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Fed will likely see economy at full employment

The U.S. economy added 211,000 in April as hiring rebounded following a tepid 79,000-job gain in March. The April additions were enough to bring the unemployment rate down to 4.4 percent.

While the market will celebrate the topline gain, the most important development in this report was buried in the details, which showed that those facing involuntary part time employment for economic reasons declined to 5.27 million, below the long-term average of 5.4 million. This will not be lost on policymakers at the U.S. Federal Reserve who at this point are likely moving toward a judgment call that the U.S. economy is now at or below full employment.

Meanwhile, market participants will probably interpret this data as a reason to pass the tacos and tequila later today as they celebrate the Cinco de Mayo commercial holiday in the U.S. It would be wise not to over imbibe as the central bank may soon pull away the sangria. The April estimate of employment affirmed the Fed’s recent decision to look past the slowdown in first quarter growth, and the underlying detail in the jobs report, as well as the diffusion in hiring, all point toward a 25-basis point rate increase in June, with an additional 25 basis points later this year. We have made the case that if growth, like the April jobs data, rebounds or even accelerate, the central bank may even choose to add a third 25 basis point rate increase to the two it is already forecasting.

Capex, a continued bright spot, may be ready to pick up the slack

Growth slowed noticeably during the first quarter due to a combination of residual seasonality, a sharp downturn in non-farm inventory building, warmer winter weather that damped utility demand and rising inflation. The result was a meager 0.7 percent increase in gross domestic product (GDP) and a weak 0.3 percent increase in overall consumption. Even so, the details of the report look a bit stronger than the headline increase, with growth on a year-ago basis up 1.9 percent. Meanwhile, real final sales increased 1.6 percent and final sales to private domestic purchasers climbed 2.2 percent.

The policy implications of the GDP report are twofold: first, the Federal Reserve will likely look right past this data, comfortable that the underlying details and bump in inflation is aligned with their forward-looking forecast for additional interest rate increases this year. Second, the Trump administration and Congress will likely view this as evidence that, absent comprehensive tax reform and infrastructure development, the economy will continue to chug along at a sub-2 percent pace for growth. While we forecasted a rebound to near 2.5 percent growth in the current quarter, there is a growing imbalance between investor and business expectations (the so-called soft data, which reflects sentiment) for growth, and hard data, which points to sluggish economic activity.

The bottom line is that if tax reform and clarity on infrastructure investment isn’t forthcoming this year, one should expect a reduction in risk appetites across the real economy and asset markets. That alone should get the attention of policymakers in D.C.  

Consumption details in the report were somewhat bleak. Demand for utilities waned, resulting in an abysmal 0.4 percent increase in outlays on services, well below the 2.5 percent average over the previous four quarters. While utilities account for about 5 percent of total service demand, seasonal shifts in demand can exert powerful swings from quarter to quarter inside the GDP estimate. And, slowing non-durable demand to 1.5 percent was definitely influenced by the 20 percent year-over-year increase in the price of retail gasoline. Regardless, the aforementioned declines should reverse in the current quarter back toward the long-term trend.

A bit more concerning is the decline of 2.5 percent in durable goods. This is undoubtedly a function of the auto sector seeing the impact of tightening credit conditions and damped consumer purchasing after a multi-year period of robust demand. That said, the sustained increases being seen in job creation and wages should support a return to form, which has resulted in a 3 percent increase in overall spending over the past three years.

During the first quarter, disposable personal income increased $121.0 billion, or 3.4 percent, compared with an increase of $141.6 billion, or 4.1 percent, in the fourth quarter of last year. Real disposable personal income increased 1.0 percent, compared with an increase of 2.0 percent during the previous quarter.

The silver lining in the data was the sustained improvement, albeit at a slower pace, of gross private investment to near 4.3 percent. Fixed investment climbed 10.4 percent, and residential investment expanded by 9.4 percent. Outlays on structures increased 22.1 percent, equipment 9.1 percent and intellectual property advanced 2 percent. Residential investment improved by 13.7 percent. We expect these gains in overall capital expenditures to be sustained in the current quarter, an improvement over the sluggish capex seen so far throughout this business cycle. Moreover, the most recent quarter’s RSM US Middle Market Business Index indicated that, at least among middle market businesses, there is continued scope for increasing capex six months ahead.  

The March nonfarm payrolls estimate of 98,000 new jobs created reflected both seasonal noise and a slowing of overall business activity during the month. Hiring averaged 190,000 during the first quarter of 2017, which is in line with the 187,000 average per month during 2016. So apart from payback for two strong months of hiring in goods producing industries and the seasonal noise in trade, transport and retail, the longer-term trend in hiring remains on track.

While the monthly estimate indicated hiring slowed, the unemployment rate declined to 4.5 percent on the back of an increase of 472,000 in the household survey. For the change to be statistically significant, it has to be +/- 500,000, so it is highly likely that this will not impress policymakers at the Federal Reservce enough to increase the pace of policy normalization. The bottom line for the March employment estimate is that it was more noise than signal.

Aggregate hours worked increased to 106.4 and are up 0.8 percent on a three-month average annualized pace. This bodes well for income gains to close out the quarter. Average hourly earnings increased 2.7 percent on a year-ago basis. The labor force participation rate held firm at 63 percent and the employment ratio improved to 60.1 percent.

Salesforce.com (CRM) Information Technology - Software | Reports February 28, After Market Closes

Key Takeaways

The Estimize consensus is calling for earnings per share of 26 cents on $2.28 billion, 1 cent higher than Wall Street on the bottom line and right in line on the top

Despite failing to make a splashy acquisition, Salesforce continues to astound investors with steadily improving financial performance

Salesforce posted 8 consecutive quarters of 20% growth on the top line and expects to extend that streak with tomorrow’s report

What are you expecting for CRM? Get your estimate in here!

Salesforce prepare to announce fiscal fourth quarter results tomorrow after the closing bell. Expectations for the report remains in line with past performance, suggesting Salesforce should continue growing at a relatively rapid clip. Analysts at Estimize expect earnings of 26 cents per share, a 36% increase from a year earlier. That estimate increased by 3% in the past 3 months on wider adoption of the company’s cloud based solutions. Revenue for the period is forecasted to increase 25% to $2.29 billion, marking 8 consecutive quarters of over 20% growth.

After a rough start to the year the stock started to turn its fortunes, jumping by 10% in the final 3 months of the year. On average, investors can expect shares to jump 3% immediately through the print but then flattens out in the next 30 days. Last quarter Salesforce maintained its extended climb on sustained demand for new and pre existing cloud based products. Revenue jumped 25% on a 24% increase in subscription and support revenue as well as a nearly 40% rise in professional services and other sales. Along with robust report, management raised guidance for fiscal 2017. Revenue is projected to increase 25% to 26% in 2017 to the range of $8.37 to $8.38 billion.  

Salesforce failed to make a splashy acquisition in 2016 while Microsoft secured the coveted services of Linkedin. Investors believe that Salesforce will start to lose ground to Microsoft as it integrates the professional network into its namesake CRM products. But often times analysts fail to acknowledge that Salesforce’s other acquisitions have been largely successful in recent years.  Considering adoption rates and demand aren’t having a detrimental impact on financial performance, Salesforce growth strategy seems to be working effectively

On the other hand, increased competition and weak currency translation remain near term headwinds that potentially negatively impact earnings growth. Oracle and now Microsoft could potentially hamper long term prospects if its native products gain traction. Currency fluctuations, as its does with other multinationals, takes toll on international operations and sales growth. Do you think CRM can beat estimates? There is still time to get your estimate in here!

The private sector kicked off 2017 by hiring 237,000 new employees in January amid an environment of improved risk-taking. Expectations of regulatory rollbacks, possible tax cuts and a fiscal boost via infrastructure during the next two years unleashed what John Maynard Keynes referred to as ‘animal spirits’ in the economy, the collective emotion that drives economic confidence, something that’s been largely missing in the recovery from the Great Recession.

The hawks at the Federal Reserve will surely take notice of this acceleration in hiring and the underlying momentum in wages across the economy. While we don’t anticipate this data will put a March rate hike on the table, there is a strong possibility that investors may see 100 basis points of rate increases this year given the likely fiscal and regulatory changes that are coming. The Fed’s current forecast is for 75 basis points in rate hikes.

The jobs report showed strong jobs gains virtually across the board even as government hiring created a drag of 10,000 jobs. The result was a net gain of 227,000. One of the more encouraging aspects of the report was that monthly hiring increased above the three-month, six-month and 12-month moving averages, which suggests room for improvement in coming months. This mirrors our own RSM US Middle Market Business Index forward-looking data, which implied a strong pace of hiring and wage gains during the first quarter of 2017.

The unemployment rate ticked up to 4.8 percent due to 813,000 individuals re-entering the workforce in January. The long-term number of unemployed remained unchanged at around 1.9 million and accounted for 24.4 percent of the workforce, one of the better months since the end of the recession in 2009.

The detail in the report was strong across the board with 58.8 percent of all industries reporting a gain in hiring. The strongest gains were located in goods producing, trade, and transport and retail trade, all of which added more than 40,000 jobs on the month. Construction and manufacturing added 36,000 and 5,000 jobs, respectively, with financial, business services, education, health, leisure and hospitality all showing strength on the month.

This week’s Federal Reserve Open Market Committee meeting should largely be a status quo affair, with only modest adjustments to the outlook for private fixed income investment based on recent improvement. There is little appetite on the committee to pull forward rate hikes into the first half of the year. With the policy statement phrase, “gradual increases,” likely to remain unchanged, this indicates the Fed’s current policy rate path should remain stable. We anticipate no dissents on the statement.

The forward-looking guidance on interest rates will likely point to three rate hikes, clustered in the second half of the year. Meanwhile, the Fed will probably maintain that the risks to the economic outlook are balanced, offering little public speculation on the effects on labor supply of fiscal policy and regulation going forward. Looking into our hazy crystal ball, however, we suspect that five years from now, when we get a look at the complete minutes of this meeting, the comments by FOMC members on the path of immigration policy will show some concern over negative supply shocks in the labor market in the coming months and years.

Given that there isn’t a Fed forecast update or press conference associated with this meeting, the portion of the policy statement that focuses on the economy will probably reaffirm that that growth is likely to remain on a moderate path. We think the committee will look past the soft top-line first estimate of fourth-quarter gross domestic product (GDP) and that the outlook for job growth and unemployment to remain solid.

The minutes for this meeting, which will be released in mid-February, may be somewhat more interesting than the policy statement, particularly regarding the pace of wage growth, which picked up noticeably in the final quarter of the year. It surely did not go unnoticed on the committee that average hourly earnings increased 4.7 percent at a three-month average annualized pace to close out the year. This may provide fodder for the hawks on the committee to, over the course of this year, modestly alter the language on inflation and the risk it poses to the economy

Microsoft Corporation (MSFT) Information Technology - Software | Reports January 25, After Market Closes

Key Takeaways

The Estimize consensus is calling for earnings per share of 81 cents on $25.37 billion, 2 center higher than Wall Street on the bottom line and $160 million on the top

Clouding computing and Productivity business remain two strong points while personal computing continues to slide

Investors expect that integrating LinkedIn with Azure and other CRM products to boost sales and capture greater market share

What are you expecting for MSFT? Get your estimate in here!

Microsoft operating systems power personal computers, but its cloud computing that now drives financial performance. After multiple years of sluggish PC demand, Microsoft made a complete 180 and began focusing on the rapidly growing cloud sector. The company’s native Azure platform now sits firmly atop the cloud computing space, just behind Amazon Web Services. Investors remain optimistic that Microsoft can build on its recent success as Azure captures more market share and reaches a wider audience. Meanwhile, the upcoming Trump administration and completion of the Linkedin deal add a new layer of interest ahead of the company’s fiscal second quarter.

Analysts forecast earnings to climb 3% to 81 cents per share, according to the Estimize consensus data. That estimate increased by 2% since Microsoft’s most recent report 3 months ago. Revenue for the period is expected to decline by 1% to $25.34 billion, marking negative comps for the first time in a year. In the past 6 months shares have increased by 12% and historically make an additional 1% jump through the print. Microsoft faces a delicate balancing act between its booming cloud business and struggling personal computing. In the first quarter revenue from cloud computing, consisting of server products, Azure and enterprise services, grew 8% to $6.4 billion. Azure, in particular, grew 116% with usage nearly doubling from a year earlier. Productivity business, which mainly comprises Office and Office 365, jumped up 6% to $6.7 billion, with Office 365 subscribers reaching nearly 24 billion. As expected, Personal computing declined 2% on a 72% decline in phone sales and 5% in gaming.

Investors expect that integrating Linkedin with Azure and other CRM products can continue to boost sales and usage. The move aims to capture Salesforce user base of sales and marketing professionals that could benefit from an all in one platform.

Microsoft's growth strategy doesn’t stop at just cloud computing. Through several acquisitions the company aims to break ground in the fast emerging Internet of Things and Artificial Intelligence markets. Touching multiple fast growing markets can help offset the ongoing losses in personal computing.

Of course a few headwinds stand in Microsoft's way for another strong report. Weak FX translation along with macroeconomic volatility put international operations at risk for a down quarter. Additional uncertainty surrounding President Trump and his forthcoming policies create new risks for companies like Microsoft. Do you think MSFT can beat estimates? There is still time to get your estimate in here!