First-Quarter US Labor Costs Marked Down on Weaker Output, Hours Annual unit labor costs rose at slowest pace in three years

US labor costs increased in the first quarter by less than previously reported, reflecting downward revisions to economic output and hours worked and consistent with other signs of moderating activity.

Unit labor costs, or what a business pays employees to produce one unit of output after taking into account changes in productivity, rose at a revised 4% annual rate, down from an initially reported 4.7%, according to Bureau of Labor Statistics figures published Thursday.

From a year earlier, unit labor costs were up just 0.9%, the slowest pace in three years. (…)

Productivity, or the output per hour of nonfarm employees, barely rose in the first three months of the year, revised down slightly to a 0.2% pace. On the whole, quarterly productivity figures are volatile. That said, a sustained slowdown would represent another hurdle for the Fed’s quest to tame inflation. (…)

The productivity report showed output rose at a 0.9% pace in the first quarter, the smallest advance since 2022. Real hourly compensation climbed just 0.4%, compared to an initially reported 1.1%. Hours worked rose at about half the originally reported pace. (…)

A report from Challenger, Gray & Christmas, Inc. indicated hiring intentions this year through May were down 50% from the same period last year. So far in 2024, companies announced plans to hire 50,833 workers, the fewest for that period in a decade.

“Job cuts remained flat in May as companies assess performance and make plans for Q3 and Q4,” said Andrew Challenger, the firm’s senior vice president. “Meanwhile, hiring announcements are at their lowest levels in a decade. The typical churn in a healthy labor market appears to be stalling.”

• Since 2019Q4, labor productivity has grown at an annualized rate of 1.5%. Our wage tracker now stands at 4.4% annualized in Q1 and 4.1% year-over-year. (Goldman Sachs)

Compensation Plans at US Small Firms Decline to Three-Year Low

The share of US small-business owners planning to raise worker compensation fell in May to a more than three-year low, indicative of a cooling jobs market and moderating wage pressures.

Some 18% of firms said they intend to boost pay in the next three months, down 3 percentage points from April and the smallest share since March 2021, according to data out Thursday from the National Federation of Independent Business. A net 37% said they raised compensation, down slightly from the prior month but still historically elevated.

A net 15% indicated they expect to hire in the next three months. While that’s the highest print so far this year, the share of firms planning to hire is below pre-pandemic levels. The government’s May employment report on Friday is expected to show a broad moderation in job growth. (…)

Rising labour costs and weak productivity could spoil the next leg of Canada’s rate-cut journey

On the same day the Bank of Canada trimmed its benchmark interest rate to 4.75 per cent, Statistics Canada revealed Wednesday that labour productivity in Canada declined 0.3 per cent in this year’s first quarter from the quarter before. Productivity, or the amount of economic output per hour worked, has now fallen for 10 of the last 12 quarters.

But unit labour costs, or how much businesses pay workers in wages and benefits to produce one unit of output, jumped 1.3 per cent over the same period.

(…) On Wednesday, Bank of Canada governor Tiff Macklem cited several risks that could push inflation higher and delay interest-rate cuts, including global tensions, a surge in house prices, “or if wage growth remains high relative to productivity.”

The good news for the bank, albeit not for workers, is that wage pressures are easing. The growth in unit labour costs was 4.3 per cent on an annual basis, which was slower than the annual rate of 5.7 per cent a year earlier, though still more than double the 30-year prepandemic average. (…)

ECB’s Preferred Pay Gauge Accelerates in New Inflation Warning Pay per employee rose 5.1% in first quarter from year earlier

Compensation per employee rose by 5.1% from a year ago in the first quarter, up from a revised 4.9% in the previous three months, ECB data showed Friday. That exceeded a Bloomberg Economics forecast of 4.6%. (…)

Officials have still sounded confident that the risk of excessive pay pressures is diminishing. President Christine Lagarde said Thursday that the trove of labor-market data that officials are monitoring point to relief ahead, even if the analysis “is not an easy matter.”

“While still elevated — no question about that — we’re seeing those wages on a declining path,” she said. “And that will particularly be the case in 2025.”

In contrast to the indicator of negotiated wages, compensation per employee includes additional factors like overtime pay and bonuses. Until recently, the ECB had been expecting that measure to slow to 4.4% in the first quarter, though Lagarde warned Thursday that recently released national data rather pointed to 4.7%.

As the official data only arrive with a considerable lag, the ECB has developed more timely indicators. Those trackers pointed to moderation ahead based on new pay deals, it said.

From the May PMI survey:

(…) the increase in input costs remained sharp and well above its pre-pandemic average. It was a similar picture for output prices – the rate of inflation in selling charges eased to a six-month low, but remained considerably steeper than that seen on average prior to 2020. Manufacturers continued to register reductions in both of the survey’s pricing measures, whereas services companies registered historically sharp rises. (…)

Pricing pressures across the eurozone services economy remained elevated, despite cooling. (…)

Reduced inflation pressures are evident in both costs and selling prices. This development is expected to be explicitly mentioned in the press conference by ECB President Christine Lagarde, countering the unexpectedly sharp wage increases reported for the first quarter. However, the PMI price indices do not yet give the all-clear, as they are unusually high in the context of the rather weak economic situation.

China’s Exports Surge More Than Expected in Economic Boost Exports climbed 7.6% last month, beating economist forecasts

Exports rose 7.6% in dollar terms from a year earlier, while imports increased 1.8%, the customs administration said Friday. That left a trade surplus of almost $83 billion for the month. Economists had forecast that exports would expand by 5.7% and imports by 4.3%.

The value of [auto] sales abroad in May was the second-highest on record, down only slightly from April’s $10.7 billion, Friday’s data showed. But the large European market is about to get harder to access, with new tariffs on Chinese EVs expected next month.

Exports to the US rose 4.8% from a year earlier, the most in three months, while shipments to countries in the Asean bloc of Asian nations jumped 25% and those to the EU fell 0.7%.

• China’s imports grew 1.8% YoY in May, down from +8.4% in April. The slowdown was partly due to softer global energy prices and comparison with a higher base.

Trump Tax Cut Renewal Is Winning Wall Street, But Could Cost $4.6 Trillion Many Republicans reject CBO estimate of $4.6 trillion cost

The estimated $4.6 trillion cost of extending expiring portions of Trump’s 2017 tax cuts isn’t dampening Republican enthusiasm for renewal next year. Many simply reject cost projections, asserting that tax cuts pay for themselves through economic gains.

Independent analyses show that wasn’t true of Trump’s 2017 tax cuts and won’t be the case if they’re renewed in 2025. That sets up a big political fight over how — and even whether — to pay for them.

This time the nation’s debt load and interest costs are much heavier burdens after the deficit-financed Trump tax cuts, multiple rounds of pandemic stimulus and Biden administration spending on its signature clean energy, infrastructure and chip manufacturing initiatives.

US government debt held by the public soared from 76% of GDP in 2017 to 97% of GDP in December. Yields investors demand on 10-year US Treasury bonds nearly doubled, from 2.4% in 2017 to 4.3% on Thursday. The federal government’s annual net interest payments surged from $263 billion to a projected $890 billion this year — more than the Defense Department budget.

The fiscal impact of the Baby Boom generation’s retirement is also weighing on the budget, with Social Security projected to run out of money to pay full benefits in 2033 and Medicare in 2036. (…)

The Congressional Budget Office in May projected it would cost $4.6 trillion cost over the next decade to extend the 2017 law’s expiring cuts in taxes on personal income, large inheritances and pass-through businesses, which include many small- and medium-sized firms. The law permanently lowered the corporate income tax rate.

That, according to analysis from the left-leaning Center for American Progress, would cause projected debt, as a share of GDP, to rise by 36 percentage points, to above 200%, by 2054.

In theory, the revenue lost by maintaining the tax cuts would be partly offset if that spurs higher rates of investment, job creation and growth. The nonprofit Committee for a Responsible Federal Budget has estimated, however, this so-called dynamic effect would recover just 1% to 14% of what’s lost in revenue. (…)

President Joe Biden has a simple approach for handling the tax-cut expiration, though it is inimical to most Republicans: extend the lower rates for individual taxpayers making less than $400,000 a year, and make up the cost by raising taxes on corporations and the wealthy. (…)

Corporate income tax revenue took a big hit after the rate cut, coming in lower in both 2018 and 2019, before the pandemic rocked the US economy.

It bounced back strongly, however, in 2021 as the country recovered from the pandemic. Republicans point out that revenue from corporate tax in 2022 and 2023 exceeded projections the CBO made in 2017 before the tax cut. (…)

For a start, inflation after the pandemic was much higher than the CBO previously projected. Corporate profits as a share of GDP also rose during the pandemic as companies raised prices more than their costs, and the Federal Reserve dramatically cut interest rates during the pandemic.

In reviewing a raft of research through 2021, William Gale, co-director of the nonpartisan Tax Policy Center, concluded that “every credible analysis of the fiscal effects” of the law found it “reduced revenues significantly.”

Harvard Professor Gabriel Chodorow-Reich found the changes to the corporate tax rate and expensing rules had a meaningful, positive impact on how much firms invested. But that didn’t come close to offsetting the enormous cost to the budget.

I almost placed the above under the below section…

WANNA BET?

Meet the ‘Degen’ Traders Fueling the Latest Meme-Stock Mania Short for ‘degenerates,’ their risky style of trading has come roaring back in recent weeks. ‘It’s still better than a lottery ticket.’

A risky style of trading is roaring back in popularity, driven by amateur traders who call themselves “degens” and pile into long-shot trades that proudly have nothing to do with conventional ways of assessing investments. Some are flinging cash at specific stocks or cryptocurrencies just to be part of a movement. Others are sticking around for the jokes and memes.

“Degen” can be a noun, adjective or verb in their language, shared mostly among young men. It’s a self-deprecating identity that some have traced back to the term “degenerate gambler.” Behind it is an ethos that values audacious bets on the market and is skeptical of investment norms: You only live once, so why bother with traditional financial advice?

Through online aliases and in chat rooms, these self-proclaimed degens brag about buying little-known digital tokens, meme stocks and speculative options contracts. They are generally drawn to assets more for the excitement around trading them than their underlying fundamentals. There’s a potential for near-instantaneous profits, or huge losses if the bets go south.

Degens are part of the fuel for meme-stock mania, like the logic-defying action in GameStop shares in recent weeks. When these internet-fueled traders stick together, they have the potential to spark wild swings in assets. All it takes is for a meme to catch fire. (…)

“It’s quick money,” said 39-year-old Daniel Moravec, a former professional poker player who identifies as a degen trader. “Buying some options or going for a high-risk stock—it’s still better than a lottery ticket.” (…)

A boom in long-shot bets tied to GameStop and other degen favorites has helped send average daily volumes in options to almost 47 million this year, the highest level on record in Options Clearing Corp. data going back to 1973. Much of this activity is concentrated in short-term trades that allow investors to score big, or lose everything. (…)

Young people especially see record-high home prices and mountains of student debt, and some of them worry they will never make enough money to reach the milestones prior generations did. Long-running surveys of young Americans show Generation Z has emerged from the pandemic feeling more disillusioned than any living generation before it. (…)

“This magic internet money is changing lives.” (…)

The National Collegiate Athletic Association surveyed 3,527 individuals between the ages of 18 and 22 last year and found that 67% of students living on college campuses bet on sports. (…)

There’s valor in sticking together, coordinating trades on platforms like Reddit or Discord. Those who take these big risks are lionized by their peers. (…)

A 2023 academic study found that many individuals overpay for trades in the options market and end up with losses, particularly around events like earnings. Many investors haven’t timed crypto particularly well, either. New users flocked to crypto around the time prices peaked in 2021, for example, and some were left with giant losses in the subsequent tumble.

After the 2021 GameStop saga, the Securities and Exchange Commission has sought to curb what regulators see as the gamification of trading by proposing guardrails on trading apps. The initiatives so far have met heavy opposition from the brokerage industry and Capitol Hill. (…)

Like Bob Farrell said: “Bull markets are more fun than bear markets.”

He also said:

• Markets tend to return to the mean over time.
• Excesses in one direction will lead to an opposite excess in the other direction.
• There are no new eras – excesses are never permanent.
• The public buys the most at the top and the least at the bottom.
• Fear and greed are stronger than long-term resolve.

U.S. SERVICES PMIs

S&P Global: Sharp rise in business activity as new orders return to growth

The seasonally adjusted S&P Global US Services PMI^® Business Activity Index rose to a one-year high of 54.8 in May, up sharply from a reading of 51.3 in April. The index pointed to a marked expansion of services activity during the month. Output has now increased in each of the past 16 months.

The increase in business activity reflected a renewed expansion of new orders, which rose modestly in May following a first reduction in six months during April. Some respondents to the survey indicated that marketing activity had helped them to secure new business, while others pointed to improvements in economic conditions.

In contrast to the picture for overall new business, however, new export orders decreased for the fourth month running in May. Panellists reported that price rises had impacted external demand. Moreover, the pace of decline was solid and the fastest since January 2023.

Despite the pick-up in total new orders, service providers continued to lower their staffing levels in May, the second month running in which this has been the case. The drop in workforce numbers often reflected the non-replacement of leavers. The pace of job cuts was only slight, however, and weaker than that seen in April as some firms looked to hire staff in response to renewed growth of new orders.

Companies were still able to keep on top of workloads, as shown by a fourth consecutive fall in backlogs of work. That said, the latest reduction in outstanding business was only marginal and the weakest in the current sequence as higher new orders imparted some pressure on capacity.

While employment decreased further in May, higher staff costs were again the key factor behind a sharp rise in overall input prices as wages were increased. The pace of input cost inflation quickened from April and was sharper than the pre-pandemic average. Panellists also reported higher shipping costs.

Likewise, a faster increase in selling prices was recorded in May. Firms raised their charges at a solid pace, extending the current sequence of inflation to four years.

Signs of demand improving was a factor behind a slight strengthening of business confidence, which nonetheless remained softer than the series average. Other factors set to support growth of business activity over the coming year are planned marketing efforts, plus hopes for a softening of inflation and reduction in interest rates.

Looking at business trends across the combined manufacturing and service sectors, the S&P Global US Composite PMI Output Index* rose to 54.5 in May, up sharply from 51.3 in April. The index signaled a marked monthly increase in business activity, and one that was the strongest since April 2022. Growth accelerated across both the manufacturing and service sectors.

Companies increased output amid a renewed rise in new orders, following a slight fall in April. New export business also expanded, albeit marginally.

Meanwhile, employment was broadly unchanged as a solid increase in manufacturing was cancelled out by lower staffing levels in services.

Input costs continued to rise sharply,with the rate of inflation quickening in May. Selling price inflation also accelerated.

Finally, business confidence improved slightly from the previous month as companies remained optimistic that output will increase over the coming year.

Andrew Harker, Economics Director at S&P Global Market Intelligence, said:

“A return to growth of new business following April’s blip supported a marked strengthening of growth in the US service sector in May. Coming on the back of a similar acceleration in the manufacturing sector, the data suggest a healthy pace of expansion in the US private sector approaching the midway point of the year.

“It was not all positive in May, however, with services employment down for the second month running as firms wait to see whether the renewed rise in new business will be sustained before committing to new hires.

“Despite lower employment, wage pressures remained a key factor pushing up input costs, which increased sharply again in May and prompted a faster increase in selling prices, providing further evidence that inflation remains sticky.”

ISM:

In May, the Services PMI^® registered 53.8 percent, 4.4 percentage points higher than April’s reading of 49.4 percent. The contraction in April ended a string of 15 months of services sector growth following a composite index reading of 49 percent in December 2022; the last contraction before that was in May 2020 (45.4 percent).

• The Business Activity Index registered 61.2 percent in May, which is 10.3 percentage points higher than the 50.9 percent recorded in April.
• The New Orders Index expanded in May for the 17th consecutive month after contracting in December 2022 for the first time since May 2020; the figure of 54.1 percent is 1.9 percentage points higher than the April reading of 52.2 percent.
• The Employment Index contracted for the fifth time in six months, though at a slower rate in May with a reading of 47.1 percent, a 1.2-percentage point increase compared to the 45.9 percent recorded in April.
• The Prices Index registered 58.1 percent in May, a 1.1-percentage point decrease from April’s reading of 59.2 percent. Wells Fargo notes that “not one of the 18 industries included in this release reported decreasing prices paid for the second consecutive month.”
• Thirteen [of 18] industries reported growth in May.

This Wells Fargo chart shows that the ISM Services index remains historically low, unlike S&P Global’s.

Demand for services was strong in May after being softish January to April. Both surveys note weak employment however. ISM respondents indicate weak retail/wholesale demand.

Both surveys signal continued wage and overall inflation pressures.

Canada Services PMI: Return to modest growth signalled in May

Underpinned by a rise in new business, Canada’s services economy experienced an increase in activity during May for the first time in a year. Modest growth encouraged staff recruitment in some cases, enabling firms to keep on top of workloads. Cost pressures remained significant, however, amid reports of higher salaries being awarded. Firms passed on these increased operating expenses wherever possible.

Bank of Canada Cuts Rates to Become First G-7 Central Bank to Ease Policy Gov. Tiff Macklem signals more cuts are possible as inflation cools

Canada’s central bank said a cut was warranted because officials are now increasingly confident that inflation is moving closer to their 2% target. Bank of Canada Gov. Tiff Macklem said more rate cuts could be in the offing should inflation show further signs of slowing, though he added the pace of reductions would likely be gradual. He also warned households, businesses and governments that rates are unlikely to return to pre-pandemic levels. (…)

The latest data for April estimated prices in Canada rose from a year ago by 2.7%—or the fourth straight month it was below 3%, which is the upper end of the central bank’s inflation-targeting range. The average of the Bank of Canada’s preferred measures of core inflation, which strips out volatile items like food and energy, cooled in May to 2.75%—the lowest level in nearly three years. Furthermore, Macklem said, the proportion of components in Canada’s consumer-price index basket that rose more than 3% is now closer to historical average.

“This all means restrictive monetary policy is working to relieve price pressures,” he said.

The Bank of Canada lowered its target for the overnight rate to 4.75% from 5%, where it sat for 11 months. Over a 16-month period ended last July, the Bank of Canada delivered 4.75 percentage points of rate increases to pull inflation down from a June 2022 peak of 8.1%. The sharp rise in interest rates has hit harder in Canada relative to the U.S., in part because of the country’s elevated household and corporate debt levels and its reliance on housing to drive growth. (…)

First-quarter gross domestic product in Canada rose 1.7% annualized, well below the central bank’s forecast of 2.8% growth, and inched up 0.5% from a year earlier. Per capita GDP has declined in six of the past seven quarters. Meanwhile, the unemployment rate sits at a 27-month high, and job vacancies have fallen to their lowest level in over three years. (…)

Bank of Canada’s Pivot Opens Path for Others to Diverge From Fed

Macklem made it clear that Canada’s interest rate policy doesn’t need to move in lockstep with that of its southern neighbor, despite the potential for downward pressure on the loonie. It was a bold signal that divergence in rates isn’t a huge concern for one of the largest US trading partners.

More central banks are weighing rate cuts, even as the Federal Reserve likely won’t start easing until later this year — if it cuts at all. The European Central Bank is expected to lower borrowing costs Thursday, while the Swiss National Bank and Sweden’s Riksbank have already pivoted to easier policy. (…)

• “The overall message from today’s statement and press conference was more dovish than we expected. While we continue to forecast cuts in September and December (for an additional 50bp of easing in 2024), we see a July cut as a clear possibility if upcoming inflation prints are in line with the recent trend.” (Goldman Sachs)

MONEY FLOWS…

Goldman Sees ‘Wall of Money’ Fueling Stock Market’s Summer Party Passive inflows, early July strength set up continuing rally

A flood of cash from passive equity allocations will pour into the stock market in early July, setting up a continuing rally through the early summer, according to Goldman Sachs Group Inc.’s trading desk.

“New quarter (Q3), new half year (2H), this is when a wall of money comes into the equity market quickly,” Scott Rubner, Goldman’s global markets division managing director and tactical specialist, wrote in a note to clients Wednesday.

In addition, share prices should benefit from strong seasonal trends and rising engagement from retail investors. “I am seeing a re-emergence in retail traders during the summer, they tend to come around in July,” he wrote.

Since 1928, the first 15 days of July have been the best two-week trading period of the year for equities, and they tend to fade after July 17, according to Rubner. (…)

By Rubner’s calculations, roughly nine basis points of new capital gets put to work every July. For this year, that would be $26 billion based on $29 trillion in passive assets available for investment. (…)

But it’s a one-way flow:

• “Investors who think today’s #stock market is somehow vastly different from 1999/2000’s #bubble simply aren’t paying attention.” (RBA)

• Bear markets are rising in big tech

(…) One metric that can’t be explained away is the number of stocks in bear markets. We use the common definition of a 20% drawdown from the most recent 52-week high as a bear market.

Oddly, more and more NDX stocks are falling into that definition. This is a change from the initial phase of the rally and is quite similar to the rally in the fall of 2021, when the index rose while more of its stocks fell into bear markets.

Over the past 25 years, there have been more than 100 trading days when a divergence like this has been in effect. These are days when the NDX closed at a 52-week high, yet at least 13% more stocks fell into bear markets than the lowest level over the past year. In other words, the index was rising, but more and more stocks were off more than 20% from their highs. (…)

Warning signs have been building in recent weeks, particularly on the Nasdaq and, even more notably, among the tech stocks in the Nasdaq 100. The index has been doing just fine, but participation is lagging badly. These conditions can persist for weeks or even months, but forward returns over the medium term tend to be weak by the time they’ve reached the current levels. (…)

BTW: US antitrust enforcer says ‘urgent’ scrutiny needed over Big Tech’s control of AI Jonathan Kanter pushes for ‘meaningful intervention’ over concentration of power in artificial intelligence sector