highest level in records. And the share saying labor quality was their biggest problem rose to match January 2020’s level, when unemployment was at a 50-year low. On another current hot topic, inflation indicators hit their highest levels since the early 1980s. The report said there were “Two headlines in the bigger picture: Labor is in short supply and holding back growth, and inflation is rampant on Main Street,” which is likely behind a drop in general economic expectations to the lowest level since early 2013.
April Trade Data Shows Signs of Normalizing After Significant Run-Up in U.S. Trade Deficit: The April trade balance data showed an expected pullback in the monthly deficit, from $75.0B to $68.9B. Imports fell $3.8B (1.4%) while exports rose $2.3B (1.1%). With the trade deficit declining $6.1B, this marks the largest monthly improvement in the U.S. trade balance since January 2019; however, the trailing 12-month trade deficit has ballooned $207B (37%) to $771B since the beginning of the pandemic. As global economies catch up in the recovery and U.S. demand begins to normalize over time, trade is expected to be a strong addition to the GDP tally.
JOLTS Report: At 9:00 a.m. CT, the April Job Openings and Labor Turnover Report is expected to show another record-high number of job openings.
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Disappointing Small Business Survey Erases Monday’s Yield Increase, Sends 10-Year Outside Bottom of Strong Two-Month Trading Range: Treasury yields rose Monday but only partially unwound the sharp drop in longer rates that occurred in the aftermath of last Friday’s disappointing payroll report. The 10-year Treasury yield added back 1.5 bps to 1.57% after sliding 7.2 bps on Friday. The S&P 500 was essentially unchanged yesterday, down less than 0.1% and hovering just below its all-time high. A nearly empty economic calendar Monday left investors waiting for a reason to commit in one direction or the other, with an eye on Thursday’s May CPI inflation report that could help shape conversations among officials when the Fed meets next week. A plethora of developments since the start of year drove economic optimism and interest rates higher in the first quarter. However, market momentum has leveled off amid the reality that it may take months to accumulate evidence of sustained acceleration. Monday’s move higher left the key 10-year Treasury yield near the low-end of a trading range it’s built since April.
The 10-year Treasury yield broke below its lowest close of that post-April range around 7 a.m. CT after May’s Small Business Survey results disappointed, further fomenting worries that supply-side strains are weighing on activity and driving prices higher. At 7:30 a.m. CT, the 10-year Treasury yield was 4.2 bps lower at 1.526%, through the late-April closing low of 1.5398%; the yield has been lower on an intraday basis one other time since March, in the aftermath of April’s surprisingly weak payroll report. A sustained break below that level could spark some volatility due to the absence of strong technical support levels. Yields in Europe were tracking lower with Treasurys in response to some softer-than-expected reports from several countries across the continent. U.S. equity futures traded mixed, consistent with the day’s global trend, as the Dow declined marginally, S&P 500 contracts inched up 0.2%, and Nasdaq futures rose 0.5% amid lower rates.
Despite Declining Card Balances, Overall Consumer Credit (Non-Real Estate) Rose in April: Consumer credit rose less than expected in April and the March expansion was revised lower. Total outstanding consumer credit, not related to real estate, rose $18.6 billion in April, or at a 5.3% annualized rate, to $4.24 trillion. However, not all credit types saw increased activity. Revolving debt, which primarily consists of credit card balances, dropped $1.9 trillion, a possible reflection of some of the March stimulus funds supplanting credit-based purchases or being used directly to pay off outstanding balances. Credit card balances fell in each quarter of 2020 but had risen in February and March. As a result, it was increased activity in the non-revolving category types, such as autos and student loan borrowings, that drove total outstanding debt higher. Non-revolving, non-real estate debt rose by over $20 billion dollars, or at a solid 7.6% annualized clip.
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