Today's Tidbits

Oil Demand Rising Faster than Anticipated in Developing Countries
From Barclays: “The latest IEA oil market report represents a significant change to its projections of oil market balances in 2007. A substantial upward revision to its estimates of the 2006 consumption baseline and upward adjustments to 2007 demand growth forecasts (alongside a very small downward adjustment to its non-OPEC supply numbers) mean, that it now forecasts oil demand this year will average a stunning 86.1mn bpd, representing growth of 1.7mn bpd over the 2006 level…The higher numbers are very much in line with the trend that has seen non-OECD accounting for the bulk of demand growth in recent years, while OECD demand as a whole has stagnated. If the IEA's forecasts for 2007 are correct, then by the end of this year non-OECD demand will have grown 3.6mn bpd since 2004, while OECD demand will be up by less than one-tenth of that at just 300,000 bpd. The message is that in countries where rapid development is leading to big increases in living standards and GDP growth, the price elasticity of oil demand is very low, and furthermore, this factor is more than enough to offset more price-sensitive oil consumption in the mature industrialised nations. As far as oil market prospects for the rest of 2007 are concerned, the picture is one of a much tighter balance between supply and demand that was being projected by the IEA just one month ago…Given that OPEC production was running at around just 30.4m bpd in May, a very substantial increase in output is required if the market is to avoid severe tightening, rapidly falling inventory levels and substantially higher prices. We doubt that any increase in OPEC supplies will materialise fast enough, and thus, significantly higher oil prices over the second half of 2007 look inevitable.”
From AP: “World energy consumption rose 2.4% last year, slowing from a rise of 3.2% in 2005, while China's energy use soared 8.4%, BP [British Petroleum] said Tuesday in its annual survey of global trends. Global energy growth in 2006 was just above the 10-year average, and the rate of growth slowed for every fuel except nuclear power, the oil company said in its Statistical Review of World Energy. The Asia-Pacific region again recorded the highest growth, at 4.9%, while consumption in North America fell 0.5% — with a 1.0% drop in the United States partially countered by increases of 1.7% in Canada and 4% in Mexico. In Europe and Eurasia, total consumption rose 1.5% in 2006 over 2005…Chinese energy use continued to account for the majority of global energy consumption growth and the country now accounts for over 15% of world energy use…Coal consumption rose 4.5% — fastest growth among hydrocarbons — pushed mainly by an 8.7% growth in China. Coal use was down in the United States but up in Britain and other countries for the third year in a row. Nuclear power output grew by 1.4% in 2006, mainly because of increased capacity use and upgrades. The use of wind and solar energy continued to grow in 2006, but from a low base. Despite a 25% increase of installed wind power capacity, it still made up less than 1% of global electricity production, while solar power accounted for even less. Ethanol use rose 22%.”
From USA Today: “The USA… is the biggest hybrid market. It accounted for 163,000 of Toyota's 313,000 total hybrid sales last year, or 52%. And the USA accounted for about 57% of the first 1 million worldwide sales…”


Rapid Growth of Global Reserves, to Support Dollar, Causes Dislocations/Inflation
From Merrill Lynch: “…over the past six months global reserves have increased by 11.6% [as foreign countries let their reserves rise rapidly to slow appreciation of their currencies versus the U.S. dollar.] We have estimated that 54% of the US current account deficit last year was accounted for by central bank buying…What this suggests is that there is a big gap between US funding needs and the foreign private sector’s desire to acquire USD assets. The implication is that the dollar is being buoyed largely by official purchases. Moreover by several alternative measures, the pace of USD reserves accumulation picked up in 2006…What is more interesting is that the most up to date data suggest that, if anything, central banks have accelerated their buying so far this year…implies that the share of the US current account deficit that is being funded by central banks is at levels that have historically been associated with very rapid USD depreciation….US residents are adding to the pressure as they are net buyers of foreign assets at an unprecedented pace around USD35bn per month. With the US current account deficit close to USD60bn on average each month, this means that there is more than USD100bn of a structural financing need. Central banks as a group are probably much longer USD than they want to be - the decline in the USD share in their portfolios is virtually entirely valuation effects rather than reallocation across currencies. The roughly 65% USD share is above any global private sector USD benchmark, which are more closer to 40%. Overall this suggests that there is a steady supply of USD waiting to be sold.”
From Bloomberg: “Cheap money is fast becoming an expensive habit for Asia. Easy liquidity has already pushed some asset prices out of kilter. Chinese stock markets are clearly overheated…Monetary conditions kept too loose for too long appear to have firmed inflation expectations… Squeezing growth out of underpriced capital is a good way for policy makers to pull an economy out of a bad patch, and for politicians to get a rally going in asset prices. It isn't a recipe for keeping the good times rolling…Those Asian policy makers who seek to actively manage inflation using short-term interest rates have a dilemma. If they raise interest rates in response to a tightening job market, they invite yield-searching speculative capital. And then, if the central bank buys the incoming dollars, domestic liquidity increases, stoking inflation. And if the central bank doesn't buy the dollars, it risks making the local currency too expensive -- too quickly -- for exporters… The strategy of restraining interest rates to avoid inviting in ``hot money'' is eventually self-destructing because it allows inflation to take hold in the domestic economy. Asian companies will eventually stop investing if the consumer doesn't have the purchasing power to buy their goods…it may be time for central bankers in the region to do some soul-searching. They have been complacent about wage inflation and their ability to control it. They are also wrong, perhaps, to view money-supply growth -- alarming in many countries -- as irrelevant. That indicator may herald an avalanche of price increases.”

Baby Boomer Retirement Trends and Issues (or be glad you had children)
From AP: “A new report portrays aging boomers as better educated, with higher incomes and longer life expectancies than the generations that preceded them. They also have fewer children and are less likely to be married, leaving them fewer options if they need help in their old age. "That one child they had will be very valuable," said William Frey, a demographer at the Brookings Institution, a Washington think tank. Frey is releasing a report today that says higher rates of divorce and separation could result in greater financial hardship for aging baby boomers. In 1980, about two-thirds of Americans age 55 to 64 lived in married-couple households. That percentage fell to less than 58 percent in 2005. Americans had been retiring at ever-younger ages since the growth of private pensions and Social Security began more than 50 years ago. However, the trend appears to be reversing. In 1950, nearly half of men 65 and older were still in the labor force, according to the Census Bureau. That percentage bottomed out in the 1980s at less than 16 percent. It has since edged up to about 19 percent, and experts believe it will increase even more as the oldest baby boomers reach 65. Women work in much larger numbers earlier in life, but among those 65 and older, their participation in the labor force has remained steady at about 10 percent since 1950. There are about 78 million baby boomers, those born from 1946 to 1964. The oldest will turn 62 next year, the age at which they become eligible for Social Security benefits. Some will continue working by choice — a government survey shows that most U.S. workers nearing retirement age want to gradually reduce their workload rather than abruptly stop. Others will have to stay on the job as fewer companies offer health insurance to retirees and many private pensions fail.”

MISC
From Morgan Stanley: “The USD continued to rise alongside surging US yields… However, the spotlight of the day fell on US fixed income, as US 10-yr Treasury yields extended their rise by 10bp to reach 5.25%, beating the June 2006 peak to claim a 5-yr high. In tow, the stock markets pared its gains as the S&P 500 fell back below 1500.”
[ As of 4:15 pm, 2y Treasury yields are at 5.07% (+6bp), and 10y Treasury yields are at 5.26% (+10.5bp). The dollar index has rallied .22 to 82.93. The Dow is closing down 130 points at 13,295. with the S&P falling 16 to 1493. Oil slid by 75 cents a barrel.]

From Bloomberg: “Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt… Ten-year note yields climbed as high as 5.272 percent, surpassing the Fed's target rate for overnight loans …at 5.25 percent…Referring to historically low premiums on emerging-market debt, Greenspan said ``it ain't going to continue that way. And indeed, all the spreads you are looking at, including your spreads relative to the 10-year are going to start to open up and
the 10-year is going to be moving as well.'' ``So I'd suggest someone out there is not going to be as happy as we are today,'' Greenspan said at an event hosted by the
Commercial Mortgage Securities Association in New York.”
From Morgan Stanley: “There is very little mortgage extension still left, with 95% of the mortgage universe non-refinaceable. Assuming that current hedging needs have been met, it is conceivable that there should be less convexity hedging in a sell-off. That said, increased supply of fixed-rate mortgages as well as slowing prepays could lead to further paying pressure over the course of the year; however it will be far more gradual than recent paying pressures.”
From JP Morgan: “According to the Manpower survey of hiring intentions for the third
quarter, a net 18% of firms planned to increase employment, unchanged from the second quarter’s share. Note, however, that this share tends to lag actual payroll growth by about a quarter. Regionally, the largest changes in hiring expectations were in the Northeast, (from 21% to 15%, and the West (from 19% to 24%). Nationally, construction hiring expectations were unchanged at 16%, but down from a peak of 27% in 3Q05…”
From The Financial Times: “The hiring outlook in India, driven by continuing shortages in many sectors such as accountancy and middle-management roles, continues to outpace that elsewhere in Asia, with some of the job creation from offshoring by multinationals starting to abate…India, Japan, Hong Kong and Australia were among those countries with the strongest hiring prospects going into the third quarter, with Germany, Norway and the UK all displaying resilient growth, though prospects have dipped in both France and Italy.”
From Bloomberg: “Wages are rising rapidly, recording annual growth rates ranging from about 5 percent in Singapore and 8 percent in China and the Philippines to a staggering 14 percent in India. Corporate profitability and expansion are now at risk. A recent Duke University/CFO Magazine survey reveals that chief financial officers in Asia are bracing for a 10 percent increase in their wage bill in the next 12 months. The CFOs expect labor productivity -- output per hour worked -- to grow only 4 percent.”
From the Union-Tribune: “Doug Duncan, chief economist for the Mortgage Bankers Association, yesterday said subprime loans had done far more good than harm to the economy. Such loans have opened the door to homeownership to millions of Americans in pricey markets like San Diego County, Duncan said. Of all outstanding U.S. home loans, about 14 percent are subprime, he said. Of those, about 19 percent are delinquent or in the process of being foreclosed on. Duncan expects less than one-third of those will actually be lost to foreclosure. Among causes of the nation's housing slump, subprime lending “was a contributing factor, but it was not the driving issue,” Duncan said.”
From Bloomberg: “U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments...A jump in foreclosures at ta time of the year that traditionally is the busiest for home sales means the slide in prices probably isn’t over…Typically, more than half of all home sales occur in the April to June period…California topped the list…and Florida was No. 2…[As a percentage of homes in the state] Nevada was the No. 1…Colorado was second…followed by California, Florida, Ohio, and Arizona. Michigan ranked No. 8…New Jersey was in the No. 15 slot…”

From Dow Jones: “General Electric Co.’s WMC Mortgage Corp. and Merrill Lynch & Co.’s First Franklin Financial Corp. are among the first subprime home lenders to adopt proposed federal guidelines on underwriting low-initial-payment mortgages to people
with flawed credit….In particular, the guidance calls for lenders to take into account the highest possible monthly payments - as opposed to the initial low payments - when deciding borrowers’ ability to repay the loans.”