In an earlier post, we noted the improvement to small business sentiment per the latest data from the NFIB.  The report also includes survey responses as to what small businesses perceive to be their biggest problems. The July report showed that small businesses have begun to take notice of easing inflation.  As shown below, throughout 2022 and into portions of 2023, inflation has ranked as the number one problem among small businesses.  But in July, Quality of Labor retook the number one spot as it had temporarily back in May.  Meanwhile, there has been a rise businesses saying that government requirements and red tape are their number one problem, tying cost of labor for the fourth most pressing issue.

Obviously, as it still occupies the number two spot, inflation remains a major problem. Even though it is a big improvement from 37% exactly one year ago, there continues to be 21% of firms that report inflation as their biggest problem. That is also well above any reading observed pre-pandemic.

On a combined basis, cost and quality of labor are the most commonly reported problem for small businesses at 33% of responses.  Unlike inflation which is hitting new lows, that is in the middle of the past few years’ range.

Historically, the NFIB survey has had sensitivities to politics with a bias towards being more optimistic during Republican administrations and vice versa.  Since the Biden Presidency began, government related problems have been on the backburner given that inflation has been playing a more pressing role.  However, there has been a steadily rising number of responses once again reporting government red tape or taxes as their biggest issues. That has come hand in hand with an increase in the survey’s Economic Policy Uncertainty Index which experienced a pronounced 4 point jump month over month in July.

Finally, we would note very few firms are reporting sales as their biggest problem. That is a significant disconnect from the index on actual sales changes which hit new lows in July.

Small business sentiment from the NFIB’s monthly survey rebounded in July with the headline index reading 91.9 versus expectations of it rising only 0.3 points to 91.3.  As shown below, small businesses are still reporting much weaker optimism than pre-pandemic or even in the first year of the pandemic, but sentiment has been making steady improvements in recent months.

In the table below, we break down each category of the NFIB’s survey. Again, the headline index remains historically low in the 14th percentile of readings. However, that is up from the 9th percentile last month.  Most other categories that contribute to the optimism index also rose month over month, albeit there were multiple that went unchanged. As a result of those moves, most categories remain at the low end of their historical ranges with a couple of exceptions: Plans to Increase Employment and Job Openings Hard to Fill. Each of those readings are in the 76th and 94th percentiles, respectively. However, as we noted in today’s Morning Lineup, overall this survey’s employment metrics have pointed to softening of labor market activity.

While several categories saw stronger readings in July, none rose more than Outlook for General Business conditions which jumped by 10 points month over month.  That is the second 10 point increase in a row which makes for the largest two month increase since May 2020. Although that reading showed an increase in optimism which coincides with continued improvement in the number of firms reporting that inflation pressures have eased, readings on small businesses actual operations were less rosy. Even though sales expectations were up, actual sales changes hit a new low of -13, the weakest since the spring of 2020, resulting in earnings changes to also drop.

Treasury yields at the long end of the curve are once again rising today with the yield on the 30 year up 3.3 bps as of this writing. That is in the context of what has already been a dramatic move higher in yields of long term Treasuries. As we discussed in Friday’s Bespoke report, the ETF tracking longer-dated Treasuries, the iShares 20+ Year US Treasury ETF (TLT), fell 1% or more three days in a row last week (prices fall when yields rise).  Meanwhile, that move higher in long end yields has also been observed in other places of the world like Germany, as discussed in today’s Morning Lineup.

Given the steep rise in yields and hence a drop in the price of TLT, the ETF is trading at extremely oversold levels.  While it has come back slightly and is currently 2.66 standard deviations below its 50-day moving average, at the most oversold reading last Thursday, TLT traded 3.84 standard deviations below its 50-DMA. In its over 20 years of history, that is the most oversold reading on record.

As shown above there have only been a handful of other periods in which TLT has fallen at least three standard deviations below its 50-DMA as it did last week. In most circumstances, when an asset reaches such extreme levels of oversold, the thinking is that some upside mean reversion can be expected. However, the exact opposite has played out for TLT historically.  As shown below, across the prior seven instances in which TLT got 3+ standard deviations below its 50-DMA, the ETF was lower a year later four times.