By now you and numerous others have had a chance to digest Apple's (AAPL) World Wide Developer Conference, which focused on software and apps. If you were expecting new hardware announcements for the iPhone or iPad, or even new hardware as in an iWatch or something else, well, you were probably disappointed.
Apple shares traded lower on the news, which simply reflects the over-hyped expectations the Internet rumor mill puts on Apple events. Buried alongside that news, chip company Broadcom (BRCM) announced it was exiting the cellular baseband business -- with a paltry 4% market share, the company has more fruitful areas to invest in. The beneficiary of that exit, which follows similar moves by Texas Instruments (TXI) and Freescale (FSL) is Qualcomm (QCOM) (which is a core holding in the Thematic Growth Portfolio).
Mobile and connected devices aside, several data points point to a firming manufacturing economy both here and in China. On the domestic front, the twice revised ISM Manufacturing Report for May showed month-over-month improvement for production as well as orders. This is good news for industrial led companies such as General Electric (GE), Parker Hannifin (PH), Eaton (ETN) and others.
May auto sales were also stronger than expected -- General Motors (GM), Chrysler and Ford (F) reported month-over-month increases. Better-than-expected production levels in the month augur well for component suppliers such as TRW Automotive (TRW) as well as chip-and-sensor companies including Freescale and Measurement Specialties (MEAS). Also this week, we also received rear-view mirror confirmation on the economy in the April Factory Orders report from the Census Bureau.
One somewhat negative thing to note from the May ISM Manufacturing Report as well as the May Markit Economics PMI report was the upward move in input prices. I have discussed similar moves in food inputs and at the pump gas prices. This week, AAA will share its 2014 summer gas price forecast, which is calling for national average prices in the range of $3.55 to $3.70 a gallon up from $3.47 to $3.67 per gallon last year.
These latest reports from Markit and ISM indicate more widespread inflation could be on the way. That means forthcoming PPI and CPI reports bear watching to see if companies are looking to pass on these price increases or if they will attempt to muddle their way through with productivity improvements and other cost savings initiatives.
While core CPI stood at 1.6% at the end of 2013, it has since accelerated to a 2.3% annual rate over the three months ending in April. Already Chipotle (CMG), McDonald's (MCD) and Sonic (SONC) have announced price increases, and, if this becomes a trend, it could weigh on revenues if wages don't pick up. If we don't see any upward movement in wages, it could mean a very rough summer for casual dining restaurants, including like Darden (DRI) and Bloomin' Brands (BLMN) and their share prices. Inflationary pressures appear to be largely showing up in unit labor costs, which rose at a 5.7% annual rate in the first quarter. Keep in mind that the yield on the 10-year U.S. Treasury note now offers investors no real rate protection.
While we are seeing upward pressure in unit labor costs, the employment situation continues to be troubling. Friday brings us the latest on the wage front with the May employment report. Even though housing activity has picked up, the May ISM Manufacturing report revealed a drop in May employment while the Markit Economics Report suggested flat employment, month-over-month. That was corroborated by the month-over-month dip in ADP's findings that the private sector added 179,000 jobs in May down from 220,000 in April; the May figure was well below the consensus expectation of 215,000 jobs.
Conflicting with this, Gallup's payroll-to-population figure for May rose 1.1% to 44.5% and compares to 42.7% in March. That bump could reflect better employment in the services sector -- the May Non-Manufacturing ISM Report climbed in most key metrics, month-over-month, including employment.
While Wall Street will be watching the headline jobs creation number, the more important indicators to watch will be wages and the labor force participation rate. Remember, so far, the main driver in the unemployment rate drop has been the greater number of people falling out of the labor force than the actual number of jobs created. A truly better-than-expected May employment report would show stronger job creation with a better mix toward higher paying jobs, an uptick in labor force participation and weekly wage growth.
