Consensus Prior
Monday, 6/11
No Data
Cleveland Fed President Pianalto speaks in Ireland on Global Interdependence
Chicago Fed President Moskow speaks on “Transitions: The State of the Automotive Industry”
Tuesday, 6/12
May Monthly Federal Budget Statement -$63.5B -$42.9B
Congressional Budget Office estimates May budget deficit was -$71B
U.S. Treasury Secretary Paulson and Atlanta Fed President Lockhart speak on American Competitiveness
Chicago Fed President Moskow speaks on “Using Payment Innovations to Improve Transportation Networks”
Greenspan speaks at Commercial Mortgage Securities Conference in NY
Wednesday, 6/13
May Import Price Index MoM +.2% +1.3%
YoY +1.9%
Import price gains expected to slow from sharp gains of over 1% MoM the past two months
Consumer goods import prices have been rising steadily for a year, as the dollar weakens and inflation picks up, after deflating in early 2006
May Advance Retail Sales MoM +.7% -.2%
Less Autos MoM +.7% unch
Should rebound from April’s decline
Gas station sales likely grew 4% on higher prices, and will make headline figure look stronger than it really is. Ex-gas total expected to rise +.5%
Retail sales excluding autos, gasoline and building materials expected to rise a respectable +.6% MoM. Accounts for around 60% of total sales.
Auto sales expected to be flat
General merchandise such as furniture and apparel expected to recover only a quarter of last month’s large decline on weather factors
Real consumer spending slowing to 2% from 4%+ in 1st quarter
April Business Inventories MoM +.3% -.1%
Manufacturing inventories rose +.5% and wholesale inventories rose +.3%
Retail inventories probably rose +.3%
Inventory to sales ratios falling back toward historic lows
Beige Book
No major changes expected
NY Fed President Geithner Speaks on Asia, the World Economy, and the International Financial System in Singapore
Dallas Fed President Fisher speaks on Importance of Higher Education
Thursday, 6/14
May Producer Price Index MoM +.5% +.7%
YoY +3.5% +3.2%
May PPI Ex-Food and Energy MoM +.2% unch
YoY +1.5% +1.5%
Rising gasoline and food prices continuing to push up headline PPI
Headline PPI expected to rise to highest level since last summer YoY
Farmers have seen higher prices for six of last seven months
Core PPI should see first MoM gain in three months, after being unch prior two months
Core PPI expected to hold steady at +1.5% YoY, down from 2% in Dec
Falling passenger car prices have been depressing core PPI
Excluding autos and tobacco, core PPI is up 2% from a year ago
Pipeline pressures rising, as April core intermediate PPI rose most in 11 months
Core crude and intermediate prices expected to each rise +.5% MoM
Initial Jobless Claims 312k 309k
Continuing Jobless Claims 2535k
4 week average has risen to 307k
Fed has hearings on Mortgage Regulations in DC with Fed Governor Kroszner
U.S. Treasury Secretary Paulson speaks on National Security in NY
Friday, 6/15
May Consumer Price Index MoM +.6% +.4%
YoY +2.6% +2.6%
May CPI Ex-Food and Energy MoM +.2% +.2%
YoY +2.3% +2.3%
An 11% MoM increase in gasoline prices should boost headline inflation by +.6% MoM, matching March’s high print for the past year
YoY headline inflation expected to hold steady at +2.6%, but risk is for an increase to +2.7%
Core CPI expected to grow +.2% MoM, the recent trend rate.
Core CPI expected to hold steady at +2.3% YoY, down from +3% YoY last fall
Relevance of rental vacancy rate under debate, but it has risen to 10.1%
Tenant rent expected to grow +.25% and OER increase +.2%
Medical and education costs expected to continue rising faster than general inflation rate at +.4% and +.5% respectively.
June Empire Manufacturing 10.5 8
Manufacturing activity seems to be recovering nationally
Durable goods orders have moved higher
NY’s emphasis on computers and electronic production should benefit
1st Quarter Current Account Balance -$202.8B -$195.8B
Trade deficit only grew by $2B between 4th and 1st quarters
Current account deficit expected to edge up to 6% of GDP
April Total Net TIC Flows $45B
Net Long-Term TIC Flows $71.5B $67.6B
Net long-term TIC flows averaged around $75b a month in 1st quarter
Most dealers looking for total flows to rise to $50b in April
No clear seasonal trends in historic data
May Industrial Production MoM +.2% +.7%
Industrial production growth is expected to slow to +.2% MoM as lower electricity demand causes utility output to fall in May
Strength comes from growth in manufacturing output
Aggregate manufacturing hours fell -.3% MoM in May even though ISM has risen strongly over past two months
Manufacturing production has been rising for last three months
Construction demand should give back surprising gains of last two months
May Capacity Utilization 81.5% 81.6%
Unexpectedly bounced back to the top of its range for the past six months in April
Peaked last summer at 82.4%
Long-run average 81%
June Preliminary Univ. of Michigan Consumer Confidence 88 88.3
Confidence softened late in May
Higher gasoline prices are starting to have an impact
Inflation expectations likely to rise, after being unchanged last month
Rising interest rates offsetting benefits of new highs in equities
Fed Chairman Bernanke and Atlanta Fed President Lockhart speak on “Credit Channel of Monetary Policy in the 21st Century”
San Francisco Fed President Yellen speaks on Free Trade in a Global Economy
**Sometime during the week the MBA Delinquency Survey will be released.
Delinquencies are expected to rise, especially for sub-prime.
Friday, June 8, 2007
Trade Deficit Shrinks as Imports Drop Almost 2% and Exports Hit New Record High
The trade deficit in April unexpectedly came in $5 billion below expectations, at $58.5B (consensus $63.5B), and $4 billion below the prior month. In addition, March's deficit was reduced by $1.5 billion to $62.4 Billion. Recall that the deficit in March had risen by $4.8 billion from the prior month, so some view the improvement in April as simply a return back to the narrowing trend of the past year. April's improvement was gained by a combination of falling imports and a record high level of exports.
Exports rose +.2% MoM to $129.5 billion on demand for food and consumer goods. Food exports rose 12% MoM in April, while computer, semiconductors, and telecom equipment saw the largest declines. The improvement in the trend of the U.S. trade deficit is being helped by strength in global economic growth, and a slow weakening of the dollar.
April's report does raise concerns about domestic retail spending. Imports fell -1.9% MoM to $191.6 billion. Most of the drop in imports was in consumer goods and vehicles, but the softening demand was relatively broad-based as capital goods also declined. Oil imports held steady, as rising prices (highest since last September) were offset by a decline in volume. Oil volumes have risen in six of the last eight weeks, as oil prices have risen, so energy imports will probably rise for May and June. Excluding petroleum, the trade deficit narrowed by $3.8 billion. Pharmaceutical imports, which have been very volatile lately, fell by -17% MoM, and statistically accounted for a large part of decline in imports in April.
Breaking down by goods versus services, the U.S. imports $67 billion more in goods than it exports. In services, the U.S. exports $8.5 billion more than it imports.
For figuring GDP impact, the government adjusts the nominal deficit figure for changes in prices. This adjustment brings the April trade deficit down to $54.9 billion, the lowest level in almost three years. Economists are revising estimates for second quarter GDP higher by +.3-.5%. Revisions to March data will slightly raise first quarter GDP.
Regionally, the trade gap with China widened to $19.4 billion for April, the largest monthly deficit since January. Year-to-date, the trade deficit with China has grown 19% versus the same period last year. The trade deficit with China has grown steadily for the last five years, as the reason for the rising protectionist sentiment in the U.S. government.
Exports rose +.2% MoM to $129.5 billion on demand for food and consumer goods. Food exports rose 12% MoM in April, while computer, semiconductors, and telecom equipment saw the largest declines. The improvement in the trend of the U.S. trade deficit is being helped by strength in global economic growth, and a slow weakening of the dollar.
April's report does raise concerns about domestic retail spending. Imports fell -1.9% MoM to $191.6 billion. Most of the drop in imports was in consumer goods and vehicles, but the softening demand was relatively broad-based as capital goods also declined. Oil imports held steady, as rising prices (highest since last September) were offset by a decline in volume. Oil volumes have risen in six of the last eight weeks, as oil prices have risen, so energy imports will probably rise for May and June. Excluding petroleum, the trade deficit narrowed by $3.8 billion. Pharmaceutical imports, which have been very volatile lately, fell by -17% MoM, and statistically accounted for a large part of decline in imports in April.
Breaking down by goods versus services, the U.S. imports $67 billion more in goods than it exports. In services, the U.S. exports $8.5 billion more than it imports.
For figuring GDP impact, the government adjusts the nominal deficit figure for changes in prices. This adjustment brings the April trade deficit down to $54.9 billion, the lowest level in almost three years. Economists are revising estimates for second quarter GDP higher by +.3-.5%. Revisions to March data will slightly raise first quarter GDP.
Regionally, the trade gap with China widened to $19.4 billion for April, the largest monthly deficit since January. Year-to-date, the trade deficit with China has grown 19% versus the same period last year. The trade deficit with China has grown steadily for the last five years, as the reason for the rising protectionist sentiment in the U.S. government.
Wednesday, June 6, 2007
Today's Tidbits
Mortgage Markets Under Pressure
From Dow Jones: “Three words describe mortgage bond performance in the first half of this year: less than stellar. So far in 2007, the $3.5 trillion market in mortgage-backed
securities guaranteed by housing finance agencies Fannie Mae (FNM) and Freddie Mac (FRE) have turned in negative returns as rising interest rates and growing supply weigh on the market… Investors from Asia - who had been big buyers of mortgage bonds in recent years - in particular have been less than enthusiastic about the market so far this year as the rise in global equities competes for their attention… Through June 1, the Lehman mortgage index logged a negative seven basis points in excess returns over Treasurys, compared with positive 39 basis points for the same period a year earlier.
Rising Treasury yields have damped investor demand since such a rate environment makes mortgage bonds less attractive… Waning interest in mortgage bonds is coinciding
with an increase in agency mortgage bond supply. One cause of the extra supply: more borrowers are taking out loans that conform to agency guidelines as lenders tighten underwriting standards in the wake of the subprime market’s woes.”
Changing Fed Outlooks
From Goldman Sachs: “Today we announced a significant change to our outlook for the US economy and financial markets. Most importantly, we no longer forecast any rate cuts by the Federal Reserve between now and the end of 2008, though we still believe that the risks lie in the direction of monetary easing. We also modestly boosted near-term growth rates on the anticipation of a more pronounced upturn in manufacturing output, and we dampened the expected increase in unemployment. In conjunction with these adjustments, we also lifted the profile for movements in long-term yields by 30-50 basis points; after a period of directionless trading around its current level for the remainder of 2007, we look for the yield on 10-year notes to drift up toward 5¼% by year-end 2008.”
“… are raising our near-term GDP estimates (Q2 goes from 2% to 3%, Q3 to 2½% from 2%).”
From Merrill Lynch: “…the Fed is not going to be cutting rates at any time this year…This is a Fed that is 100% concentrated on not only getting core inflation below 2%, but as several Fed officials have told us lately, it has to get to 1.5% and with a higher unemployment rate than the 4.5% print we saw on Friday. The fact that the Fed has retained a hawkish stance in the face of five consecutive quarters of below-average 3% growth, not to mention what was a near-recession like 0.6% GDP pace in the first quarter, is a clear signal that the Fed does not care so much about what the real economy is doing as much as what the unemployment rate and core inflation are doing.”
From Deutsche Bank: “The Fed has been right to hold to its opinion of a moderation of economic growth with upside inflation risks. The growth outlook remains moderate and
inflation is beginning to move back into the Fed’s comfort zone, keeping hopes alive that the next move will be a rate cut. However, resilient labour markets means the Fed is in no rush. We’ve pushed our forecast for the first Fed cut into Q4’07.”
From Bear Stearns: “We’re maintaining our forecasts for 3% second quarter growth, more in the second half of 2007, a decline in the unemployment rate, one or two Fed hikes in the second half, and a somewhat stronger dollar as the Fed shift toward hikes becomes apparent.”
MISC
From Dow Jones: “…the 10-year yield remained just short of the keynote 5% mark… The dollar gained against the euro Wednesday after the ECB lifted interest rates to 4.0%
but put forth no firm plans to hike rates again soon. Meanwhile, the dollar declined against the yen as a decline in U.S. stocks spurred some risk aversion that caused yen-funded carry trades to unwind modestly…The major [equity] indexes were all down about 1%. Decliners outnumbered advancers by about five to one…Crude oil futures shook off losses and turned higher Wednesday on reports that Turkey sent several thousand troops into northern Iraq in pursuit of Kurdish rebels, heightening worries about Middle Eastern oil supplies.”
From MarketWatch: “U.S. stocks fell sharply Wednesday, with the Dow Jones Industrial Average losing over 100 points, as news that unit labor costs jumped in the first quarter fueled concerns over inflation, interest rates and rising bond yields, further sapping enthusiasm in the market. Losses accelerated in afternoon trade after the Dow and the S&P 500 failed to hold key technical levels… Of the Dow's 30 components, 27 retreated…” [Dow closed down 130, S&P down 13.5 points]
From Morgan Stanley: [On European equity markets] “As of Friday, our Fundamentals
indicator tells us to sell too, because of higher bond yields and higher ISM new orders. This is in addition to existing sell signals on our Valuation (CVI) and Risk indicators. Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980. Equities have always been down in the next 6 months, on average by 15%. Previous occasions include September 1987 and April 2002.”
From Lehman: “…fixed-rate mortgages had been trending higher and are up 36% on a y-o-y basis while adjustable-rate mortgage are down nearly 30% y-o-y. This is to be expected given tighter lending standards and a shift away from risky mortgages.”
From RBSGC: “Natl. Assoc of Realtors projects US home sales will fall 4.6% this year, with prices down 1.3%. Last month the forecast was -2.9% and -1%, respectively.”
From AP: “Many public companies are putting dramatically lower expenses on their books for stock options awarded their executives than what they are reporting to the IRS under two differing sets of rules, Senate investigators have found…found a $43 billion "gap" for stock options between corporate IRS tax returns and expenses reported in financial statements for December 2004 to June 2005. That means U.S. public companies legally avoided billions in taxes for that period by claiming $43 billion more in tax deductions for options awards than the compensation amount for options recorded on their books, said Levin, the subcommittee's chairman. While not breaking the law, the companies benefited from an "outdated and overly generous stock-option tax rule,"…”
From Barclays: “…not only has there been a very significant move up in quantities consumed in all commodity sectors so far this decade, but that for many there has been further acceleration in growth so far in 2007, especially in base and precious metals. It is also worth noting that this has happened despite the weakness of the US economy in Q1. The move up in average growth rates for many commodities is a long-term phenomenon and is likely to continue putting the supply side under pressure to keep up, especially if the recent surge in output of many commodities begins to falter once again.”
From RBSGC: “…we found a dramatic shift in the Stone & McCarthy Survey -- one of our preferred proxies. The Survey went from near the longest it's been since 2003 to dead flat. This means that the pain trade for this audience is no longer desperately lower, i.e. lower levels won't force buying. The drop was the biggest 1-week move we've seen in a while. This is more in line with other recent proxies like CoT specs and Dealer holdings which should a similar, albeit far less dramatic, move from long to less long. It's part of a healthy process to get the market in a more neutral state…”
From Bear Stearns: “For most households, their biggest asset is the net present value of their future earnings. Expected lifetime earnings, sensitive to unemployment and compensation, is the primary support for consumption. The negative wealth effect from the decline in stocks in 2000-2002 and the decline in home prices in 2006-2007 left consumption growth largely unaffected – we think because the unemployment rate was relatively low.”
From Lehman: “The ECB governing council raised the official refinancing rate from 3.75% to 4% at today's meeting - as expected. The new Staff Projections entailed upward revisions to the 2007 growth and inflation forecasts, but kept the 2008 inflation forecast unchanged, while reducing the growth forecast for next year slightly.”
From Lehman: “…hedge funds generated 7.11% since the beginning of 2007 and have pulled ahead of the first five months of 2006 (5.23%).”
From Dow Jones: “A typical carry trade involves borrowing yen, which is loaned at rates near zero and then using the proceeds to buy currencies offering much higher interest rates. The investor then pockets the interest gained from the high-yielder before buying back yen to repay the loan. The risk is that while interest is accruing, the high-yielding currency plunges in value, or the yen surges, which could wipe out carry trade profits in an instant.”
From The Financial Times: “Opec on Tuesday warned western countries that their efforts to develop biofuels as an alternative energy source to combat climate change risked driving the price of oil “through the roof”. Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries, said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels. The warning from Opec, which controls about 40 per cent of global oil production, comes as the group of eight leading industrialised nations meets on Wednesday with climate change at the top of its agenda. The US and Europe want to use biofuels to combat global warming and to strengthen energy security…”
From AP: “General Mills Inc. said on Tuesday it would raise cereal prices to match increases by competitors… customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent.”
From Dow Jones: “Three words describe mortgage bond performance in the first half of this year: less than stellar. So far in 2007, the $3.5 trillion market in mortgage-backed
securities guaranteed by housing finance agencies Fannie Mae (FNM) and Freddie Mac (FRE) have turned in negative returns as rising interest rates and growing supply weigh on the market… Investors from Asia - who had been big buyers of mortgage bonds in recent years - in particular have been less than enthusiastic about the market so far this year as the rise in global equities competes for their attention… Through June 1, the Lehman mortgage index logged a negative seven basis points in excess returns over Treasurys, compared with positive 39 basis points for the same period a year earlier.
Rising Treasury yields have damped investor demand since such a rate environment makes mortgage bonds less attractive… Waning interest in mortgage bonds is coinciding
with an increase in agency mortgage bond supply. One cause of the extra supply: more borrowers are taking out loans that conform to agency guidelines as lenders tighten underwriting standards in the wake of the subprime market’s woes.”
Changing Fed Outlooks
From Goldman Sachs: “Today we announced a significant change to our outlook for the US economy and financial markets. Most importantly, we no longer forecast any rate cuts by the Federal Reserve between now and the end of 2008, though we still believe that the risks lie in the direction of monetary easing. We also modestly boosted near-term growth rates on the anticipation of a more pronounced upturn in manufacturing output, and we dampened the expected increase in unemployment. In conjunction with these adjustments, we also lifted the profile for movements in long-term yields by 30-50 basis points; after a period of directionless trading around its current level for the remainder of 2007, we look for the yield on 10-year notes to drift up toward 5¼% by year-end 2008.”
“… are raising our near-term GDP estimates (Q2 goes from 2% to 3%, Q3 to 2½% from 2%).”
From Merrill Lynch: “…the Fed is not going to be cutting rates at any time this year…This is a Fed that is 100% concentrated on not only getting core inflation below 2%, but as several Fed officials have told us lately, it has to get to 1.5% and with a higher unemployment rate than the 4.5% print we saw on Friday. The fact that the Fed has retained a hawkish stance in the face of five consecutive quarters of below-average 3% growth, not to mention what was a near-recession like 0.6% GDP pace in the first quarter, is a clear signal that the Fed does not care so much about what the real economy is doing as much as what the unemployment rate and core inflation are doing.”
From Deutsche Bank: “The Fed has been right to hold to its opinion of a moderation of economic growth with upside inflation risks. The growth outlook remains moderate and
inflation is beginning to move back into the Fed’s comfort zone, keeping hopes alive that the next move will be a rate cut. However, resilient labour markets means the Fed is in no rush. We’ve pushed our forecast for the first Fed cut into Q4’07.”
From Bear Stearns: “We’re maintaining our forecasts for 3% second quarter growth, more in the second half of 2007, a decline in the unemployment rate, one or two Fed hikes in the second half, and a somewhat stronger dollar as the Fed shift toward hikes becomes apparent.”
MISC
From Dow Jones: “…the 10-year yield remained just short of the keynote 5% mark… The dollar gained against the euro Wednesday after the ECB lifted interest rates to 4.0%
but put forth no firm plans to hike rates again soon. Meanwhile, the dollar declined against the yen as a decline in U.S. stocks spurred some risk aversion that caused yen-funded carry trades to unwind modestly…The major [equity] indexes were all down about 1%. Decliners outnumbered advancers by about five to one…Crude oil futures shook off losses and turned higher Wednesday on reports that Turkey sent several thousand troops into northern Iraq in pursuit of Kurdish rebels, heightening worries about Middle Eastern oil supplies.”
From MarketWatch: “U.S. stocks fell sharply Wednesday, with the Dow Jones Industrial Average losing over 100 points, as news that unit labor costs jumped in the first quarter fueled concerns over inflation, interest rates and rising bond yields, further sapping enthusiasm in the market. Losses accelerated in afternoon trade after the Dow and the S&P 500 failed to hold key technical levels… Of the Dow's 30 components, 27 retreated…” [Dow closed down 130, S&P down 13.5 points]
From Morgan Stanley: [On European equity markets] “As of Friday, our Fundamentals
indicator tells us to sell too, because of higher bond yields and higher ISM new orders. This is in addition to existing sell signals on our Valuation (CVI) and Risk indicators. Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980. Equities have always been down in the next 6 months, on average by 15%. Previous occasions include September 1987 and April 2002.”
From Lehman: “…fixed-rate mortgages had been trending higher and are up 36% on a y-o-y basis while adjustable-rate mortgage are down nearly 30% y-o-y. This is to be expected given tighter lending standards and a shift away from risky mortgages.”
From RBSGC: “Natl. Assoc of Realtors projects US home sales will fall 4.6% this year, with prices down 1.3%. Last month the forecast was -2.9% and -1%, respectively.”
From AP: “Many public companies are putting dramatically lower expenses on their books for stock options awarded their executives than what they are reporting to the IRS under two differing sets of rules, Senate investigators have found…found a $43 billion "gap" for stock options between corporate IRS tax returns and expenses reported in financial statements for December 2004 to June 2005. That means U.S. public companies legally avoided billions in taxes for that period by claiming $43 billion more in tax deductions for options awards than the compensation amount for options recorded on their books, said Levin, the subcommittee's chairman. While not breaking the law, the companies benefited from an "outdated and overly generous stock-option tax rule,"…”
From Barclays: “…not only has there been a very significant move up in quantities consumed in all commodity sectors so far this decade, but that for many there has been further acceleration in growth so far in 2007, especially in base and precious metals. It is also worth noting that this has happened despite the weakness of the US economy in Q1. The move up in average growth rates for many commodities is a long-term phenomenon and is likely to continue putting the supply side under pressure to keep up, especially if the recent surge in output of many commodities begins to falter once again.”
From RBSGC: “…we found a dramatic shift in the Stone & McCarthy Survey -- one of our preferred proxies. The Survey went from near the longest it's been since 2003 to dead flat. This means that the pain trade for this audience is no longer desperately lower, i.e. lower levels won't force buying. The drop was the biggest 1-week move we've seen in a while. This is more in line with other recent proxies like CoT specs and Dealer holdings which should a similar, albeit far less dramatic, move from long to less long. It's part of a healthy process to get the market in a more neutral state…”
From Bear Stearns: “For most households, their biggest asset is the net present value of their future earnings. Expected lifetime earnings, sensitive to unemployment and compensation, is the primary support for consumption. The negative wealth effect from the decline in stocks in 2000-2002 and the decline in home prices in 2006-2007 left consumption growth largely unaffected – we think because the unemployment rate was relatively low.”
From Lehman: “The ECB governing council raised the official refinancing rate from 3.75% to 4% at today's meeting - as expected. The new Staff Projections entailed upward revisions to the 2007 growth and inflation forecasts, but kept the 2008 inflation forecast unchanged, while reducing the growth forecast for next year slightly.”
From Lehman: “…hedge funds generated 7.11% since the beginning of 2007 and have pulled ahead of the first five months of 2006 (5.23%).”
From Dow Jones: “A typical carry trade involves borrowing yen, which is loaned at rates near zero and then using the proceeds to buy currencies offering much higher interest rates. The investor then pockets the interest gained from the high-yielder before buying back yen to repay the loan. The risk is that while interest is accruing, the high-yielding currency plunges in value, or the yen surges, which could wipe out carry trade profits in an instant.”
From The Financial Times: “Opec on Tuesday warned western countries that their efforts to develop biofuels as an alternative energy source to combat climate change risked driving the price of oil “through the roof”. Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries, said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels. The warning from Opec, which controls about 40 per cent of global oil production, comes as the group of eight leading industrialised nations meets on Wednesday with climate change at the top of its agenda. The US and Europe want to use biofuels to combat global warming and to strengthen energy security…”
From AP: “General Mills Inc. said on Tuesday it would raise cereal prices to match increases by competitors… customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent.”
As Expected, ULC and Productivity Both Deteriorated
First quarter non-farm productivity was revised down to 1% from 1.7%, and unit labor costs were revised up to +1.8% from +.6% previously. So, with productivity falling and labor costs rising, the Fed will remain concerned about inflation and growth. Soft productivity growth tends to lower the non-inflationary potential growth rate of the economy.
Productivity measures output per employee hour worked. Quarterly productivity growth peaked at +10.4% quarterly annualized growth in 2003, and fell into negative territory briefly in 2005 and 2006. Last quarter's level is near the four quarter average of .95%, but below the 20 quarter (5 year) average of 2.6% quarterly annualized growth pace. Fourth quarter productivity was left unchanged at a +2.1% quarterly annualized rate. For the entire year of 2006, non-farm productivity rose +1% YoY, this is a notable slowing from the +3.1% annual average growth rate from 2000-2005. In contrast to total productivity, manufacturing productivity rose in the first quarter to +2.4% annualized versus +1.9% annualized in the fourth quarter. Non-financial productivity, which is monitored by the Fed, rose +.6% annualized in the first quarter.
A change in how bonus payments and stock options are accounted for caused labor costs to decelerate in the first quarter from the fourth quarter. Though compensation rose +2.8% annualized in the fourth quarter (versus an initial estimate of +2.3%), when adjusted for inflation, real compensation fell -1% annualized in the first quarter. This compares to a real compensation growth rate of +13.6% annualized in the fourth quarter, and a recent high. But when looking over a longer time horizon, to account for the changes in compensation timing and computation, it is clear that compensation is growing faster than inflation.
Unit labor costs measure compensation versus output growth, and are adjusted for efficiency gains. With GDP being revised lower (+.6%) in the first quarter, and output growing at a four year low, and compensation rising, it is not surprising that unit labor costs rose, even as hours worked fell (-.4%), the most in four years. The 1.8% annualized increase in ULC for the first quarter is a substantial slowing from the +8.9% revised rise in the fourth quarter increase for non-farm businesses. ULC for manufacturing grew +4.5% annualized in the first quarter. Durable goods producers saw their ULC rise even faster, to +6.2% annualized, as wage gains outstripped productivity improvements. Non-financial ULC rose +4.1% annualized in the fourth quarter, and have risen +3% YoY.
Productivity measures output per employee hour worked. Quarterly productivity growth peaked at +10.4% quarterly annualized growth in 2003, and fell into negative territory briefly in 2005 and 2006. Last quarter's level is near the four quarter average of .95%, but below the 20 quarter (5 year) average of 2.6% quarterly annualized growth pace. Fourth quarter productivity was left unchanged at a +2.1% quarterly annualized rate. For the entire year of 2006, non-farm productivity rose +1% YoY, this is a notable slowing from the +3.1% annual average growth rate from 2000-2005. In contrast to total productivity, manufacturing productivity rose in the first quarter to +2.4% annualized versus +1.9% annualized in the fourth quarter. Non-financial productivity, which is monitored by the Fed, rose +.6% annualized in the first quarter.
A change in how bonus payments and stock options are accounted for caused labor costs to decelerate in the first quarter from the fourth quarter. Though compensation rose +2.8% annualized in the fourth quarter (versus an initial estimate of +2.3%), when adjusted for inflation, real compensation fell -1% annualized in the first quarter. This compares to a real compensation growth rate of +13.6% annualized in the fourth quarter, and a recent high. But when looking over a longer time horizon, to account for the changes in compensation timing and computation, it is clear that compensation is growing faster than inflation.
Unit labor costs measure compensation versus output growth, and are adjusted for efficiency gains. With GDP being revised lower (+.6%) in the first quarter, and output growing at a four year low, and compensation rising, it is not surprising that unit labor costs rose, even as hours worked fell (-.4%), the most in four years. The 1.8% annualized increase in ULC for the first quarter is a substantial slowing from the +8.9% revised rise in the fourth quarter increase for non-farm businesses. ULC for manufacturing grew +4.5% annualized in the first quarter. Durable goods producers saw their ULC rise even faster, to +6.2% annualized, as wage gains outstripped productivity improvements. Non-financial ULC rose +4.1% annualized in the fourth quarter, and have risen +3% YoY.
Tuesday, June 5, 2007
Non-Manufacturing ISM Surprises to Upside
Non-manufacturing ISM rose much higher than expected, to 59.7 in May (consensus 55.8). This is a substantial increase from 56 in April and a four year low of 52.4 in March. Business activity has now been above 50 for 50 months in a row, indicating continued expansion. The headline figure is a separate question, and not an aggregation of the sub-components. Looking at the sub-components also shows strong growth during May.
Business activity, new orders, and employment all grew at a faster pace. New export orders increased by over 10 points to 66, an all-time high.
Prices also rose to 66.4 as almost every category of commodity price rose during the month. Prices have now risen for 48 straight months.
Only two of 14 industries reported decreased activity, and they were accommodation and food service, and wholesale trade. Even construction saw an increase in activity.
Inventories grew for the fourth month in a row, registering 61 for May. Most of the inventory growth appears to have been desired to prepare for future demand, except for real-estate. Thirty-three percent of respondents don't hold or measure inventories.
Business activity, new orders, and employment all grew at a faster pace. New export orders increased by over 10 points to 66, an all-time high.
Prices also rose to 66.4 as almost every category of commodity price rose during the month. Prices have now risen for 48 straight months.
Only two of 14 industries reported decreased activity, and they were accommodation and food service, and wholesale trade. Even construction saw an increase in activity.
Inventories grew for the fourth month in a row, registering 61 for May. Most of the inventory growth appears to have been desired to prepare for future demand, except for real-estate. Thirty-three percent of respondents don't hold or measure inventories.
In short
Interest rates hit a ten month high (10y Treasury at 4.99%), and a few street economists are giving in and eliminating their calls for the Fed to ease this year.
Equities also under pressure today. The Dow is down 81, S&P down 8. Dollar index down .16, to 81.90, and oil is unchanged
Equities also under pressure today. The Dow is down 81, S&P down 8. Dollar index down .16, to 81.90, and oil is unchanged
Monday, June 4, 2007
Factory Orders Growth Slows
April factory orders rose +.3% MoM (consensus +.7%). March was revised higher to +4.1% from +3.5%. Reduced orders for transportation equipment and machinery were responsible for a substantial part of the decline. Civilian aircraft orders fell 10.7% MoM in April after rising 54% in March. Auto demand declined -2.7% MoM, versus an increase of +2.4% in March. Orders for new machinery fell -1.5% MoM after rising +5.4% the prior month.
Durable goods orders, which make up a little over half of the index, rose +.8% MoM versus a gain of +5.1% in March. The April gain was slightly higher than the originally reported gain of +.6% MoM. Non-durable good demand fell -.2% MoM after rising +2.9% last month. Items in this category include food and gasoline.
Orders for capital goods excluding aircraft and defense slowed to +2.1% MoM from +4.6% in March, but this is better than the original estimate of +1.2% from the Commerce Dept. Orders for this category are used as a proxy for future business investment. Shipments of these goods are used for calculating GDP, and the shipments rose +1% MoM in April following a gain of +1.6% in March.
It appears that businesses were a bit more wary of building up inventories in April. Inventories rose +.5% MoM, for the largest gain since September, and have risen in 13 of the past 14 months. The inventory to sales ratio fell to 1.24 months from 1.25 months.
Durable goods orders, which make up a little over half of the index, rose +.8% MoM versus a gain of +5.1% in March. The April gain was slightly higher than the originally reported gain of +.6% MoM. Non-durable good demand fell -.2% MoM after rising +2.9% last month. Items in this category include food and gasoline.
Orders for capital goods excluding aircraft and defense slowed to +2.1% MoM from +4.6% in March, but this is better than the original estimate of +1.2% from the Commerce Dept. Orders for this category are used as a proxy for future business investment. Shipments of these goods are used for calculating GDP, and the shipments rose +1% MoM in April following a gain of +1.6% in March.
It appears that businesses were a bit more wary of building up inventories in April. Inventories rose +.5% MoM, for the largest gain since September, and have risen in 13 of the past 14 months. The inventory to sales ratio fell to 1.24 months from 1.25 months.
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