Small Business sentiment from the NFIB was released early this morning and came in unchanged versus April and right inline with expectations at 104.5.  After surging as high 105.9 earlier this year, sentiment has drifted lower in the last few months, but still remains well above its historical average levels and not far from the all-time highs seen back in late 2004.

The table below breaks out the different issues that small businesses consider to be their number one problems.  Topping the list this month is Taxes, which increased from 21% up to 22%.  Not far behind Taxes, more and more small businesses are citing a lack of labor quality as their biggest problem.  What’s really notable about this month’s report, though, is the “problem” that isn’t in the number two spot.  As shown, Government Red Tape was cited by just 13% of small businesses as their number one problem, which was down from 17% last month.  This is only the second time since November 2012 that Taxes and Red Tape haven’t taken up the top two spots.  In the case of Red Tape (chart below table), there hasn’t been a month where fewer small businesses cited it as their number one problem in over seven years (March 2010).

The Trump Administration came into office seeking tax cuts and decreased red tape.  Thus far nothing has been done on taxes, but the new administration has been able to tackle regulatory issues somewhat.  Not coincidentally, the tax issue is still the biggest concern for small businesses, while worries over “government red tape” have dipped quite a bit.

As mentioned above, labor issues are becoming increasingly problematic for small businesses and that could ultimately lead to increased wage pressure.  In addition to Quality of Labor, which we mentioned above and show in the chart below, labor costs have also spiked.  At this month’s level of 8%, there has only been one other month (August 2016) where more businesses cited labor costs as their number one problem (second chart below).

Over the last few months, the S&P 500 Financial sector ETF (XLF) traced out a head-and-shoulders top with shoulders in the high 23s/low 24s with a head above 25. Up until a couple days ago, XLF was also having a very hard time closing above a declining 50 day moving average. Unfortunately for US Bank bears, though, the neckline of the formation held and the set-up never confirmed (which would have been a close in XLF below the neckline. Over the last two days, XLF has carved out steady price action above the level of the right shoulder. That invalidates the technical formation which if confirmed would have targeted a move down to the mid-20s. Of course, just because the head-and-shoulders was never confirmed doesn’t mean XLF is headed higher in a hurry; the neckline is still worth watching as an important support level, although, from a technical perspective, the risk-reward is less biased towards the downside.