Financial Review

G19

Sinclair Noe — July 6, 2017

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DOW – 158 = 21,320
SPX – 22 = 2409
NAS – 61 = 6089
RUT – 19 = 1400
10 Y + .04 = 2.37
OIL + .16 = 45.29
GOLD – 1.70 = 1226.00
BITCOIN +0.08% = 2621.33 USD
ETHEREUM – 1.30% = 265.59

The G20 Summit is underway in Hamburg Germany.

China’s President Xi Jinping and German Chancellor Angela Merkel pledged to work together more closely on a range of issues. Japan and the European Union agreed a free trade pact to create the world’s biggest open economic area and signal resistance to what they see as President Trump’s protectionist turn.

German chancellor Merkel, who is hosting the summit, wants to unite world leaders on environmental goals, but will be careful not to mention the words “climate change” around the US president. Japanese Prime Minister Shinzo Abe urged the G20 states to continue working together on climate protection, after Trump pulled the United States out of the 2015 Paris agreement on climate change policy.

France announced it will end the sale of gasoline and diesel vehicles by 2040 and become carbon neutral 10 years later. Earlier today, Trump delivered a speech in Warsaw before heading to the summit. Tomorrow, Trump meets with Russian President Putin.

The G20 is the G19 this year. Brazil is absent. Brazilian President Michele Temer faces criminal corruption charges. Meanwhile, protesters are capturing the spotlight. There are 20,000 riot police in Hamburg; six times more protesters. What are they protesting? Well, it’s a mixed bag of issues but it seems to include globalization, a lack of action on climate change, war, inequality, refugees, and authoritarianism in general.

Germany, the host of the G19, saw its bond yields climb to the highest levels in 18 months. The yield on German 10-year bunds rose nine basis points to 0.56 percent; part of a drop in global government bonds that spread to the US and pushed the yield on 10-year Treasury notes to the highest level since May.

Bonds across Europe fell after the results of a French debt auction showed a drop in excess demand for 30-year securities. Trading volumes in bund futures contracts jumped after the auction results were announced, sparking the surge in yields. The Stoxx Europe 600 Index fell 0.7 percent as bond yields rose, bringing its decline since mid-May to about 4 percent. Eurozone stocks were hot a couple of months ago, now, not so much.

Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are rushing for the exit. DoubleLine Capital Chief Executive Officer Jeffrey Gundlach says the recent selloff is a sign of more pain to come for Treasury bulls.

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Tomorrow we will receive the Labor Department’s monthly non-farm payroll report. Today we had a sampling of predictive data.

The ADP National Employment Report showed private sector payrolls increased by 158,000 jobs last month, stepping down from the 230,000 positions created in May and below expectations for a gain of 185,000.

While the ADP report has a spotty record predicting non-farm payrolls, June’s modest job gains together with the modest rise in first-time applications for jobless benefits and cooling services sector employment pose a downside risk to the government’s June jobs report.

Last month, for example, ADP recorded 253,000 private-sector job gains while the Labor Department tallied just 147,000 private jobs and 138,000 total additions, after subtracting out government job losses.

Outplacement consultancy firm Challenger, Gray & Christmas reports the number of planned layoffs fell in June to its lowest level of the year as employers opted to hold onto existing jobs in a tight labor market where skilled laborers are harder to find.

Meanwhile, initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 248,000 for the week ended July 1. It was the third straight weekly increase in claims. Still, it was the 122nd straight week that claims remained below 300,000, a threshold associated with a healthy labor market.

A report from the Institute for Supply Management showed its non-manufacturing sector index rose half a point to a reading of 57.4 in June. A reading above 50 indicates expansion in the vast services sector. Industries reported an increase in new orders, but said employment growth had slowed.

A report from the Commerce Department showed the trade deficit fell 2.3 percent to $46.5 billion in May. When adjusted for inflation, the trade deficit narrowed to $62.8 billion from $63.8 billion in April. Real goods exports surged to an all-time high in May, propelled by record high petroleum exports.

Still, the real trade deficit averaged $63.3 billion in April and May, above the first quarter’s average of $62.2 billion. That suggests trade will be a drag on gross domestic product in the second quarter after contributing 0.23 percentage point to the economy’s 1.4 percent annualized growth pace in the first three months of the year.

As the US economy enters its ninth year of expansion this month, many Americans feel the recovery has been incomplete — and the numbers back them up. Five states — Arizona, Connecticut, Mississippi, Nevada and Wyoming — still haven’t regained their levels of gross domestic product from before the financial crisis, more than five years after the country hit that milestone.

Arizona’s GDP is still 0.3% below the pre-recession peak. Home prices in Arizona are still almost 11% lower than 2007 levels. Eight states are below pre-recession levels of employment. And 15 have home prices that have yet to rebound fully.

Eighteen states and the District of Columbia sued the US Education Department and Secretary Betsy DeVos over the recent suspension of rules that would have swiftly canceled student-loan debt of people defrauded by Corinthian Colleges Inc and other for-profit schools.

The suits claim the department broke federal law in announcing the delay with limited public notice and opportunity to comment. They said the department and DeVos were using the pending litigation as “a mere pretext” to repeal the rules and replace them with one that “will remove or dilute student rights and protections.”

DeVos said she wanted to pause the acceleration of the debt cancellation process because it “puts taxpayers on the hook for significant costs.” She also said a delay was needed while current litigation in California over the rules, works its way through the legal system. Consumer groups Public Citizen and Project on Predatory Student Lending sued to remove the delay as well.

The Home Shopping Network is having a sale. The buyer is QVC, the shopping channel owned by Liberty Interactive is buying Home Shopping Network for $2.6 billion. A combined QVC-HSN ranks as the No. 6 U.S. online retailer ($7.5 billion eCommerce sale in 2016), dwarfed by Amazon ($123.8 billion). QVC and HSN will continue to operate as individual brands.

We’re waiting for an announce from Berkshire Hathaway. Berkshire Hathaway’s energy business is close to a deal to acquire Oncor, the electric-utility giant based in Texas. Oncor, one of the largest utility companies in the US, says it serves 10 million customers across Texas. It earned $935 million in operating revenues and $73 million in net income in the quarter ended March 31.

We just had a vote in Illinois. A financial showdown, more than two years in the making, went to a vote this afternoon in the Illinois House as Democrats enacted a $36 billion spending plan fueled by a 32 percent income tax increase over the Republican governor’s objection.

Votes to override Gov. Bruce Rauner’s vetoes of the budget package give Illinois its first annual budget since 2015 and spell the end of the nation’s longest fiscal stalemate since at least the Great Depression. The standoff entered a third fiscal year on July 1. Credit-rating houses had threatened to downgrade the state’s creditworthiness to “junk,” signaling to investors that buying state debt is a highly speculative venture.

Yesterday, Moody’s Investors Service, put Illinois under review for a downgrade even with the new budget. Moody’s said that while lawmakers have made progress, the House budget does not address the state’s massively underfunded pensions or do enough to pay down bills.

The resolution to the fiscal standoff, which emerged from the Democrat-led legislature over the last several days, triggered a rally in Illinois bond prices by signaling that elected leaders are beginning to tackle the government’s long-building financial strains. Without a full-year budget for the past two years, Illinois continued to run up deficits, leaving it with dwindling reserves, a record pile of unpaid bills and increasing obligations to its underfunded employee pension system.

Thirty-three of the 50 U.S. states reported revenues that came in below projections in fiscal year 2017, the highest number of states since the recession decimated budgets in 2010.

Microsoft announced a major reorganization that will include up to 3,000 layoffs, largely in sales. The job cuts amount to less than 10 percent of the company’s total sales force, and about 75 percent of them will be outside the US. Reports from last week suggested this was going to happen and that Microsoft was going to specifically focus on how it sells its cloud-services product, Azure, which has been booming in recent quarters.

Financial Review

Halftime

Sinclair Noe — June 30, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 62 = 21,349
SPX + 3 = 2423
NAS – 3 = 6140
RUT – 0.84 = 1415
10 Y + .03 = 2.30%
OIL + 1.40 = 46.33
GOLD – 4.20 = 1242.20
BITCOIN + 0.39% = 2509.80 USD
ETHEREUM – 6.64% = 279.09

I’m not sure we established a trading pattern this week. Down, up, down, up. We did see a return to volatility. The indexes saw big moves, much sound and fury amounting to very little. It might just be window dressing to finish out the quarter and heading into a long holiday weekend.

The markets will be open for a half day on Monday, but, this is the beginning of a long holiday weekend.

As we wrap up the second quarter and the first half of the year, let’s check where we stand.
For the month: the Dow gained 1.6%, the S&P gained 0.5%, the Nasdaq lost 0.9% for the month, and the Russell gained 3%.

For the second quarter: the Dow gained 3.3%, the S&P up 2.6%, the Nasdaq up 3.9%, and the Russell up 3.9%.

For the first half: the Dow is up 8%, the S&P up 8.2%, the Nasdaq up 14%, and the Russell up 6.1%.

So, the Nasdaq is the big winner so far, this year, but seemed to lose momentum in June. The S&P 500 recorded its biggest percentage first-half gain since climbing 12.6 percent in the first six months of 2013. The Nasdaq posted its biggest first-half gain since 2009.

Oil is down 14% from the start of the year and down 5% for the month of June. OPEC and certain other oil-producing countries agreed to extend their production cuts, originally set to expire at the end of June, by nine months (ending March 2018). They didn’t count on US shale producers ramping up production to fill the void.

The count of working oil rigs in the US fell this week for the first time in 24 weeks, breaking the record streak of increases. After several upward revisions, the International Energy Agency currently expects U.S. crude production to end the year 0.8 mmb/d higher than year-end 2016; although some traders are expecting closer to 1 mmb/d.

As such, the rapid U.S. shale growth in the back half of the year could meaningfully increase U.S. oil supply. Meanwhile, when OPEC cuts fall off in early 2018, look for the global oil glut to come roaring back.

The yield on the 10-year Treasury note has dropped 14 basis points from the start of the year, however the yield has been climbing in the past week or so, after hitting a low for the year at 2.13%.

This is still the most contrary move among major asset classes because the Federal Reserve has raised interest rates twice in the first half, and promises another cut in the second half plus plans to trim its balance sheet.

US 10-year yield has now moved above 200-day moving average, and broke the down trendline from March.

Second-quarter corporate results are set to begin in earnest in the coming weeks, with S&P 500 companies expected to post an 8-percent rise in earnings. Investors have been looking for earnings to support historically high valuations, with the S&P 500 trading at about 18 times earnings estimates for the next 12 months compared to the long-term average of 15 times.

We’re bumping right along the top end of historic valuation levels. It’s getting harder to find undervalued stocks with so much optimism factored into stock prices.

The U.S. dollar recovered slightly today, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further. The dollar index declined 4.6% in the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.

The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010.

In late May, we told you the Midwest experienced flooding that damaged corn and wheat crops. Since then, the northern Plains states have experienced a drought that left crops withering in the field. Spring wheat, traded on the Minneapolis Grain Exchange, has soared 32 percent in June. Spring wheat is a thinly traded commodity, but it was a big winner, especially considering futures contracts are leveraged, this was a killer trade.

As we wrap up the first half we are once again reminded that the heavyweight champion of traders is still Warren Buffett. Warren Buffett is set to pull in $12 billion in profits on a single deal with Bank of America. Buffett invested $5 billion in Bank of America in 2011. That move came at a critical time for Bank of America with the company trying to leave behind the financial crisis with its new CEO Brian Moynihan.

Buffett negotiated a favorable deal with the bank, due to his investment acting as a public vote of confidence in the company’s future. His $5 billion investment in preferred shares came with the option to convert those to common stock shares until 2021. The preferred shares paid $300 million annually in dividends.

Buffett’s common stock shares are currently worth about $17 billion, $12 billion more than the purchase price. Warren Buffett’s Berkshire Hathaway is now the biggest owner of two of the world’s largest banks: Bank of America and Wells Fargo.

Consumer spending rose modestly in May and inflation cooled, pointing to a slow-but-steady economic expansion. Consumer spending rose 0.1 percent last month. Consumer prices excluding food and energy rose 1.4 percent on a yearly basis, compared to a 1.5 percent gain in April.

The Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index fell 0.1 percent in May from April, dragged lower by drops in prices for consumer goods and energy. When food and energy were excluded, the index was up 0.1 percent.

The slowdown in inflation has boosted consumer spending power. After-tax personal income adjusted for inflation rose 0.6 percent in May, the largest gain since April 2015.

Even so, the University of Michigan’s consumer sentiment index fell to 95.1 this month, its lowest since November, according to a final reading for the gauge published today. The index has been rising steadily since 2008 and in November it hit its highest level since before the 2007-09 recession.

Senate Republicans still don’t have a healthcare deal. Senate Republicans headed home for a week-long recess without coming to an agreement on their bill, named the Better Care Reconciliation Act. This represents another delay for the Trump agenda.

Illinois is poised to enter its third straight fiscal year without a budget. The Illinois House adjourned on Friday, the last day of the budget year, without enacting a plan and will reconvene at 11 a.m. local time on Saturday. While negotiations continue, it signals the legislature will blow the midnight deadline and extend the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015.

Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status. The state of Illinois will be rated junk. Without a spending plan, the state has effectively been on autopilot, leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year.

The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wreaked havoc on universities, putting their accreditation at risk. If the standoff isn’t resolved, Illinois officials have said they won’t be able to pay contractors and road construction will shut down, putting thousands out of work.

The yields on the state’s bonds have risen as investors anticipate a downgrade. Without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses. That means school funding, state payroll, and pension payments could be affected. This won’t jeopardize debt-service payments. Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

President Trump says he is “sending in Federal help” to Chicago to help curb gun violence. The president tweeted early Friday that crime in Chicago has reached “epidemic proportions,” citing more than 1,700 shootings in the city so far, this year.

So, the Feds are sending in a strike force of 20 Alcohol, Tobacco, and Firearm, or ATF agents for what officials called a “laser focus” on the illegal trafficking of weapons. They join 41 ATF agents already in Chicago. The force will also focus on investigating and prosecuting repeat gun offenders. Don’t hold your breath.

This week saw a couple of important anniversaries. 20 years ago, the British handed over rule of Hong Kong to the Chinese. 10 years ago, the first iPhone was sold. Apple sold more than 50 million iPhones in the first three months of 2017 alone, bringing in $33.2 billion.

Drivers are set to pay the lowest Independence Day price for gasoline since 2005 — and for the first time on record, the Fourth of July holiday per-gallon cost will run below the price from New Year’s Day, according to GasBuddy.

Motorists on the road for the Fourth of July holiday weekend are expected to pay an average of $2.21 a gallon for gasoline, well below the 10-year average of $3.14. If you are driving, be careful out there, and have a great Independence Day.

Financial Review

Bounce Back

Sinclair Noe — June 28, 2017

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DOW + 143 = 21,454
SPX + 21 = 2440
NAS + 87 = 6234
RUT + 21 = 1425
10 Y + .02 = 2.22%
OIL + .54 = 44.78
GOLD + 2.10 = 1249.80
BITCOIN + 0.05% = 2585.84 USD
ETHEREUM + 3.73% = 314.34

Well, isn’t this familiar. The markets have a down day only to bounce back. The S&P 500 posted its largest one-day gain in two months while Nasdaq Composite recorded its best day in eight months. The S&P 500 has been somewhat fickle this month with three of this year’s biggest gains and two of its worst losses having occurred in June.

For the first time in seven years, the Federal Reserve did not object to any of the capital plans of 34 banks it reviewed in the second part of the annual stress tests implemented in the wake of the financial crisis.  Only Capital One Financial needed to submit a new capital plan by Dec. 28 to address “weaknesses in its capital planning process.”

Last Thursday, all 34 banks passed the Dodd-Frank Act Stress Tests for the third time by topping the Fed’s requirements for being able to handle a severe recession. Wednesday’s results from the Comprehensive Capital Analysis and Review, or CCAR, marked the first time since the test launched seven years ago that the Fed did not object to any of the banks’ capital plans.

The passing grade means banks can use extra capital for stock buybacks, dividends and other purposes beyond a cushion against possible catastrophe. And we are already hearing from big banks. Citigroup announced plans to repurchase up to $15.6 billion of common stock over the next 12 months and double its quarterly dividend to 32 cents per share, bringing total payouts to $18.9 billion.

Fewer buyers signed contracts to buy existing homes in May, likely because they can’t find or afford what they want. The pending home sales index from the National Association of Realtors dropped 0.8 percent month to month and is now 1.7 percent lower than May 2016.

The number of home sales that closed this spring was slightly higher than a year ago, but the lack of listings clearly held the market back. The supply of homes for sale at the end of May was down more than 8 percent from a year ago, and homes that were listed sold at the fastest rate on record. The tight supply is pushing home prices higher, considerably faster than income growth.

Low mortgage rates have not been much help in offsetting these big price gains, and in fact may be exacerbating the problem, especially if rates begin to rise as is widely expected. The inventory crisis is worst on the low end of the market, where demand is highest.

The number of starter and trade-up homes currently on the market is down 15.6 percent and 13 percent, respectively, compared with a year ago, according to Trulia. The inventory of premium homes has fallen 3.9 percent.

The supply situation has buyer confidence in the housing market dropping. Just over half of renters say they think now is a good time to buy. That is down from 62 percent one year ago. While about 80 percent of current homeowners think now is a good time to buy, they are not listing their homes for sale. This may have more to do with weakening affordability than anything else. They don’t want to sell if they can’t afford a move-up home.

Senate leadership has reportedly set a Friday deadline for a new draft of the Better Care Reconciliation Act. The Congressional Budget Office could score it next week, setting up a mid-July vote. The vote has been delayed, but the Senate’s repeal and replace efforts are far from over.

When it comes to public support, there’s room for improvement. Just 17 Percent of Americans approve of the Republican Senate Health Care Bill – that’s almost as low as the approval rating for Congress. Fifty-five percent say they disapprove, while about a quarter said they hadn’t heard enough about the proposal to have an opinion on it.

Yesterday, we told you about the new Petya cyber virus that started in Ukraine and was infecting computers around the globe. The malicious code locked machines and demanded victims post a ransom worth $300 in bitcoins or lose their data entirely, like the extortion tactic used in the global WannaCry ransomware attack in May.

Day 2 of the ransomware attack and the situation is getting worse. Danish shipping giant A.P. Moller-Maersk said it was struggling to process orders and shift cargoes, congesting some of the 76 ports around the world run by its APM Terminals subsidiary.

FedEx shares temporarily halted trading before the package delivery giant disclosed that an information system virus significantly affected the global operations of its TNT Express subsidiary. In a statement, FedEx said that while TNT’s operations and communications systems were disrupted, “no data breach is known to have occurred.” The company noted that operations of all other FedEx companies were unaffected. FedEx shares finished the day up 1.3%.

United Parcel Service will freeze a pension plan for about 70,000 nonunion U.S. employees because of escalating costs and volatility in determining future payments, replacing it with a different retirement benefit. UPS’s pension plans in the U.S. had a $9.85 billion shortfall at the end of last year, meaning they were about 76 percent funded. The shift won’t occur until Jan. 1, 2023, giving affected workers more than five years to prepare.

The US announced today it’s rolling out a set of new, largely undisclosed security measures targeting some 2,000 international flights arriving at American airports every day.  The new rules will apply to 180 airlines flying out of 280 airports in 105 countries, and could prompt additional screening time for the 325,000 airline passengers arriving in the United States daily.

The move aims to end a limited in-cabin ban on laptops and other large electronic devices and prevent its expansion to additional airports. Officials said that travelers can expect intensified screening at airports, in the form of sniffing dogs, or more screening equipment. Details are still sketchy, including when the new confidential rules will be put in place. Sometime in the short and medium term.

Blue Apron Holdings cut the expected price range for its initial public offering to $10 to $11 per share from its previous estimate of $15 to $17 per share after potential investors expressed concerns about Amazon’s Whole Foods deal as well as Blue Apron’s marketing costs and lack of profitability.

Blue Apron’s new pricing guidance gives the company a valuation of up to $2.08 billion, below both the $3.2 billion implied by its previous estimate and the $2.2 billion by its latest private fundraising round two years ago. Blue Apron is the biggest U.S. meal-kit company and the first set to go public.

Amazon already has a small meal-kit business, delivering ingredients and recipes to customers in a handful of cities, and the Whole Foods deal announced could provide a ready-made distribution system for food delivery in the form of brick-and-mortar grocery stores.

Dutch healthcare company Philips has agreed to buy U.S.-based Spectranetics for $2.1 billion including debt. Spectranetics uses techniques including lasers and tiny drug-covered balloons to clean the insides of veins and arteries that have become clogged due to heart disease.

Beef Products Inc has settled its defamation lawsuit against the ABC television network over news reports on its processed beef product known as “pink slime.” The settlement came 3-1/2 weeks after the trial in the case got under way. Terms of the settlement were not disclosed. ABC used the term “pink slime” more than 350 times across six different media platforms including TV and online. ABC said it is not retracting or apologizing for anything. Bon Appetit.

Facebook tops 2 billion users. CEO Mark Zuckerberg made the announcement on his personal Facebook page. Facebook now becomes the unofficial least exclusive club in the world.

Brazil’s federal police have halted issuing new passports on the eve of school vacations, citing insufficient funds. The federal police exhausted its budget for immigration control and travel documents and won’t be able to restore the service until additional funds are approved.

For the third year in a row, the state of Illinois is poised to begin its fiscal year on July 1 with no state budget and billions of dollars in the red. If that happens, S&P Global Ratings says Illinois will probably lose its ­investment-grade status and become the first U.S. state on record to have its general obligation debt rated as junk.

Illinois is already the worst-rated state at BBB-, S&P’s lowest investment-grade rating. The state owes at least $800 million in interest and late fees on its unpaid bills. Any further downgrade will make it more expensive the next time the state needs to sell bonds.

Two years ago, Illinois’s budget impasse meant that the state’s lottery winners had to wait for months to get their winnings. Now, with $15 billion in unpaid bills, Illinois is on the brink of being unable to even sell Powerball tickets. And winning the Powerball was probably their best chance of breaking the budget impasse.

KB Homes  announced earnings of $0.33 a share on revenue of $1 billion, both better than expected. KB Home climbed 5 percent.

General Mills rose 1.9 percent after the maker of Cheerios cereal, Yoplait yogurt and other packaged foods served up fourth-quarter earnings and revenue that beat expectations.

Staples will be acquired by Sycamore Partners for about $6.9 billion in one of the largest retail deals of the year. Sycamore is paying $10.25 a share for the retailer; that represents a 12 percent premium to its share price on Tuesday, before reports surfaced that the transaction was close to be being completed.

Financial Review

Records Across the Board

Sinclair Noe — June 1, 2017

DOW + 135 = 21,144
SPX + 18 = 2430
NAS + 48 = 6246
RUT + 25 = 1396
10Y + .02 = 2.22%
OIL – .30 = 48.02
GOLD – 3.20 = 1266.40
BITCOIN (Undefined %) = 2452.09
ETHEREUM – 4.09% = 221.44

A record high close for the Dow Industrial average, taking out the last high from March 1^st. Also records for the S&P 500 and the Nasdaq Composite.

In many ways, the Dow is just playing catch-up with the other indexes that were already in record territory. While the Nasdaq is up 16% this year and the S&P 500 has rallied 8.5%, the Dow is up a more modest 7%.

The Institute for Supply Management’s manufacturing index inched slightly higher, hitting 54.9. This implies the overall manufacturing economy grew for the 96th consecutive month.

The Commerce Department announced that spending in the construction sector fell 1.4 percent for the month, the biggest drop since a 2.9 percent fall a year ago. Construction spending was forecast to have grown 0.5 percentage points in April, after falling 0.2 percentage points in March. The drop reflects significant weaknesses in home building, non-residential construction and government projects.

The number of Americans filing for unemployment benefits increased more than expected last week, but the rise probably does not signal a material shift in labor market conditions as claims for several states, including California, were estimated. Initial claims for state unemployment benefits jumped 13,000 to a seasonally adjusted 248,000 for the week ended May 27.

The ADP private sector employment report showed that 253,000 jobs were added in May. The report could signal a strong government payrolls report on Friday that includes hiring in both public and private sectors.

Forecasts are for 185,000 non-farm payrolls created in May. Mark Zandi, chief economist at Moody’s Analytics said, “The current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force. Increasingly, businesses’ number one challenge will be a shortage of labor.”

The Federal Reserve’s latest Beige Book report, a collection of economic anecdotes from businesses across the country, indicated that employers everywhere are under pressure to both hire workers and pay them more. Economists in the Cleveland Fed’s district report, “Staffing firms noted an increase in the number of job openings and placements during the past two months, a situation which they attributed to an improving business climate.” These comments were echoed across the country.

Forecasts from Fed officials suggest that a median of two more hikes are planned before the end of the year – for a total of three. However, San Francisco Federal Reserve Bank President John Williams said that while he sees three interest rate hikes this year as his baseline scenario, four rate increases would also be appropriate if the economy got an unexpected boost.

Perhaps even more important than rate hikes, is what the Fed will say about trimming its $4.5 trillion balance sheet which expanded sharply in response to the Great Recession. The bank massively expanded that balance sheet by buying mortgage and Treasury bonds, as a way of helping keep interest rates low.

Jerome Powell, a Fed board governor, said on CNBC the impact of the Fed’s pullback from bond buying would be minimal. The Fed seems to be trying to have its cake and eat it too, arguing that its bond purchases, also known as quantitative easing or QE, were highly powerful when implemented but will make little difference when withdrawn.

President Trump announced the US will withdraw from the Paris climate agreement and will seek to renegotiate the pact in a way that treats American workers better. Trump is kicking off a withdrawal process that will take until November 2020 to unfold.

While the decision wasn’t exactly unexpected (it was a campaign promise, after all), in today’s announcement Trump said it will bring back clean coal jobs. It won’t. Much of America’s coal gets shipped to a fast-shrinking fleet of power plants that burn the fuel, and there’s no easy path to boosting demand from the sector.

The country’s use of natural gas and renewable energy to produce electricity is meanwhile gathering speed — and creating new generations of energy jobs. Low natural gas prices, at the end of the day, have decimated most of the U.S. coal production. Coal plants have closed and you’re not reopening them.

In a Rose Garden ceremony at the White House today, Trump said, “The bottom line is the Paris accord is very unfair,” citing the deal’s “draconian” financial and economic burdens and a litany of economic projections backing up his case. But the estimates at the heart of the debate varied so widely, some analysts viewed them as unreliable.

Supporting the pro-pullout side was one estimate saying $3 trillion in gross domestic product and 6.5 million in jobs will be lost over the next quarter century — numbers Trump cited without pointing out the timeline. Another view puts the GDP hit at more than $8 trillion through 2100 — but that’s the damage estimated if the U.S. exits the deal.

More worrisome than the long-term guesses could be the expected tariffs on U.S. carbon emitters slapped on by other countries. Twenty-five US companies signed on to a letter running today as a full-page advertisement in the New York Times and Wall Street Journal arguing in favor of the climate pact, and warning of potential “retaliatory measures” by other nations.

Trump said he would like to re-negotiate the Paris accord but today France, Germany, and Italy said they would not enter discussions to change the deal.

While there are still a large number of workers in the traditional fossil-fuel industries according to the Department of Energy, the number of Americans employed in energy-efficient and renewable-energy jobs is also huge.

For instance, 1.1 million Americans work in electric-power generation through traditional fossil fuels, but renewables follow closely with 880,000 employees. Additionally, from a long-term economic perspective, shifting toward renewable energy would likely be more beneficial for job growth.

The Department of Energy said the renewable sector is booming with solar employment growing by 25% and wind-generation employment growing by 32% in 2016. Add on the fact that 2.2 million people are employed in the “the design, installation, and manufacture of Energy Efficiency products and services,” and it’s clear that combating climate change is a big employment driver for the US.

Illinois paid the price for its ongoing budget impasse, with both S&P Global Ratings and Moody’s Investors Service dropping the state’s general obligation credit ratings to one step above junk. The rating downgrades came a day after Illinois’ spring legislative session ended without a budget deal.

S&P cut its rating on $26.3 billion of bonds one notch to BBB-minus, the lowest it has rated any state, and warned that Illinois could sink to the junk level unless it passes a budget that addresses a gaping structural deficit.

Moody’s downgraded Illinois to Baa3 from Baa2, citing the prolonged political impasse that has impeded progress in dealing with a nearly $130 billion unfunded pension liability and fueled growth in unpaid bills now approaching $15 billion, equal to 40 percent of the state’s operating budget.

The boards of Linde Group and Praxair voted to merge, creating a $73 billion global industrial gases leader. Linde’s shareholders will not vote on the deal but 75 percent must tender their shares to the new company for the deal to go through. The deal is expected to close in the second half of 2018.

Deere & Co said it would buy privately held German company Wirtgen Group for about $4.88 billion to expand its road construction operations as it looks to cut down its dependence on its slowing farm business. Deere makes equipment for part of the road-building process – loaders and dump trucks to load rocks into crushers from quarries, earth-moving tools at construction sites, and dozers and motor-graders that help grade roads.

Wirtgen makes crushers that break down large rocks, milling machines, plants to supply hot asphalt for road projects, and pavers and rollers. It has a network of company-owned and independent dealers in about 100 countries.