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Morning Report: Small Business Optimism Improves


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Stocks are higher this morning despite some more hawkish Fed-speak yesterday. Bonds and MBS are up, with the 10 year yield back below 4%. Markets are awaiting the CPI print tomorrow.

Germany reported that inflation rose to 6.4% in June, which highlights the fact that Europe still has a big inflation problem. Overall Euro inflation is 5.5%, while the UK has a big problem with inflation at 8.7%. Global sovereign bond yields do correlate, so high inflation in Europe will have a lifting effect on US bond yields, just through correlation.

China’s inflation rate officially hit 0%, and that is the wild card in this whole scenario. China has a real estate bubble of epic proportions, and once they burst they generally emit a massive deflationary pulse. Countries going through this generally devalue the currency and then try and export their way out of it. This would work to push global inflation lower.

Small Business Optimism increased in June, according to the NFIB Small Business Optimism Survey. The outlook has improved, however this is still the 18th month below the historical average. Importantly, the number of small businesses raising prices fell to the lowest level since March 2021. This is still inflationary, however the trend is moving lower.

Earnings trends and employment are trending lower, but the outlook is becoming less dour. People are still wondering why we haven’t hit a recession yet and why the labor market remains as strong as it is. Overall small business optimism is back at levels associated with the bad old days of 2008 – 2013, however the actual data points (employment, consumer spending, credit availability) are still strong.

Part of the issue with optimism may be that business in general might start having margin pressures, caused by rising costs but stabilizing prices. Margin data will be one of the big questions going into earnings season which starts on Friday.

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