Today’s employment report for May confirms that the economy continues to soar. Average hourly earnings rose at a 10 percent annual rate from the first quarter, a further indication of upcoming inflation.
The Week That Was
Economic news this past week continue to show business activity soaring in May. Today’s
employment report confirms other data. Private employment increased in May by 492,000, a 5 percent annual rate of growth. Hourly earnings rose sharply, up at a 10 percent annual rate from the first quarter. Employers are raising wages in response to the shortage of workers.
ISM business activity surveys for May were above 60, indicating very rapid growth. Both manufacturing and service companies registered improvements from April’s already strong readings.
Weekly initial claims for unemployment compensation continue to plummet. Claims fell to 385,000 in the fourth week in May. That is down from 428,000 in the past four weeks.
Things to Come
The only significant economic news scheduled for next week is the CPI (consumer price
index), due on Thursday.
Commodity prices were up significantly in May, and business surveys confirm shortages of goods and upward price pressures throughout the economy. Consumer prices for May (both the total and ex-food and -energy) are likely to be up at least 0.3 percent and 0.4 percent, respectively. If so, the year-over-year inflation numbers will have increased to 3 percent to 5 percent, the highest yearly inflation since 2011.
Supply chain problems continue to be reported throughout the country. This is due in part to the sharp acceleration in demand as well as federal labor assistance policies that pay people for not working.
Market Forces
None of the major stock indexes had any significant moves over the past week. It appears
as if the stock market has taken an early summer vacation.
The S&P500 remains 25 percent above its fundamental value. Even so, S&P company profits soared in the first quarter, well above their longer-term trend. Second quarter profits are also likely to be very strong.
This upward momentum will not only continue in the months ahead, it is likely to carry over well into the second half of the year.
When the Fed pumps a significant amount of money into the economy, it has to go somewhere. Stocks are often the key beneficiary of new money. In spite of the market’s overvaluation, the next move is more likely to be to higher than lower.
Longer-term interest rates remain low. The yield on 10-year Treasury notes has settled in the 1.6 percent vicinity. This coming week’s consumer price index will likely raise concerns over imminent inflation. If so, look for longer-term rates to move higher.
Bondholders continue to expect the Fed to keep interest rates low. However, longer-term rates can move higher without a rise in short-term rates. The one percentage point increase in longer-term rates this past year shows that they can move without a change in short-term rates.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 25 percent
Monetary Policy: highly expansive