Industrial production unexpectedly declined -.5% MoM (consensus +.2%) in October. Capacity utilization also weakened unexpectedly to 81.7% (consensus 82.1%). The -.5% monthly decline in production was the largest since January, when the economy was working through the inventory overhang. Capacity utilization was last this low in April. Industrial production has risen 1.8% YoY.
The weakness in October was lead by a -1.6% MoM decline in utility demand, probably due to the warmer than normal temps. Mining output fell -.6% MoM and manufacturing production fell -.4% MoM. Durable goods production fell -.2% MoM and nondurable fell -.4% MoM.
There were widespread declines in consumer goods output, which dropped -.7% MoM. Consumer durable goods continued to fall for the third month in a row, down -.6% MoM, though it is up +5.2% YoY. As expected with the housing slump, demand for appliances, furniture and home electronics all fell over -.5% MoM. Construction supplies fell -.4% MoM and is essentially unchanged YoY.
On the positive side, aircraft demand kept transit output up 1.7% MoM, but construction equipment output dropped substantially. Defense demand grew +.4% MoM.
Friday, November 16, 2007
Foreign Demand for US Assets Improved in September, But Not Enough to Fund Current Account Deficit
Total net monthly TIC flows remained in negative territory in September at -$14.7B versus the revised -$150.7 from August. Even though the net selling experienced in August was revised down to -$150.7B, from the previously reported decline of -$163B, last month (August) retains the record for monthly foreign selling of total U.S. assets. Of the total monthly long-and short-term flows, private investors sold -$27.8B, while official purchasers, such as foreign central banks, bought a net +$13.1B of US assets, causing the net total foreign monthly sales of -$14.7B.
The long-term net securities TIC flows (durations longer than one year), which are more indicative of long-term investment, rose $26.4 billion, after falling a revised -$70.6B of net sales last month. Today's TIC data suggests that foreigners are no longer interested in funding the United State's current account and trade deficits, which are running at over $60B a month, or approx $2.1B a day in foreign funding needs. The dollar index is now down .275 on the day, to 75.79, as the dollar remains near record lows.
In September, foreigners bought the largest amount of Treasuries in six months, as the Fed rate cut gave a boost to Treasury prices and interest rates fell. Net Treasury purchases rose $26.3B in September after falling $2.8B in August. Stock indices also had a good rally in September. International holdings of U.S equities rose a net $2.5B in September after falling $40.7B in August. Demand for Agency debt and MBS also rose, growing from $8.4B in demand in August to $11.5B net purchases in September.
Private investors of long-term assests bought a net $11.6B of Treasuries, $2.3B of agencies, and $10.5B of corporate bonds, plus a net $2.5B of equities. Official purchasers bought a net $14.6 Billion of Treasuries, $9.2B of agencies, $4.6B of corporate bonds and essentially no equities. These foreign purchases of U.S. assets were partially offset by U.S. investors purchases of foreign securities which reduced net demand by $29B. U.S. investors bought a net $19.7B of foreign bonds and $9.2B of foreign equities in September.
The UK increased their holdings of U.S. Treasury debt by $22.4B last month (often Middle Eastern investors), followed by Brazil at $2.7B and oil exporters at $2.4B. The largest sellers of Treasuries in September were the Caribbean at -$4.9B (usually hedge funds), France and China each at -$3.5B, Japan at -$3.4B and Korea at -$3.2B. Most of the increase was in Treasury Bonds as opposed to Treasury Bills. Japan remains the largest foreign holder of U.S. government debt at $582B followed by China at $397B and the UK at $266B. OPEC countries weigh in at $125B and Brazil at $109B.
The long-term net securities TIC flows (durations longer than one year), which are more indicative of long-term investment, rose $26.4 billion, after falling a revised -$70.6B of net sales last month. Today's TIC data suggests that foreigners are no longer interested in funding the United State's current account and trade deficits, which are running at over $60B a month, or approx $2.1B a day in foreign funding needs. The dollar index is now down .275 on the day, to 75.79, as the dollar remains near record lows.
In September, foreigners bought the largest amount of Treasuries in six months, as the Fed rate cut gave a boost to Treasury prices and interest rates fell. Net Treasury purchases rose $26.3B in September after falling $2.8B in August. Stock indices also had a good rally in September. International holdings of U.S equities rose a net $2.5B in September after falling $40.7B in August. Demand for Agency debt and MBS also rose, growing from $8.4B in demand in August to $11.5B net purchases in September.
Private investors of long-term assests bought a net $11.6B of Treasuries, $2.3B of agencies, and $10.5B of corporate bonds, plus a net $2.5B of equities. Official purchasers bought a net $14.6 Billion of Treasuries, $9.2B of agencies, $4.6B of corporate bonds and essentially no equities. These foreign purchases of U.S. assets were partially offset by U.S. investors purchases of foreign securities which reduced net demand by $29B. U.S. investors bought a net $19.7B of foreign bonds and $9.2B of foreign equities in September.
The UK increased their holdings of U.S. Treasury debt by $22.4B last month (often Middle Eastern investors), followed by Brazil at $2.7B and oil exporters at $2.4B. The largest sellers of Treasuries in September were the Caribbean at -$4.9B (usually hedge funds), France and China each at -$3.5B, Japan at -$3.4B and Korea at -$3.2B. Most of the increase was in Treasury Bonds as opposed to Treasury Bills. Japan remains the largest foreign holder of U.S. government debt at $582B followed by China at $397B and the UK at $266B. OPEC countries weigh in at $125B and Brazil at $109B.
Thursday, November 15, 2007
Today's Tidbits
Decline of the Dollar Indicates Weakening US Global Economic Dominance
From Bloomberg: “``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor. Now the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side. After declining in five of the last six years, the weakest dollar in the era of floating currencies reflects a period of diminished U.S. political and economic hegemony. Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll. ``What we're seeing is a very broad rebalancing of economic and political power in the world,'' says Jeffrey Garten, a Yale School of Business professor who was the Commerce Department's undersecretary for international trade in the Clinton administration. ``The scales are moving, and they're moving quite fast.''… For the first time, economists are raising the once-improbable specter that the dollar's monopoly as the world's dominant reserve currency is under threat. Like the British pound, its predecessor as the world currency, the dollar has fallen victim to widening burdens overseas and economic stresses at home. The slippage began in 1971 when President Richard Nixon, in a stopgap move to cope with the inflationary financing of the Vietnam War, halted the exchange of dollars for gold…``Part of the depreciation is permanent,'' says Harvard University professor Kenneth Froot, who has been a consultant to the Fed. ``There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity.'' The Fed's trade-weighted major currency index bottomed at 71.11 on Nov. 7, the lowest since the era of free-floating currencies started in 1971. Against the yen and European currencies, the dollar is now worth about a third of what it was in the days of fixed rates. One of the main U.S. exports since then has been the dollar itself, in exchange for foreign capital to finance trade deficits and a national debt of more than $9 trillion. While the current- account deficit is narrowing from last year's record $811.5 billion, the U.S. still requires $2.1 billion a day of other people's money. ``We're getting into a very unstable situation,…Such a prospect unsettles U.S. allies, and concerns are mounting that the flight from the dollar is feeding on itself and threatening a crisis of confidence …The dollar's share of global central banks' currency portfolios slid to 64.8 percent in the second quarter from 71 percent in 1999, the year the euro debuted, the International Monetary Fund says. The euro, used in 13 countries, now accounts for 25.6 percent. ``The global reserve system is fraying; it's falling apart,'' said Joseph Stiglitz, a Nobel-laureate economist at Columbia University…To be sure, the latest slump -- 6.6 percent against the euro sin ce the end of August, 4.7 percent against the yen --partly reflects an economic dry spell. Credit-market turmoil led banks to cut consumer lending, bruising the U.S. economy's main engine…For now, the U.S. economy is a drag on the rest of the world. When the IMF last month trimmed its global growth prediction for 2008 to 4.8 percent from 5.2 percent, it blamed the U.S., whose forecast was cut to 1.9 percent from 2.8 percent….Cash-rich governments are discovering the profit motive, adding to pressure on the dollar as they comb the world's markets for investments that pay more than the current 4.25 percent return on 10-year U.S. Treasury bonds. Economists at Merrill Lynch & Co. estimate as much as $1.2 trillion in dollar holdings will shift to other currencies in the next five years. A warning by Cheng Siwei, vice chairman of the National People's Congress, that China will invest in stronger currencies triggered a recent stampede out of the dollar. China doesn't have to dump dollars to depress the U.S. currency, economists at UBS AG say. Accumulating them at a slower pace will have the same effect.”
CPI Data Shows Unusual Divergence in Rental Indices
From HSBC: “Tenant rent (+0.5%) rose more than anticipated, although OER was lower at +0.2%. Rising fuel costs (which results in a downward adjustment to OER) may account for this gap, or alternatively it may be that rents at larger homes selected to match owner-occupied units are rising slower than smaller renter-occupied units. In either case, we need to watch for the possibility of a sustained pickup in rental inflation.”
From Goldman Sachs: “October featured an unusual divergence between rent and owners equivalent rent (OER). OER increased by 0.2% while rent ran much faster at +0.5% (the unrounded gap was 0.23%). When these have diverged in the past there has tended to be a correction the next month; more fundamentally, with markets for both rental and owner-occupied housing in excess supply, we would take the owners equivalent rent number more seriously.”
GE Let’s Money Market Fund “Break the Buck”
From Lehman: “Barron’s reported that a General Electric Asset Management-sponsored short-term bond fund returned cash to outside investors at 96 cents on the dollar after the fund took losses of $200 million on mortgage-related securities.”
From Morgan Stanley: “The announcement from GE follows news that BoA and Legg Mason shored up some of their money market funds with cash injections. In contrast, GE
is not adding any additional cash to this fund and is instead allowing investors to withdraw money at $0.96/share--effectively 'breaking the buck'. Even though the GE fund is a relatively small money market fund, the announcement is likely to fuel concerns about additional contagion from subprime market weakness.”
Fed Doubles Forecast Frequency to Four Times a Year
From Goldman Sachs: “…the FOMC announced several significant changes to its communication of forecasts of inflation and economic activity, including: (1) greater forecast frequency, (2) a longer forecast horizon, (3) forecasts of headline as well as core inflation, (4) more information about the dispersion of individual forecasts, and (5) written summaries. This is a highly welcome step in providing more color about FOMC thinking on a more frequent basis. That said, market participants should be aware of several points: (1) The FOMC forecasts are not, and never have been, one integrated view; they are a collection of 19 different forecasts; (2) forecasts for out years are better thought of as objectives in the case of inflation and opinions about sustainable growth in the case of GDP; (3) the added attention to headline inflation does not mean that the FOMC has dropped its focus on core inflation as a key indicator for where inflation (by either measure) is headed; and (4) formal adoption of an inflation targeting (IT) regime is quite a distance off, if it occurs at all.”
Total and Ex-BP Oil Executives Expect Major Supply Shortage Early Next Decade
From AP: “Perhaps the biggest reason that oil costs nearly $100 a barrel can be found in places like China, where roads that were full of bicycles 15 years ago are now choking with cars and trucks. Or in India, where sales of diesel-powered generators have soared as people try to avoid frequent power outages. The rapid growth in China, India and other emerging economies has been fed by crude oil, but this rising demand for fossil fuels may finally be pushing the limits of supply… Some experts see a potential disaster looming - in as soon as five years or even less. Chris Skrebowski, the editor of the London-based Petroleum Review, thinks slower-than-expected supply growth combined with rising demand from burgeoning Asian economies could result in a worldwide shortfall of as much as 7 million barrels a day by 2013. Demand is so strong that Matthew Simmons, a Houston oil and gas investment banker, says $100 a barrel oil may even be a bargain… From the oil industry, too, there are voices of concern. For example, Christophe de Margerie, chief executive of Total SA, France's largest oil company, believes the Department of Energy's global production forecast is far too high. "One hundred million barrels ... is now in my view an optimistic case," de Margerie said at an industry conference in London late last month. "It is not (just) my view, it is the industry view, it is the view of people who like to speak clearly, honestly and not ... just to please people."
Over time, soaring energy costs could have disastrous consequences for the world economy, with affordable transportation being the most obvious casualty. Manufacturing, petrochemicals and power generation would all be affected. But some analysts argue that consumption growth will slow if limited supply keeps prices high. Recent evidence suggests that prices of $80 a barrel have already begun to put a crimp in consumption in industrialized countries, said Leo Drollas, chief economist at the London-based Center for Global Energy Studies… Drollas' view appeared to get a boost Tuesday when the IEA lowered its oil demand forecast for the fourth quarter by 500,000 barrels a day and for 2008 by 300,000 barrels a day. Demand growth will now average 1.2 percent in 2007, the group said. However, it said demand will likely grow 2.3 percent in 2008, keeping consumption close to global supply. So far, subsidies in China and India have blunted the impact of high prices on their consumers. But state-run oil refineries are feeling the pinch, and China recently raised retail gasoline prices about 10 percent… Looking at planned oil field developments, Skrebowski, the London-based oil expert, calculates that 23.6 million barrels a day of new production will come onto the market by 2013 - and that only if projects are completed on schedule, despite growing shortages of equipment and qualified personnel. But the former long-term planner for energy giant BP PLC and oil analyst for Saudi Arabia believes that new production will be largely offset by the natural depletion of existing fields totaling 20 million barrels a day. The net gain, then, would be only about 3.5 million barrels over the five-year period, raising daily production to 88.5 million barrels. Against that, Skrebowski says IEA demand projections would raise consumption to 96 million barrels by 2013, more than 7 million barrels short of his production estimate. "After 2011 we could be in for serious trouble," he said.”
MISC
From JP Morgan: “The headline CPI, already up to 3.5%oya from 1.9% as recently as August, is likely to exceed 4% by year-end, signaling a very significant drag on the consumer’s purchasing power. But core inflation remains well-contained.”
From Merrill Lynch: “AB-CP was UP $8.1 bln w/w (in seasonally adjusted terms), its first weekly rise since the week of August 8th, the week prior to the financial market upset and Fed discount rate cut, on August 17th. So far, including the latest week, outstanding issuance of AB-CP has fallen $329.6 bln since the week of August 8th, the "peak" of the AB-CP issuance.”
From Morgan Stanley: “Looking back to the summer crisis, bank CDS was a great leading indicator for this[Fed funds/LIBOR]spread widening.”From Deutsche Bank: “The news that FAS 157 was largely going forward starting today was a factor behind yesterday's late equity sell-off. FASB yesterday decided only to delay implementation for nonfinancial assets and liabilities, e.g. goodwill…A large range of possibly profitable investments could be in Level 3, and thus Level 3 asset levels should not be a gauge of subprime exposure.”From The Wall Street Journal: “…put money into a health-care flexible spending account. Many workers -- particularly young singles -- make the mistake of paying more taxes than they should because they don't take advantage of these pre-tax savings accounts… "you could be saving 40% of every dollar you spend." …"The average [health-care] plan today has a deductible of $350…Indeed, a Hewitt survey estimates employees will contribute an average of $1,859 toward insurance premiums in 2008, compared with $1,690 this year. Out-of-pocket expenses are also expected to climb, thanks to higher co-pays and deductibles. According to Hewitt, employees can expect to pay an average $3,597 out of pocket in 2008, or about 10% more than last year.”
From HSBC: “UAE Central Bank governor, Nasser al-Suweidi, said in a press interview today that the UAE might switch from a dollar peg to a peg against a dollar-heavy basket of currencies…it must be noted that the governor stressed that the UAE will act only with other Gulf states and will not act unilaterally. If this is taken literally to mean that the UAE will only move if other Gulf states adjust with it, then it is far less likely that there will be adjustment. Every indication from Saudi Arabia, the pivotal Gulf player, suggests that it is opposed to change. The onshore market in Saudi Arabia continues to believe that there will be no movement.…The market is now waiting for comment from Saudi Arabia, which, along with the UAE, has seen strong dollar selling across the curve in anticipation of currency change. The other key event is a meeting of GCC heads of state which will take place in Qatar in the first week of December. The forum was already expected to confirm that plans for monetary union in 2010 have been delayed. It will now be keenly watched for evidence that the Gulf states are preparing to introduce more substantial changes to their individual currency regimes.”
From The Wall Street Journal: “Just weeks after some of the world's largest banks took tens of billions of dollars in losses on their holdings of debt linked to tainted mortgages, a new concern is emerging: It might not have been enough.”
From Reuters: “Loans to banks from the Federal Home Loan Bank system rose by 28.6 percent to $824 billion in September from the end of 2006 as the institutions sought alternate mortgage funding, the FHLB Office of Finance said on Wednesday.”
From Credit Suisse: “2008 total mortgage securities (Agency MBS, non-Agency ABS/MBS) net issuance is likely to decline 80% to $106B from 2007 levels. Agency MBS net issuance is projected at $639B, non-Agency MBS at -$189B and subprime at -$344B assuming the Q3:07 run rate… Decline in issuance is concentrated in subprime. Agency MBS and non-Agency MBS net issuance projected at $762B (annualized) in 2007 are essentially flat from 2006 levels. 2008 MBS net issuance is projected at $450B, a 41% decline from 2007.”
From Barclays: “It seems that the vainest age to be is 27, when mirrors are looked into 52 times a day on average. By contrast, people in their sixties only look in the mirror an average of 5 times a day. British women look in the mirror an average of 34 times a day, while men do it 27 times.”
From JP Morgan: “The Philadelphia Fed and Empire State surveys have showed little change in current manufacturing activity in November, but both have shown a significant decline in future expectations.”
End of Day Market Update
From UBS: “Markets. Equity markets fell again on Thursday, with the S&P 500 down 1.3% and the Nasdaq down 1.0%. 10-year Treasury yields fell 9bp to 4.16%; 2-year yields fell 16bp to 3.35%. “
From Bloomberg: “``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor. Now the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side. After declining in five of the last six years, the weakest dollar in the era of floating currencies reflects a period of diminished U.S. political and economic hegemony. Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll. ``What we're seeing is a very broad rebalancing of economic and political power in the world,'' says Jeffrey Garten, a Yale School of Business professor who was the Commerce Department's undersecretary for international trade in the Clinton administration. ``The scales are moving, and they're moving quite fast.''… For the first time, economists are raising the once-improbable specter that the dollar's monopoly as the world's dominant reserve currency is under threat. Like the British pound, its predecessor as the world currency, the dollar has fallen victim to widening burdens overseas and economic stresses at home. The slippage began in 1971 when President Richard Nixon, in a stopgap move to cope with the inflationary financing of the Vietnam War, halted the exchange of dollars for gold…``Part of the depreciation is permanent,'' says Harvard University professor Kenneth Froot, who has been a consultant to the Fed. ``There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity.'' The Fed's trade-weighted major currency index bottomed at 71.11 on Nov. 7, the lowest since the era of free-floating currencies started in 1971. Against the yen and European currencies, the dollar is now worth about a third of what it was in the days of fixed rates. One of the main U.S. exports since then has been the dollar itself, in exchange for foreign capital to finance trade deficits and a national debt of more than $9 trillion. While the current- account deficit is narrowing from last year's record $811.5 billion, the U.S. still requires $2.1 billion a day of other people's money. ``We're getting into a very unstable situation,…Such a prospect unsettles U.S. allies, and concerns are mounting that the flight from the dollar is feeding on itself and threatening a crisis of confidence …The dollar's share of global central banks' currency portfolios slid to 64.8 percent in the second quarter from 71 percent in 1999, the year the euro debuted, the International Monetary Fund says. The euro, used in 13 countries, now accounts for 25.6 percent. ``The global reserve system is fraying; it's falling apart,'' said Joseph Stiglitz, a Nobel-laureate economist at Columbia University…To be sure, the latest slump -- 6.6 percent against the euro sin ce the end of August, 4.7 percent against the yen --partly reflects an economic dry spell. Credit-market turmoil led banks to cut consumer lending, bruising the U.S. economy's main engine…For now, the U.S. economy is a drag on the rest of the world. When the IMF last month trimmed its global growth prediction for 2008 to 4.8 percent from 5.2 percent, it blamed the U.S., whose forecast was cut to 1.9 percent from 2.8 percent….Cash-rich governments are discovering the profit motive, adding to pressure on the dollar as they comb the world's markets for investments that pay more than the current 4.25 percent return on 10-year U.S. Treasury bonds. Economists at Merrill Lynch & Co. estimate as much as $1.2 trillion in dollar holdings will shift to other currencies in the next five years. A warning by Cheng Siwei, vice chairman of the National People's Congress, that China will invest in stronger currencies triggered a recent stampede out of the dollar. China doesn't have to dump dollars to depress the U.S. currency, economists at UBS AG say. Accumulating them at a slower pace will have the same effect.”
CPI Data Shows Unusual Divergence in Rental Indices
From HSBC: “Tenant rent (+0.5%) rose more than anticipated, although OER was lower at +0.2%. Rising fuel costs (which results in a downward adjustment to OER) may account for this gap, or alternatively it may be that rents at larger homes selected to match owner-occupied units are rising slower than smaller renter-occupied units. In either case, we need to watch for the possibility of a sustained pickup in rental inflation.”
From Goldman Sachs: “October featured an unusual divergence between rent and owners equivalent rent (OER). OER increased by 0.2% while rent ran much faster at +0.5% (the unrounded gap was 0.23%). When these have diverged in the past there has tended to be a correction the next month; more fundamentally, with markets for both rental and owner-occupied housing in excess supply, we would take the owners equivalent rent number more seriously.”
GE Let’s Money Market Fund “Break the Buck”
From Lehman: “Barron’s reported that a General Electric Asset Management-sponsored short-term bond fund returned cash to outside investors at 96 cents on the dollar after the fund took losses of $200 million on mortgage-related securities.”
From Morgan Stanley: “The announcement from GE follows news that BoA and Legg Mason shored up some of their money market funds with cash injections. In contrast, GE
is not adding any additional cash to this fund and is instead allowing investors to withdraw money at $0.96/share--effectively 'breaking the buck'. Even though the GE fund is a relatively small money market fund, the announcement is likely to fuel concerns about additional contagion from subprime market weakness.”
Fed Doubles Forecast Frequency to Four Times a Year
From Goldman Sachs: “…the FOMC announced several significant changes to its communication of forecasts of inflation and economic activity, including: (1) greater forecast frequency, (2) a longer forecast horizon, (3) forecasts of headline as well as core inflation, (4) more information about the dispersion of individual forecasts, and (5) written summaries. This is a highly welcome step in providing more color about FOMC thinking on a more frequent basis. That said, market participants should be aware of several points: (1) The FOMC forecasts are not, and never have been, one integrated view; they are a collection of 19 different forecasts; (2) forecasts for out years are better thought of as objectives in the case of inflation and opinions about sustainable growth in the case of GDP; (3) the added attention to headline inflation does not mean that the FOMC has dropped its focus on core inflation as a key indicator for where inflation (by either measure) is headed; and (4) formal adoption of an inflation targeting (IT) regime is quite a distance off, if it occurs at all.”
Total and Ex-BP Oil Executives Expect Major Supply Shortage Early Next Decade
From AP: “Perhaps the biggest reason that oil costs nearly $100 a barrel can be found in places like China, where roads that were full of bicycles 15 years ago are now choking with cars and trucks. Or in India, where sales of diesel-powered generators have soared as people try to avoid frequent power outages. The rapid growth in China, India and other emerging economies has been fed by crude oil, but this rising demand for fossil fuels may finally be pushing the limits of supply… Some experts see a potential disaster looming - in as soon as five years or even less. Chris Skrebowski, the editor of the London-based Petroleum Review, thinks slower-than-expected supply growth combined with rising demand from burgeoning Asian economies could result in a worldwide shortfall of as much as 7 million barrels a day by 2013. Demand is so strong that Matthew Simmons, a Houston oil and gas investment banker, says $100 a barrel oil may even be a bargain… From the oil industry, too, there are voices of concern. For example, Christophe de Margerie, chief executive of Total SA, France's largest oil company, believes the Department of Energy's global production forecast is far too high. "One hundred million barrels ... is now in my view an optimistic case," de Margerie said at an industry conference in London late last month. "It is not (just) my view, it is the industry view, it is the view of people who like to speak clearly, honestly and not ... just to please people."
Over time, soaring energy costs could have disastrous consequences for the world economy, with affordable transportation being the most obvious casualty. Manufacturing, petrochemicals and power generation would all be affected. But some analysts argue that consumption growth will slow if limited supply keeps prices high. Recent evidence suggests that prices of $80 a barrel have already begun to put a crimp in consumption in industrialized countries, said Leo Drollas, chief economist at the London-based Center for Global Energy Studies… Drollas' view appeared to get a boost Tuesday when the IEA lowered its oil demand forecast for the fourth quarter by 500,000 barrels a day and for 2008 by 300,000 barrels a day. Demand growth will now average 1.2 percent in 2007, the group said. However, it said demand will likely grow 2.3 percent in 2008, keeping consumption close to global supply. So far, subsidies in China and India have blunted the impact of high prices on their consumers. But state-run oil refineries are feeling the pinch, and China recently raised retail gasoline prices about 10 percent… Looking at planned oil field developments, Skrebowski, the London-based oil expert, calculates that 23.6 million barrels a day of new production will come onto the market by 2013 - and that only if projects are completed on schedule, despite growing shortages of equipment and qualified personnel. But the former long-term planner for energy giant BP PLC and oil analyst for Saudi Arabia believes that new production will be largely offset by the natural depletion of existing fields totaling 20 million barrels a day. The net gain, then, would be only about 3.5 million barrels over the five-year period, raising daily production to 88.5 million barrels. Against that, Skrebowski says IEA demand projections would raise consumption to 96 million barrels by 2013, more than 7 million barrels short of his production estimate. "After 2011 we could be in for serious trouble," he said.”
MISC
From JP Morgan: “The headline CPI, already up to 3.5%oya from 1.9% as recently as August, is likely to exceed 4% by year-end, signaling a very significant drag on the consumer’s purchasing power. But core inflation remains well-contained.”
From Merrill Lynch: “AB-CP was UP $8.1 bln w/w (in seasonally adjusted terms), its first weekly rise since the week of August 8th, the week prior to the financial market upset and Fed discount rate cut, on August 17th. So far, including the latest week, outstanding issuance of AB-CP has fallen $329.6 bln since the week of August 8th, the "peak" of the AB-CP issuance.”
From Morgan Stanley: “Looking back to the summer crisis, bank CDS was a great leading indicator for this[Fed funds/LIBOR]spread widening.”From Deutsche Bank: “The news that FAS 157 was largely going forward starting today was a factor behind yesterday's late equity sell-off. FASB yesterday decided only to delay implementation for nonfinancial assets and liabilities, e.g. goodwill…A large range of possibly profitable investments could be in Level 3, and thus Level 3 asset levels should not be a gauge of subprime exposure.”From The Wall Street Journal: “…put money into a health-care flexible spending account. Many workers -- particularly young singles -- make the mistake of paying more taxes than they should because they don't take advantage of these pre-tax savings accounts… "you could be saving 40% of every dollar you spend." …"The average [health-care] plan today has a deductible of $350…Indeed, a Hewitt survey estimates employees will contribute an average of $1,859 toward insurance premiums in 2008, compared with $1,690 this year. Out-of-pocket expenses are also expected to climb, thanks to higher co-pays and deductibles. According to Hewitt, employees can expect to pay an average $3,597 out of pocket in 2008, or about 10% more than last year.”
From HSBC: “UAE Central Bank governor, Nasser al-Suweidi, said in a press interview today that the UAE might switch from a dollar peg to a peg against a dollar-heavy basket of currencies…it must be noted that the governor stressed that the UAE will act only with other Gulf states and will not act unilaterally. If this is taken literally to mean that the UAE will only move if other Gulf states adjust with it, then it is far less likely that there will be adjustment. Every indication from Saudi Arabia, the pivotal Gulf player, suggests that it is opposed to change. The onshore market in Saudi Arabia continues to believe that there will be no movement.…The market is now waiting for comment from Saudi Arabia, which, along with the UAE, has seen strong dollar selling across the curve in anticipation of currency change. The other key event is a meeting of GCC heads of state which will take place in Qatar in the first week of December. The forum was already expected to confirm that plans for monetary union in 2010 have been delayed. It will now be keenly watched for evidence that the Gulf states are preparing to introduce more substantial changes to their individual currency regimes.”
From The Wall Street Journal: “Just weeks after some of the world's largest banks took tens of billions of dollars in losses on their holdings of debt linked to tainted mortgages, a new concern is emerging: It might not have been enough.”
From Reuters: “Loans to banks from the Federal Home Loan Bank system rose by 28.6 percent to $824 billion in September from the end of 2006 as the institutions sought alternate mortgage funding, the FHLB Office of Finance said on Wednesday.”
From Credit Suisse: “2008 total mortgage securities (Agency MBS, non-Agency ABS/MBS) net issuance is likely to decline 80% to $106B from 2007 levels. Agency MBS net issuance is projected at $639B, non-Agency MBS at -$189B and subprime at -$344B assuming the Q3:07 run rate… Decline in issuance is concentrated in subprime. Agency MBS and non-Agency MBS net issuance projected at $762B (annualized) in 2007 are essentially flat from 2006 levels. 2008 MBS net issuance is projected at $450B, a 41% decline from 2007.”
From Barclays: “It seems that the vainest age to be is 27, when mirrors are looked into 52 times a day on average. By contrast, people in their sixties only look in the mirror an average of 5 times a day. British women look in the mirror an average of 34 times a day, while men do it 27 times.”
From JP Morgan: “The Philadelphia Fed and Empire State surveys have showed little change in current manufacturing activity in November, but both have shown a significant decline in future expectations.”
End of Day Market Update
From UBS: “Markets. Equity markets fell again on Thursday, with the S&P 500 down 1.3% and the Nasdaq down 1.0%. 10-year Treasury yields fell 9bp to 4.16%; 2-year yields fell 16bp to 3.35%. “
CPI Data as Expected- Jobless Claims Rise
The market consensus was spot on for October's CPI data. Everything came in at consensus. Headline CPI rose +.3% MoM and 3.5% YoY. Core CPI rose +.2% MoM and 2.2% YoY. This was the fifth month in a row that core CPI rose +.2% MoM indicating that core inflation, excluding food and energy, has been growing at a very steady pace. The 3.5% annual increase in headline inflation was the largest increase in over a year, and is a substantial jump from the 2.8% YoY rate of September. The increase to 2.2% YoY in core inflation represents the first increase in this measure this year. It has trended down from 2.7% YoY in January.
Energy costs began their serious rise in price in the second half of October, and were therefore not included in the month's inflation data which are collected mid-month. The steady rise since then indicates that inflation will definitely rise in November. This will be a concern for the Fed. For October, retail energy prices (as well as gasoline prices) rose +1.4% MoM (+14.5% YoY), the largest monthly gain since May. Electricity prices rose +1.5% MoM, the largest increase since January. Over the past year, gasoline prices through mid-October had risen 23.4%.
Food prices rose +.3% MoM, and are up 4.4% YoY. Medicare moved higher again, rising +.6% MoM, the fastest pace in the past six months.
Housing costs slowed to +.2% MoM and +3.1% YoY. Owner's equivalent rent rose +.2% MoM (+2.8 YoY).
In another report, new jobless claims rose 20k, much more than expected, to 339k (consensus 320k), just matching the six month high reached in October. This will also concern the Fed as it suggests that the job market may be slowing. Continuing claims have moved toward the high end of the past year suggesting that it is getting harder to find a new job when laid off.
Energy costs began their serious rise in price in the second half of October, and were therefore not included in the month's inflation data which are collected mid-month. The steady rise since then indicates that inflation will definitely rise in November. This will be a concern for the Fed. For October, retail energy prices (as well as gasoline prices) rose +1.4% MoM (+14.5% YoY), the largest monthly gain since May. Electricity prices rose +1.5% MoM, the largest increase since January. Over the past year, gasoline prices through mid-October had risen 23.4%.
Food prices rose +.3% MoM, and are up 4.4% YoY. Medicare moved higher again, rising +.6% MoM, the fastest pace in the past six months.
Housing costs slowed to +.2% MoM and +3.1% YoY. Owner's equivalent rent rose +.2% MoM (+2.8 YoY).
In another report, new jobless claims rose 20k, much more than expected, to 339k (consensus 320k), just matching the six month high reached in October. This will also concern the Fed as it suggests that the job market may be slowing. Continuing claims have moved toward the high end of the past year suggesting that it is getting harder to find a new job when laid off.
Wednesday, November 14, 2007
Producer Price Inflation Increases Slower than Expected in October
Both headline and core producer prices rose less than expected MoM and YoY. Headline PPI rose +.1% MoM (consensus +.3%) and +6.1% YoY (consensus +6.4%). Core PPI inflation was unchanged MoM (consensus +.2%) and +2.5% YoY (consensus +2.6%). This data doesn't take away from the fact that the actual inflation rates rose year-over-year in October versus September. At 2.5% YoY, core inflation is +.5% higher than the 2% YoY pace of September. Headline inflation rose even more, jumping from 4.4% YoY in September to +6.1% YoY in October.
The subdued gains in PPI inflation indicates that the energy price increases (-.8% MoM) experienced this fall have yet to fully be integrated into producer prices. Notably, producer prices for gasoline fell -3.1% MoM in October, and residential gas prices fell -2.4% MoM. This increases the risk of higher prices appearing in the November data, as most of the recent rise occurred in the second half of the month, and was likely underrepresented in this survey which occurred earlier in the month. Gasoline prices are up 32.4% YoY. Food prices rose +1% MoM in October, and are up 7.1% YoY.
As expected, there was more volatility in car and light truck pricing in October. Passenger car prices rose 1% MoM while light truck prices fell -2.7% MoM. Over the past year, car prices have risen only +.4% YoY and truck prices have grown by +5.1% YoY. Computer prices continue to fall (-1.3% MoM, -22.5% YoY). In total, consumer goods prices at the producer level rose +.1% MoM, and capital equipment prices fell -.1% MoM for the second month in a row. Weak capital equipment spending suggests weak business investment in future growth.
Intermediate goods prices rose a modest +.1% MoM (+5.6% YoY), while crude goods prices rose a very strong +2.4% MoM and 25.7% YoY. Excluding food and energy, crude goods prices still rose near the average of the past three months of +1.4% MoM and are up 18.6% YoY. Crude energy prices rose 5.9% MoM.
Consumer prices are announced tomorrow.
The subdued gains in PPI inflation indicates that the energy price increases (-.8% MoM) experienced this fall have yet to fully be integrated into producer prices. Notably, producer prices for gasoline fell -3.1% MoM in October, and residential gas prices fell -2.4% MoM. This increases the risk of higher prices appearing in the November data, as most of the recent rise occurred in the second half of the month, and was likely underrepresented in this survey which occurred earlier in the month. Gasoline prices are up 32.4% YoY. Food prices rose +1% MoM in October, and are up 7.1% YoY.
As expected, there was more volatility in car and light truck pricing in October. Passenger car prices rose 1% MoM while light truck prices fell -2.7% MoM. Over the past year, car prices have risen only +.4% YoY and truck prices have grown by +5.1% YoY. Computer prices continue to fall (-1.3% MoM, -22.5% YoY). In total, consumer goods prices at the producer level rose +.1% MoM, and capital equipment prices fell -.1% MoM for the second month in a row. Weak capital equipment spending suggests weak business investment in future growth.
Intermediate goods prices rose a modest +.1% MoM (+5.6% YoY), while crude goods prices rose a very strong +2.4% MoM and 25.7% YoY. Excluding food and energy, crude goods prices still rose near the average of the past three months of +1.4% MoM and are up 18.6% YoY. Crude energy prices rose 5.9% MoM.
Consumer prices are announced tomorrow.
Retail Sales Weaken in October
As expected, retail sales growth fell substantially at the start of the 3rd quarter in October, rising +.2% MoM (consensus +.1%) versus the 7% MoM revised higher (prior +.6% MoM) increase in September. Excluding autos, retail sales also rose +.2% MoM (consensus +.2%) in October. Ex-auto sales were revised down a tenth to +.3% for the prior month.
It appears that rising fuel prices (gas station sales +.8% MoM) caused demand for furniture (-.9% MoM), department store (-.5% MoM), and sporting goods (-.4% MoM) to decline. Excluding gasoline, retail sales rose +.1% MoM. Food and beverage prices rose +.4% MoM, a slower pace from the +.7% MoM increase the prior month. Surprisingly building materials rose +.6% MoM. Restaurant sales, which are often one of the first discretionary items to be cut, rose +.7% MoM. This makes it less clear what impact the slowing of the economy is having on consumers. The International Council of Shopping Centers last week announced that the 1.6% gain versus the prior year in sales of their members was the worst showing since 1995. Wal-Mart began markdowns of many products earlier than usual this year.
The government uses retail sales excluding autos, gasoline and building materials as an input to GDP. This sector rose +.1% MoM, the lowest pace since last April, except for August when it fell -.3% MoM. Over the past year this sector has grown +5% YoY versus +6.7% YoY for the headline figure. In addition, this group was revised down from an originally reported gain of +.5% MoM in September to +.2% MoM.
Retail sales data from the U.S. Census Bureau is adjusted for seasonal variation and business day differences, but not for price changes. This indicates that when adjusted for inflation, real retail sales declined last month.
It appears that rising fuel prices (gas station sales +.8% MoM) caused demand for furniture (-.9% MoM), department store (-.5% MoM), and sporting goods (-.4% MoM) to decline. Excluding gasoline, retail sales rose +.1% MoM. Food and beverage prices rose +.4% MoM, a slower pace from the +.7% MoM increase the prior month. Surprisingly building materials rose +.6% MoM. Restaurant sales, which are often one of the first discretionary items to be cut, rose +.7% MoM. This makes it less clear what impact the slowing of the economy is having on consumers. The International Council of Shopping Centers last week announced that the 1.6% gain versus the prior year in sales of their members was the worst showing since 1995. Wal-Mart began markdowns of many products earlier than usual this year.
The government uses retail sales excluding autos, gasoline and building materials as an input to GDP. This sector rose +.1% MoM, the lowest pace since last April, except for August when it fell -.3% MoM. Over the past year this sector has grown +5% YoY versus +6.7% YoY for the headline figure. In addition, this group was revised down from an originally reported gain of +.5% MoM in September to +.2% MoM.
Retail sales data from the U.S. Census Bureau is adjusted for seasonal variation and business day differences, but not for price changes. This indicates that when adjusted for inflation, real retail sales declined last month.
Weekly Economic Calendar November 12 - 16, 2007
Monday, 11/12
No Data
Tuesday, 11/13
October Monthly Budget Statement Consensus -$57.1B Prior -$49.3B
Expenses expected to grow 3% faster than tax receipts
September Pending Home Sales Consensus MoM -2.5% Prior -6.5%
Downturn likely to continue slowing
Sales fell 10.7% in July and 6.5% in August
Fed Governor Kroszner speaks at S&P Bank Conference
Wednesday, 11/14
October Producer Price Index
Consensus Prior
MoM 0.3% 1.1%
YoY 6.4% 4.4%
October Core PPI (Ex-Food and Energy)
Consensus Prior
MoM 0.2% 0.1%
YoY 2.6% 2%
Energy and vehicle prices had sharp falls a year ago in October causing the year-over-year changes to pop higher this month
New model vehicles introduced in October tend to lead to larger than normal ‘misses’ each year in October consensus estimates
Food prices expected to rise +.7% MoM again
October Advance Retail Sales Consensus 0.2% Prior 0.6%
Less Autos Consensus 0.3% Prior 0.4%
Retail sales expected to soften due to warmer than normal weather, especially for apparel, delaying winter purchases
Vehicle sales declined 1% MoM
Chain stores reported disappointing sales
Retail gas prices steady
September Business Inventories Consensus 0.3% Prior 0.1%
Dallas Fed President Fisher speaks on the US Economic Outlook in Australia
Fed Chairman Bernanke speaks on “Monetary Arrangements in the 21st Century”
Thursday, 11/15
Initial Jobless Claims Consensus 320K Prior 317K
Continuing Claims Consensus 2565k Prior 2579k
Saw a large decline of 13k last month, but 4 week average rose to 330k
October Consumer Price Index
Consensus Prior
MoM .3% 0.1%
YoY 3.5% 2.8%
October Core CPI (Ex-Food and Energy)
Consensus Prior
MoM 0.2% 0.2%
YoY 2.2% 2.1%
Gasoline prices were flat on the month, but seasonal factors expect a decline, so it may be a small net positive MoM
Total CPI will see a large increase YoY from gasoline prices
Food should also push up the headline figure
Rental inflation may remain elevated for OER and tenant rent at +.3%
In contrast, core CPI expected to remain steady at recent growth rates
November Empire Manufacturing Consensus 20 Prior 28.8
Has been the strongest of the regional indexes
New orders, shipments and employment were all strong in Oct at over 20
More emphasis on high tech than other areas
November Philadelphia Fed Consensus 5 Prior 6.8
Continued weakening expected
Chicago Fed President Evans speaks on “Strategies for Improving Economic Mobility of Workers”
Kansas City Fed President Hoenig speaks on US Economic Outlook
Friday, 11/16
September Total Net TIC Flows Prior -$163B
Net Long-Term (Durations over 1 year) Consensus $80B Prior -$69.3B
Expected to rebound into positive territory after plummeting in Aug
Equity markets recovered and Fed cut interest rate
Short-term flows may remain low if demand for bank deposits remains weak among investors concerned about further credit downgrades
October Industrial Production Consensus 0.1% Prior 0.1%
Manufacturing hours worked fell -.4% during October as manu ISM fell
Higher utility demand may offset lower growth in other areas
Over the past year, the annual growth pace has slowed below the long-term trend, but has not dropped into recessionary territory
Risk to lower than consensus figure
October Capacity Utilization Consensus 82% Prior 82.1%
Steady level expected, with a risk toward lower usage
Atlanta Fed President Lockhart speaks on Southeast Economic Outlook
No Data
Tuesday, 11/13
October Monthly Budget Statement Consensus -$57.1B Prior -$49.3B
Expenses expected to grow 3% faster than tax receipts
September Pending Home Sales Consensus MoM -2.5% Prior -6.5%
Downturn likely to continue slowing
Sales fell 10.7% in July and 6.5% in August
Fed Governor Kroszner speaks at S&P Bank Conference
Wednesday, 11/14
October Producer Price Index
Consensus Prior
MoM 0.3% 1.1%
YoY 6.4% 4.4%
October Core PPI (Ex-Food and Energy)
Consensus Prior
MoM 0.2% 0.1%
YoY 2.6% 2%
Energy and vehicle prices had sharp falls a year ago in October causing the year-over-year changes to pop higher this month
New model vehicles introduced in October tend to lead to larger than normal ‘misses’ each year in October consensus estimates
Food prices expected to rise +.7% MoM again
October Advance Retail Sales Consensus 0.2% Prior 0.6%
Less Autos Consensus 0.3% Prior 0.4%
Retail sales expected to soften due to warmer than normal weather, especially for apparel, delaying winter purchases
Vehicle sales declined 1% MoM
Chain stores reported disappointing sales
Retail gas prices steady
September Business Inventories Consensus 0.3% Prior 0.1%
Dallas Fed President Fisher speaks on the US Economic Outlook in Australia
Fed Chairman Bernanke speaks on “Monetary Arrangements in the 21st Century”
Thursday, 11/15
Initial Jobless Claims Consensus 320K Prior 317K
Continuing Claims Consensus 2565k Prior 2579k
Saw a large decline of 13k last month, but 4 week average rose to 330k
October Consumer Price Index
Consensus Prior
MoM .3% 0.1%
YoY 3.5% 2.8%
October Core CPI (Ex-Food and Energy)
Consensus Prior
MoM 0.2% 0.2%
YoY 2.2% 2.1%
Gasoline prices were flat on the month, but seasonal factors expect a decline, so it may be a small net positive MoM
Total CPI will see a large increase YoY from gasoline prices
Food should also push up the headline figure
Rental inflation may remain elevated for OER and tenant rent at +.3%
In contrast, core CPI expected to remain steady at recent growth rates
November Empire Manufacturing Consensus 20 Prior 28.8
Has been the strongest of the regional indexes
New orders, shipments and employment were all strong in Oct at over 20
More emphasis on high tech than other areas
November Philadelphia Fed Consensus 5 Prior 6.8
Continued weakening expected
Chicago Fed President Evans speaks on “Strategies for Improving Economic Mobility of Workers”
Kansas City Fed President Hoenig speaks on US Economic Outlook
Friday, 11/16
September Total Net TIC Flows Prior -$163B
Net Long-Term (Durations over 1 year) Consensus $80B Prior -$69.3B
Expected to rebound into positive territory after plummeting in Aug
Equity markets recovered and Fed cut interest rate
Short-term flows may remain low if demand for bank deposits remains weak among investors concerned about further credit downgrades
October Industrial Production Consensus 0.1% Prior 0.1%
Manufacturing hours worked fell -.4% during October as manu ISM fell
Higher utility demand may offset lower growth in other areas
Over the past year, the annual growth pace has slowed below the long-term trend, but has not dropped into recessionary territory
Risk to lower than consensus figure
October Capacity Utilization Consensus 82% Prior 82.1%
Steady level expected, with a risk toward lower usage
Atlanta Fed President Lockhart speaks on Southeast Economic Outlook
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