Will Rising Wages in China Have Impact on Prices in the U.S.?

Prices in US5/9/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

U.S. stocks opened flat this morning while commodities, after last week’s selloff, are staging a solid recovery.  Earnings reports are unlikely to provide a catalyst for stocks – in either direction – with roughly 90% of the reports in the books.  As such, macro news will garner much of investors’ attention this week, including inflation data, retail sales, and the ongoing budget battle in Washington.  Overseas markets are mostly lower with European stocks down on lingering sovereign debt concerns while the nuclear crisis continues to weigh on the Nikkei.  Bucking the trend is the Hang Seng, which closed nearly 1% higher.  Led by last week’s biggest losers, namely silver and oil, commodities are solidly higher this morning.  Oil is making a run at returning to the century mark while gold is back over $1500.

Looking back at Friday, stocks gained some ground after a better-than-expected monthly jobs report, with well over 200,000 jobs added in March.  An early rally faded later in the session on renewed Greece sovereign debt concerns and seemingly unfounded speculations that the country was looking to exit the euro zone.  In terms of sectors, oil prices continued their slide, boosting Industrials by nearly 1%, but limiting the Energy sector’s advance.  Lower energy prices did not help retailers, which fell about a half percent and caused Consumer Discretionary to end the session flat.  A weak euro propped up the dollar, which gained nearly 3% last week.  For last week in total, the resource sectors dragged the S&P down by 1.7%, but the index is still up over 7% for the year.  Commodities sold off sharply across the board, led by silver and oil, which lost about 27% and 14%, respectively.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. So, why the disappointment in commodities last week? There are several factors that drove last week’s reaction.  Commodities had run up sharply, setting the stage for volatility to the downside.  As a catalyst to the pullback, margin requirements were hiked.  The minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures was increased to $21,600 a contract up from $11,745 two weeks ago.  The sharp increase required investors to deposit 84% more cash to support their positions or sharply reduce their holdings of contracts.  The new margin requirements take effect today, Monday, May 9th.  As fuel to the selling, economic data disappointed until Friday’s job report, which led to a halt in commodities declines.  Notably, the non-manufacturing ISM index, the ADP payroll report, and most importantly, initial jobless claims were all worse than expected.
  2. Inflation reports are likely to dominate this week. Reports on April inflation are “front and center” on this week’s economic calendar, but China’s possible rate hike is also on the market’s radar.  The April jobs report was solid (but not spectacular), but it’s still going to be a long climb back for the labor market.  The output gap (the difference between actual gross domestic product and potential gross domestic product) is one of the key metrics the Fed will use as it gauges when to remove the unprecedented monetary policy stimulus from the system.
  3. Strong corporate revenues have been a pleasant surprise. As another solid earnings season comes to an end, the revenue upside is striking.  At almost 2%, the aggregate top line upside surprise is the best of the current economic expansion.  While a currency lift is part of the story, as is strength in Emerging Markets, the strength has been broad-based across the resources as well as industrial and consumer cyclicals.  Despite the strong results, the guidance has not been good enough to lift profit expectations for the balance of the year.
  4. Will rising wages in China have impact on prices in the United States? China has been giving up low end manufacturing business to Vietnam, Cambodia and other nations as they seek to provide higher value goods and services to afford a better standard of living.  As the U.S. shifts where it sources low value-added products, overall U.S. prices may not be materially affected.  With 80% of the world’s population in emerging markets, there is a tremendous amount of cheap labor.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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