Higher food and energy costs pushed the headline producer price index slightly higher than expected in April to +.7% MoM (consensus +.6%), but increases have slowed from the February and March pace of +1%+ growth. PPI held steady on an annual basis at +3.2% YoY (consensus +3.1%).
Excluding food and energy, core PPI inflation was unchanged in April, for the second month in a row. It has been a year and a half since core PPI has had two consecutive months without an increase. On an annual basis, PPI actually fell more than expected from a year earlier to +1.5% YoY (consensus +1.8%) from +1.7% YoY in March. The core figures indicate an easing of price increases for many goods.
The PPI report shows gasoline rising +8.2% MoM (+5.1% YoY). Energy prices rose at a trend like +3.4% MoM (3m ave +3.5% monthly gain, or almost 50% when annualized). Food prices moderated to rise +.4% MoM in April, but are up +7.7% YoY. The largest declines in prices in April were -1.8% MoM for computers(-22% YoY) and -1% MoM for passenger cars(-2.8% YoY). Auto prices have fallen in 5 of the last 7 months. Light trucks fell -.5% MoM.
Intermediate goods prices show steady, broadbased growth, rising +.9% MoM, and +3.7% YoY. The intermediate core index accelerated to +.8% MoM (+3.6% YoY) from +.2% MoM the prior three months, and showed the largest monthly gain in almost a year. Crude PPI prices fell -1.5%, but are up 11.1% YoY.
It is important to remember that PPI measures only domestically produced goods prices, and does not include services. So today's figure represents prices paid to factories, farmers, and other producers of goods.
Friday, May 11, 2007
Retail Sales Drop in April
April retail sales were weaker than anticipated, falling -.2% MoM (consensus +.4%). This was the first decline since last September. Offsetting April's weakness were revisions higher for the prior month. The headline figure was increased to +1% from +.7%, and ex-autos was revised higher to +1.1% from +.8% in March. These March revisions will improve first quarter GDP growth.
Consumer spending accounts for about 70% of U.S. GDP, so a pullback in consumption raises concerns about the vitality of the U.S. economy. What is interesting too is that retail spending is falling as credit card usage is rising. It appears that consumers may be getting strapped for cash as the jobs market has slowed. Sales at Wal-Mart fell 3.5% in April, as discount and department stores saw their weakest monthly sales in over 35 years last month.
Higher gasoline prices are clearly negatively impacting spending on other goods. Sales excluding automobiles and gasoline fell -.2% MoM, the largest decline in over two years for this category. Higher volumes and prices pushed gas station sales up +1.7% MoM. Gas prices rose an average of 26 cents in April versus May, leading to an increase of $30 per month for the average household, and $20 Billion nationally.
The government uses retail sales excluding autos, gasoline and building materials to help calculate GDP. This category dropped -.1% MoM in April after rising +.9% MoM in March. The excluded categories are included in GDP from other sources.
Areas showing improved sales in April include electronics, grocery stores, catalog sales and furniture. Weakness was seen in building materials, clothing, and autos. Department stores sales fell -2.1% MoM and are down -4% YoY.
Versus a year ago, retail sales rose +3.1% in April, down from a 4% average over the previous six months.
Consumer spending accounts for about 70% of U.S. GDP, so a pullback in consumption raises concerns about the vitality of the U.S. economy. What is interesting too is that retail spending is falling as credit card usage is rising. It appears that consumers may be getting strapped for cash as the jobs market has slowed. Sales at Wal-Mart fell 3.5% in April, as discount and department stores saw their weakest monthly sales in over 35 years last month.
Higher gasoline prices are clearly negatively impacting spending on other goods. Sales excluding automobiles and gasoline fell -.2% MoM, the largest decline in over two years for this category. Higher volumes and prices pushed gas station sales up +1.7% MoM. Gas prices rose an average of 26 cents in April versus May, leading to an increase of $30 per month for the average household, and $20 Billion nationally.
The government uses retail sales excluding autos, gasoline and building materials to help calculate GDP. This category dropped -.1% MoM in April after rising +.9% MoM in March. The excluded categories are included in GDP from other sources.
Areas showing improved sales in April include electronics, grocery stores, catalog sales and furniture. Weakness was seen in building materials, clothing, and autos. Department stores sales fell -2.1% MoM and are down -4% YoY.
Versus a year ago, retail sales rose +3.1% in April, down from a 4% average over the previous six months.
Thursday, May 10, 2007
Initial Unemployment Claims Surprisingly Drop
Initial unemployment claims unexpectedly fell by 9k to 297k (consensus 315k). Initial claims have now fallen for 4 weeks in a row, for a cumulative decline of 46k. The four week moving average declined by over 10k, to 317k. Continuing claims increased by 65k, about 2/3rds of the 98k drop from the prior week, but the longer term trend continues to rise.
Initial claims below 300k indicate a strong labor market, but rising continuing claims belies some of this strength, and perhaps reinforces the skills shortage problem evident in many industries.
Initial claims below 300k indicate a strong labor market, but rising continuing claims belies some of this strength, and perhaps reinforces the skills shortage problem evident in many industries.
Import Prices Continue to Rise
Import prices rose more than expected in April, at +1.3% MoM (consensus +1%), but the excess gain was essentially offset by a revision lower in the prior month to +1.5% from +1.7% MoM. Again, higher petroleum prices were mainly to blame for the rise (+6.5% MoM). The annual change is running at +1.9% YoY in April.
Non-petroleum prices are up an even stronger +2.9% YoY (+.2% MoM). This is because food prices have risen +8.8% YoY(+1.4% MoM) while petroleum costs are actually down -1.8% YoY. Last month, non-petroleum industrial supplies and materials rose a strong +.9% MoM.
Capital goods prices fell for the third month in a row, declining -.4% MoM in April. Computers saw their largest monthly drop in prices since 1999.
Higher oil prices led to higher import costs from oil exporting countries like Canada(+1.4% MoM) and Mexico(+2.3% MoM) during the month. Import prices from the European Union and China each fell -.1% MoM, with Japanese import prices unchanged in April. On an annual basis, prices from Canada have risen 3.2% YoY and fallen -.4% YoY from China.
Export price gains have been trending lower over the past three months, from +.8% MoM in February to +.3% MoM in April. Over the past year, export prices have risen much faster than import prices at +4.9% YoY versus +1.9% YoY. The strength has been in agricultural and food export prices, which have risen around 20% YoY. In contrast, consumer goods export prices have only risen +2.6% YoY.
Rising import prices are likely to impact PPI more quickly than CPI.
Non-petroleum prices are up an even stronger +2.9% YoY (+.2% MoM). This is because food prices have risen +8.8% YoY(+1.4% MoM) while petroleum costs are actually down -1.8% YoY. Last month, non-petroleum industrial supplies and materials rose a strong +.9% MoM.
Capital goods prices fell for the third month in a row, declining -.4% MoM in April. Computers saw their largest monthly drop in prices since 1999.
Higher oil prices led to higher import costs from oil exporting countries like Canada(+1.4% MoM) and Mexico(+2.3% MoM) during the month. Import prices from the European Union and China each fell -.1% MoM, with Japanese import prices unchanged in April. On an annual basis, prices from Canada have risen 3.2% YoY and fallen -.4% YoY from China.
Export price gains have been trending lower over the past three months, from +.8% MoM in February to +.3% MoM in April. Over the past year, export prices have risen much faster than import prices at +4.9% YoY versus +1.9% YoY. The strength has been in agricultural and food export prices, which have risen around 20% YoY. In contrast, consumer goods export prices have only risen +2.6% YoY.
Rising import prices are likely to impact PPI more quickly than CPI.
Trade Deficit Worsens in March
Imports rose to a four year high in March on higher crude oil shipments, with oil prices at a six month high, while imports from China declined. The monthly trade deficit rose to -$63.9B (consensus -$60B), over a ten percent rise from the prior month's trade deficit. February's deficit was revised lower by $500m to -$57.9B.
Both imports and exports were at their second highest levels on record. Consumer goods imports rose to a record high in March. Total imports of goods and services rose +4.5% MoM, representing the largest monthly gain in 4.5 years. Exports rose +1.8% MoM on record sales of industrial supplies and autos. The weaker dollar is helping to make US goods more competitive globally, though it has only fallen -3.1% YoY against a trade weighted basket of currencies.
The trade deficit with China narrowed by over a billion dollars last month as imports from China fell to the lowest level in the past ten months. China is the U.S.'s second largest trading partner, and is trying to deflect rising protectionist sentiment in the U.S. The U.S. trade deficits widened with the EU, Canada, and Mexico in March, while holding steady with Japan.
First quarter GDP estimates are likely to be revised lower based on this data.
A slowing U.S. economy, combined with robust growth in other parts of the world, are anticipated to help the U.S. trade deficit trend lower this year.
Both imports and exports were at their second highest levels on record. Consumer goods imports rose to a record high in March. Total imports of goods and services rose +4.5% MoM, representing the largest monthly gain in 4.5 years. Exports rose +1.8% MoM on record sales of industrial supplies and autos. The weaker dollar is helping to make US goods more competitive globally, though it has only fallen -3.1% YoY against a trade weighted basket of currencies.
The trade deficit with China narrowed by over a billion dollars last month as imports from China fell to the lowest level in the past ten months. China is the U.S.'s second largest trading partner, and is trying to deflect rising protectionist sentiment in the U.S. The U.S. trade deficits widened with the EU, Canada, and Mexico in March, while holding steady with Japan.
First quarter GDP estimates are likely to be revised lower based on this data.
A slowing U.S. economy, combined with robust growth in other parts of the world, are anticipated to help the U.S. trade deficit trend lower this year.
Wednesday, May 9, 2007
U.S. Federal Open Market Committee Statement
May 9 (Bloomberg) -- The following is the full text of the
statement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep its
target for the federal funds rate at 5 1/4 percent.
Economic growth slowed in the first part of this year and
the adjustment in the housing sector is ongoing. Nevertheless,
the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Although inflation
pressures seem likely to moderate over time, the high level of
resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy
concern remains the risk that inflation will fail to moderate as
expected. Future policy adjustments will depend on the evolution
of the outlook for both inflation and economic growth, as implied
by incoming information.
Voting for the FOMC monetary policy action were: Ben S.
Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M.Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan;Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
statement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep its
target for the federal funds rate at 5 1/4 percent.
Economic growth slowed in the first part of this year and
the adjustment in the housing sector is ongoing. Nevertheless,
the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Although inflation
pressures seem likely to moderate over time, the high level of
resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy
concern remains the risk that inflation will fail to moderate as
expected. Future policy adjustments will depend on the evolution
of the outlook for both inflation and economic growth, as implied
by incoming information.
Voting for the FOMC monetary policy action were: Ben S.
Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M.Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan;Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
Tuesday, May 8, 2007
Nice Wholesales Inventory Report Showing Better Sales and Reduced Inventories
U.S. Wholesale Inventories rose less than expected in March, and sales rose at the fastest rate in a year-and-a-half! This is good news, as it indicates the inventory overhang may be dissipating. Reduced inventories should spur demand for new production.
Wholesale inventories rose +.3% MoM (consensus +.4%), and account for about 25% of all business inventories. Plus, the prior month was revised down to +.4% MoM from +.5% initially. Durable goods inventories were unchanged in March, and machinery inventories fell a substantial -1.3% MoM. Non-durable goods inventories continued to rise, gaining +.8% MoM.
Sales rose +1.8% MoM, and were up +1.9% when petroleum sales are excluded (the largest monthly increase since 2004). For the past two months, ex-petroleum sales only rose +.2% MoM. Almost all categories saw improvement. Durable goods sales rose +2.1% MoM, with all major segments seeing growth, lead by computers +6.1% MoM, and machinery +3.4% MoM. This was the best month of durable goods sales in six months. Non-durable goods sales rose +1.5%, down from a +2.8% MoM gain in February. Both grocery and gasoline sales growth slowed in March. Oil prices rose about $4 a barrel during March, to only add +.8% MoM to petroleum sales growth.
The inventory-to-sales ratio has fallen back to 1.14 months of supply, down from 1.16 in January. The cycle low was 1.12 months, indicating that companies are regaining control over their stockpiles.
If sales growth continues to improve, excess inventories should continue to be worked down. This will help the manufacturing sector to recover, and growth to pick up later this year.
Wholesale inventories rose +.3% MoM (consensus +.4%), and account for about 25% of all business inventories. Plus, the prior month was revised down to +.4% MoM from +.5% initially. Durable goods inventories were unchanged in March, and machinery inventories fell a substantial -1.3% MoM. Non-durable goods inventories continued to rise, gaining +.8% MoM.
Sales rose +1.8% MoM, and were up +1.9% when petroleum sales are excluded (the largest monthly increase since 2004). For the past two months, ex-petroleum sales only rose +.2% MoM. Almost all categories saw improvement. Durable goods sales rose +2.1% MoM, with all major segments seeing growth, lead by computers +6.1% MoM, and machinery +3.4% MoM. This was the best month of durable goods sales in six months. Non-durable goods sales rose +1.5%, down from a +2.8% MoM gain in February. Both grocery and gasoline sales growth slowed in March. Oil prices rose about $4 a barrel during March, to only add +.8% MoM to petroleum sales growth.
The inventory-to-sales ratio has fallen back to 1.14 months of supply, down from 1.16 in January. The cycle low was 1.12 months, indicating that companies are regaining control over their stockpiles.
If sales growth continues to improve, excess inventories should continue to be worked down. This will help the manufacturing sector to recover, and growth to pick up later this year.
Monday, May 7, 2007
Consumer Credit Surged to a 4 Month High
Consumer credit jumped to $13.5B in March (consensus +$4B), or a 6.7% annualized pace. Consumer credit covers lending to individuals that is not collateralized by real-estate. The growth was relatively evenly split between revolving and non-revolving debt in dollar terms, but credit card debt increased at a 9.2% annualized rate, while non-revolving (auto loans) debt increased at a 5.2% annualized rate. For comparison, in the fourth quarter of last year, consumer credit grew at a 4.1% annualized pace, with revolving debt 8.4% annualized and non-revolving growing at a 1.7 annualized rate.
Credit card issuers are benefiting from consumers inability to continue tapping home equity, which is causing them to switch to higher cost revolving debt. MasterCard saw its first quarter profit climb 70 percent to a new record, and the number of transactions increased a substantial 19%.
Credit card issuers are benefiting from consumers inability to continue tapping home equity, which is causing them to switch to higher cost revolving debt. MasterCard saw its first quarter profit climb 70 percent to a new record, and the number of transactions increased a substantial 19%.
Today's Tidbits
Impacts of a Weaker Dollar
From Citi: “U.S. dollar weakness is becoming increasingly broad based…”
From Bloomberg: “Investors are dumping dollars, lured by higher returns elsewhere. The U.S. will grow more slowly than Europe for the first time since 2001 and Japan for the first time in 16 years, the IMF forecasts. The difference in yield between 10-year German bonds and Treasuries has shrunk to the smallest since 2004. The Fed's U.S. Trade Weighted Real Broad Dollar index, a monthly inflation-adjusted gauge of the dollar, has fallen 16 percent since 2002 to 94.27, near the lowest in 10 years…The dollar's depreciation has boosted overseas sales at U.S. exporters…The decline in the dollar has helped trim the U.S. trade deficit. The shortfall in the current account, the broadest measure of trade, has shrunk to $195.8 billion in the fourth quarter, equivalent to about 6 percent of the economy, from a record 7 percent in 2005…The deficit is about double the percentage of the gross domestic product that it was in 1985, when the Fed's Real Broad Dollar index began a three-year, 30 percent slide that helped push the U.S. current account into surplus in 1991.”
Equity Strength
From Morgan Stanley: “The Dow hit records on 4 of 5 days last wk, closed higher for a 5th straight wk & has been up for 23/26 days, its strongest run since 1944. The SPX was also up for a 5th straight wk & is just 1.4% below its record high from mar 2000.”
From Merrill Lynch: “The S&P 500 Index exhibited its strongest monthly rally in April since December 2003, with each of the ten sectors displaying positive price performance.”
From Bloomberg: “Companies in the Standard & Poor's 500 Index get 49 percent of their sales from outside the U.S., up from 30 percent in 2001, according to S&P, whose index includes the biggest corporations. The balance may tip this year as global growth outpaces the U.S. The world economy will expand 4.2 percent in 2007, twice the U.S. pace, according to Goldman Sachs … the S&P 500's 6.2 percent gain this year with profits that exceeded analysts' expectations. The index is now 1.4 percent below its peak reached seven years ago and even investors who used to be pessimistic about stocks say demand from China and Germany will push American shares higher…The 409 S&P 500 companies that reported first-quarter results through last week on average posted earnings growth of 12 percent.”
From Reuters: “Chinese central bank chief Zhou Xiaochuan acknowledged yesterday that a bubble in the country's stock market was a concern and said the central bank is monitoring asset prices along with inflation. China's stock market is up more than 40 per cent since the start of the year, and the valuations of many equities are high compared with international benchmarks and historical levels…He also said he expects China's inflation in 2007 to be higher than in 2006, but still manageable. "There is no evidence to say inflation is out of control," he said. "We are very closely watching annual inflation rates…”
Low Risk Premiums Encourage Holding More Money in Short-Term Instruments
From Deutsche Bank: “High demand for short term instruments has been changing the spreads in the sector, as investors shy away from the long end of the curve due to low risk premia. We expect the compression of money market spreads to continue, as long as we stay in this flat-curve, low risk premium environment… Rising demand for short end assets is evident in… substantial growth of investments into money market funds.… In the year ending February 2007, the total amount of official reserves held in the form bank deposits in US banks increased by $184 billion… Another prominent shift into the short end of the curve was implemented by US commercial banks. Given the halt in the growth of banks’ mortgage portfolios, they have balanced the deposit growth with an increase in the amount of balance sheet assets held in the form of short term instruments.”
From RBSGC: “…the Fed…recently reported…for the week ended on April 25…MBS holdings by US banks decreased by $4 bn. This was down $3 bn for pass-throughs, and down $1 bn for CMOs. Deposits increased $49 bn over the week, and were up $110 bn since the end of March, the largest monthly increase since September 2001.”
Rising U.S. Protectionism Likely to Increase U.S. Inflation
From Morgan Stanley: “Disinflation is at risk as the US Congress flirts with protectionism. The cross-border arbitrage of costs and pricing - one of the unmistakable hallmarks of globalization - could well turn unfavorable if China bashers get their way….The US economy has benefited greatly from an outbreak of "imported disinflation" over the past decade. (1) Since 1997, such external pressures have reduced US inflation by about one percentage point per year. (2) US import penetration has risen from 22% in the early 1990s to about 38% today, with low-cost developing economies accounting for 58% of the increase. (3) Imported productivity growth has also held back US inflation. (4) An outbreak of trade protectionism could lead to a reversal of the external pressures of disinflation, thereby boosting overall inflation…This could be a recipe for the dreaded stagflation scenario - an awful outcome for financial markets and the functional equivalent of a tax hike on an already beleaguered American middle class….Inflation is the cruelest tax of all.”
Movement to Loans from Bonds By Junk Credit Cos Raises Bond Default Risks
From Dow Jones: “U.S. firms with less-than-stellar credit quality are increasingly turning to the loan market for their funding needs, in a trend that may leave investors seriously short-changed in the event of a default, according to a new study by Fitch Ratings. The credit agency’s research notes the pickup in leveraged loan issuance in the U.S., as companies seek cheaper interest rates than they can get in the high-yield bond market… In the event of a default, both types of investors may find themselves further down the line for compensation than they expected. Creditors generally have a better chance of repayment on leveraged loans than on high-yield bonds, since the latter are unsecured, meaning they’re not backed by collateral. “In the event of a default, therefore, the more loans there are in a company’s capital structure, all else being equal, the worse the unsecured bond holder’s recovery prospects typically are,” Fitch said. The ratings agency noted a 28% increase in the growth of loans in borrower capital structures in 2006, compared with a 9% increase in unsecured bonds. Fitch estimated that the resulting slide down the capital structure may have lopped as much as 10% off the recovery rates on high-yield bonds. In a sector breakdown, Fitch noted utilities as showing the strongest growth in loans versus bond issuance…Moreover, this structural shift was responsible for around two-thirds of the recovery-rating downgrades Fitch carried out in U.S. high-yield bond market last year.”
Florida More Exposed than Other States to a Housing Downturn and Recession
From Goldman Sachs: “Although the housing downturn has long featured prominently in our call for US economic weakness, we do not expect it to cause an outright recession.
First, the direct and indirect housing drag on GDP is “only” likely to be a cumulative 3-4 percentage points, and one that is spread out over 2-3 years. This is probably insufficient on its own to push GDP growth into negative territory…But there is at least one state—namely Florida--where the housing downturn is likely to cause an outright recession. Our best guess is that the direct and indirect housing drag on GDP will total a cumulative 6-8 percentage points, twice as large as in the country as a whole… Florida has the largest amount of excess housing supply in America. In 2006, unsold homes for sale made up 4.3% of all homes for owner-occupation, almost twice as large a proportion as in the nation as a whole. Data on existing-home inventories tell a similar tale, with months’ supply figures of around 30 months in some counties (the national figure is 7.3 months). The reason for the record supply-demand imbalance is that housing starts in Florida have been far in excess of underlying demographic demand for several years. As of 2006, we estimate that the housing stock was growing roughly twice as fast as the population… At the national level, we currently calculate a mortgage payment share of about 23%, compared with an average of just under 20% in the 1990s. This implies that house prices would need to fall by about 15% to get back to fair value immediately, though rising incomes can do their share to close the affordability gap if the adjustment is gradual. Indeed, our current forecast for national home prices is a 5% decline this year… the overvaluation is far more extreme in Florida, where the mortgage payment share is now 31% versus 18% in the 1990s. This means that house prices would have to fall by over 40% to get back to fair value immediately. Even under our assumption that the adjustment takes several years, we expect declines of 10%-15% this year. At least in the single-family market, the biggest drops are likely to occur on the West Coast of Florida where the excesses have been most pronounced. Such declines are likely to imply a sharp drag on consumer spending growth in the state… Florida has seen above-average levels of mortgage equity withdrawal (MEW) in recent years. According to data produced by Moody’s Economy.com, MEW in Florida was running at a peak rate of 13.8% of disposable income in the third quarter of 2006, compared with a peak rate of 8.9% in the US as a whole...If MEW were to fall by 10% of income, this could imply a hit to consumer spending of around 3%...”
MISC
Editor’s Note: The Treasury yield curve flattened slightly when the ten year Treasury yield fell a basis point, in listless trading on very light volume. The Dow rose to another new record high, the fifth higher close in a row, to close up 48 at 13,313. The dollar was weaker, especially versus the Asian currencies. Crude futures closed lower for the sixth session in a row.
From Merrill Lynch: “…the 2/10 curve is now back to being inverted for the first time in four weeks…Meanwhile, the one part of the stock market that is most sensitive to the shape of the curve - we're talking about the banks here - is the only segment that is in the 'red' year-to-date.
From Bloomberg: “Bernanke's consensus-driven decision-making style, fondness for inflation targets and reliance on the Fed staff all suggest he'll be slower than predecessor Alan Greenspan to ease credit, economists say. Such caution could prove critical if the economy fails to improve, as the Fed expects, after growth in the first quarter was the weakest in four years. ``Bernanke is locked into the Fed forecast and the Fed consensus,'' says Allen Sinai…``He's much less likely to move quickly than Greenspan.''”
From JP Morgan: “…real consumer spending is likely to slow from an average 4.0% growth in the past two quarters to 2.0% this quarter, as real income is squeezed by the sharp increase in the price of fuel...the squeeze on households from higher inflation is being reinforced by a slowdown in nominal income. Early in 2Q07, hourly earnings were up at a 3.3% pace and hours-worked at a 0.6% pace. If sustained, the implied growth of labor income would be the slowest since early 2005.”
From Dow Jones: “German manufacturing orders continued to rise in March, exceeding expectations as the number of orders for large ticket items rose strongly, the German Economics Ministry said. The volume of new orders rose 2.4% on the month…and to show a 9.8% rise on the year…”
From Merrill Lynch: “The housing market has shown the classic signs of a bubble for several years, and asset values have not historically recovered quickly from such speculative periods. It is our working assumption that home prices will basically be flat for the next 10 years from today's prices. Although that might sound terribly bearish it is actually quite bullish relative to historical precedent. Consider that NASDAQ's peak was more than 7 years ago, and the index is today only about half way back to that peak.”
From Voice of San Diego: “The recent tightening in the subprime lending market has had a bigger effect on buyers of lower-priced properties than on those of higher-priced properties, and the volume of low-end homes sold has dropped as a result. Thus, the subprime tightening is actually driving the median price higher than it would be otherwise, even though its real effect on home pricing power is surely a negative one.”
From Dow Jones: “Citigroup agreed to pay $200,000 to settle charges that one of its brokerage units manipulated auctions of municipal and corporate bonds from January 2003 through the end of June 2004, the Securities and Exchange Commission said.
The proposed settlement mirrors one that Citigroup, Goldman Sachs Group, Merrill Lynch & Co. and 12 other securities firms made one year ago with the SEC over auction-rate securities violations. The settlement involved practices at Legg Mason Wood Walker, a unit of Legg Mason that Citigroup bought in December 2005. Legg Mason failed to disclose it made bids for its own account in 2003 and 2004 to prevent an auction it was managing from failing. Failed auctions - when the supply of securities for sale outweighs bids to buy them - require securities issuers to pay higher interest rates.”
From Citi: “U.S. dollar weakness is becoming increasingly broad based…”
From Bloomberg: “Investors are dumping dollars, lured by higher returns elsewhere. The U.S. will grow more slowly than Europe for the first time since 2001 and Japan for the first time in 16 years, the IMF forecasts. The difference in yield between 10-year German bonds and Treasuries has shrunk to the smallest since 2004. The Fed's U.S. Trade Weighted Real Broad Dollar index, a monthly inflation-adjusted gauge of the dollar, has fallen 16 percent since 2002 to 94.27, near the lowest in 10 years…The dollar's depreciation has boosted overseas sales at U.S. exporters…The decline in the dollar has helped trim the U.S. trade deficit. The shortfall in the current account, the broadest measure of trade, has shrunk to $195.8 billion in the fourth quarter, equivalent to about 6 percent of the economy, from a record 7 percent in 2005…The deficit is about double the percentage of the gross domestic product that it was in 1985, when the Fed's Real Broad Dollar index began a three-year, 30 percent slide that helped push the U.S. current account into surplus in 1991.”
Equity Strength
From Morgan Stanley: “The Dow hit records on 4 of 5 days last wk, closed higher for a 5th straight wk & has been up for 23/26 days, its strongest run since 1944. The SPX was also up for a 5th straight wk & is just 1.4% below its record high from mar 2000.”
From Merrill Lynch: “The S&P 500 Index exhibited its strongest monthly rally in April since December 2003, with each of the ten sectors displaying positive price performance.”
From Bloomberg: “Companies in the Standard & Poor's 500 Index get 49 percent of their sales from outside the U.S., up from 30 percent in 2001, according to S&P, whose index includes the biggest corporations. The balance may tip this year as global growth outpaces the U.S. The world economy will expand 4.2 percent in 2007, twice the U.S. pace, according to Goldman Sachs … the S&P 500's 6.2 percent gain this year with profits that exceeded analysts' expectations. The index is now 1.4 percent below its peak reached seven years ago and even investors who used to be pessimistic about stocks say demand from China and Germany will push American shares higher…The 409 S&P 500 companies that reported first-quarter results through last week on average posted earnings growth of 12 percent.”
From Reuters: “Chinese central bank chief Zhou Xiaochuan acknowledged yesterday that a bubble in the country's stock market was a concern and said the central bank is monitoring asset prices along with inflation. China's stock market is up more than 40 per cent since the start of the year, and the valuations of many equities are high compared with international benchmarks and historical levels…He also said he expects China's inflation in 2007 to be higher than in 2006, but still manageable. "There is no evidence to say inflation is out of control," he said. "We are very closely watching annual inflation rates…”
Low Risk Premiums Encourage Holding More Money in Short-Term Instruments
From Deutsche Bank: “High demand for short term instruments has been changing the spreads in the sector, as investors shy away from the long end of the curve due to low risk premia. We expect the compression of money market spreads to continue, as long as we stay in this flat-curve, low risk premium environment… Rising demand for short end assets is evident in… substantial growth of investments into money market funds.… In the year ending February 2007, the total amount of official reserves held in the form bank deposits in US banks increased by $184 billion… Another prominent shift into the short end of the curve was implemented by US commercial banks. Given the halt in the growth of banks’ mortgage portfolios, they have balanced the deposit growth with an increase in the amount of balance sheet assets held in the form of short term instruments.”
From RBSGC: “…the Fed…recently reported…for the week ended on April 25…MBS holdings by US banks decreased by $4 bn. This was down $3 bn for pass-throughs, and down $1 bn for CMOs. Deposits increased $49 bn over the week, and were up $110 bn since the end of March, the largest monthly increase since September 2001.”
Rising U.S. Protectionism Likely to Increase U.S. Inflation
From Morgan Stanley: “Disinflation is at risk as the US Congress flirts with protectionism. The cross-border arbitrage of costs and pricing - one of the unmistakable hallmarks of globalization - could well turn unfavorable if China bashers get their way….The US economy has benefited greatly from an outbreak of "imported disinflation" over the past decade. (1) Since 1997, such external pressures have reduced US inflation by about one percentage point per year. (2) US import penetration has risen from 22% in the early 1990s to about 38% today, with low-cost developing economies accounting for 58% of the increase. (3) Imported productivity growth has also held back US inflation. (4) An outbreak of trade protectionism could lead to a reversal of the external pressures of disinflation, thereby boosting overall inflation…This could be a recipe for the dreaded stagflation scenario - an awful outcome for financial markets and the functional equivalent of a tax hike on an already beleaguered American middle class….Inflation is the cruelest tax of all.”
Movement to Loans from Bonds By Junk Credit Cos Raises Bond Default Risks
From Dow Jones: “U.S. firms with less-than-stellar credit quality are increasingly turning to the loan market for their funding needs, in a trend that may leave investors seriously short-changed in the event of a default, according to a new study by Fitch Ratings. The credit agency’s research notes the pickup in leveraged loan issuance in the U.S., as companies seek cheaper interest rates than they can get in the high-yield bond market… In the event of a default, both types of investors may find themselves further down the line for compensation than they expected. Creditors generally have a better chance of repayment on leveraged loans than on high-yield bonds, since the latter are unsecured, meaning they’re not backed by collateral. “In the event of a default, therefore, the more loans there are in a company’s capital structure, all else being equal, the worse the unsecured bond holder’s recovery prospects typically are,” Fitch said. The ratings agency noted a 28% increase in the growth of loans in borrower capital structures in 2006, compared with a 9% increase in unsecured bonds. Fitch estimated that the resulting slide down the capital structure may have lopped as much as 10% off the recovery rates on high-yield bonds. In a sector breakdown, Fitch noted utilities as showing the strongest growth in loans versus bond issuance…Moreover, this structural shift was responsible for around two-thirds of the recovery-rating downgrades Fitch carried out in U.S. high-yield bond market last year.”
Florida More Exposed than Other States to a Housing Downturn and Recession
From Goldman Sachs: “Although the housing downturn has long featured prominently in our call for US economic weakness, we do not expect it to cause an outright recession.
First, the direct and indirect housing drag on GDP is “only” likely to be a cumulative 3-4 percentage points, and one that is spread out over 2-3 years. This is probably insufficient on its own to push GDP growth into negative territory…But there is at least one state—namely Florida--where the housing downturn is likely to cause an outright recession. Our best guess is that the direct and indirect housing drag on GDP will total a cumulative 6-8 percentage points, twice as large as in the country as a whole… Florida has the largest amount of excess housing supply in America. In 2006, unsold homes for sale made up 4.3% of all homes for owner-occupation, almost twice as large a proportion as in the nation as a whole. Data on existing-home inventories tell a similar tale, with months’ supply figures of around 30 months in some counties (the national figure is 7.3 months). The reason for the record supply-demand imbalance is that housing starts in Florida have been far in excess of underlying demographic demand for several years. As of 2006, we estimate that the housing stock was growing roughly twice as fast as the population… At the national level, we currently calculate a mortgage payment share of about 23%, compared with an average of just under 20% in the 1990s. This implies that house prices would need to fall by about 15% to get back to fair value immediately, though rising incomes can do their share to close the affordability gap if the adjustment is gradual. Indeed, our current forecast for national home prices is a 5% decline this year… the overvaluation is far more extreme in Florida, where the mortgage payment share is now 31% versus 18% in the 1990s. This means that house prices would have to fall by over 40% to get back to fair value immediately. Even under our assumption that the adjustment takes several years, we expect declines of 10%-15% this year. At least in the single-family market, the biggest drops are likely to occur on the West Coast of Florida where the excesses have been most pronounced. Such declines are likely to imply a sharp drag on consumer spending growth in the state… Florida has seen above-average levels of mortgage equity withdrawal (MEW) in recent years. According to data produced by Moody’s Economy.com, MEW in Florida was running at a peak rate of 13.8% of disposable income in the third quarter of 2006, compared with a peak rate of 8.9% in the US as a whole...If MEW were to fall by 10% of income, this could imply a hit to consumer spending of around 3%...”
MISC
Editor’s Note: The Treasury yield curve flattened slightly when the ten year Treasury yield fell a basis point, in listless trading on very light volume. The Dow rose to another new record high, the fifth higher close in a row, to close up 48 at 13,313. The dollar was weaker, especially versus the Asian currencies. Crude futures closed lower for the sixth session in a row.
From Merrill Lynch: “…the 2/10 curve is now back to being inverted for the first time in four weeks…Meanwhile, the one part of the stock market that is most sensitive to the shape of the curve - we're talking about the banks here - is the only segment that is in the 'red' year-to-date.
From Bloomberg: “Bernanke's consensus-driven decision-making style, fondness for inflation targets and reliance on the Fed staff all suggest he'll be slower than predecessor Alan Greenspan to ease credit, economists say. Such caution could prove critical if the economy fails to improve, as the Fed expects, after growth in the first quarter was the weakest in four years. ``Bernanke is locked into the Fed forecast and the Fed consensus,'' says Allen Sinai…``He's much less likely to move quickly than Greenspan.''”
From JP Morgan: “…real consumer spending is likely to slow from an average 4.0% growth in the past two quarters to 2.0% this quarter, as real income is squeezed by the sharp increase in the price of fuel...the squeeze on households from higher inflation is being reinforced by a slowdown in nominal income. Early in 2Q07, hourly earnings were up at a 3.3% pace and hours-worked at a 0.6% pace. If sustained, the implied growth of labor income would be the slowest since early 2005.”
From Dow Jones: “German manufacturing orders continued to rise in March, exceeding expectations as the number of orders for large ticket items rose strongly, the German Economics Ministry said. The volume of new orders rose 2.4% on the month…and to show a 9.8% rise on the year…”
From Merrill Lynch: “The housing market has shown the classic signs of a bubble for several years, and asset values have not historically recovered quickly from such speculative periods. It is our working assumption that home prices will basically be flat for the next 10 years from today's prices. Although that might sound terribly bearish it is actually quite bullish relative to historical precedent. Consider that NASDAQ's peak was more than 7 years ago, and the index is today only about half way back to that peak.”
From Voice of San Diego: “The recent tightening in the subprime lending market has had a bigger effect on buyers of lower-priced properties than on those of higher-priced properties, and the volume of low-end homes sold has dropped as a result. Thus, the subprime tightening is actually driving the median price higher than it would be otherwise, even though its real effect on home pricing power is surely a negative one.”
From Dow Jones: “Citigroup agreed to pay $200,000 to settle charges that one of its brokerage units manipulated auctions of municipal and corporate bonds from January 2003 through the end of June 2004, the Securities and Exchange Commission said.
The proposed settlement mirrors one that Citigroup, Goldman Sachs Group, Merrill Lynch & Co. and 12 other securities firms made one year ago with the SEC over auction-rate securities violations. The settlement involved practices at Legg Mason Wood Walker, a unit of Legg Mason that Citigroup bought in December 2005. Legg Mason failed to disclose it made bids for its own account in 2003 and 2004 to prevent an auction it was managing from failing. Failed auctions - when the supply of securities for sale outweighs bids to buy them - require securities issuers to pay higher interest rates.”
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