Daily Insight

U.S. markets were closed for Good Friday. Today will likely be a relatively light session as European bourses are closed, which may keep some overseas investors on the sidelines even regarding their U.S. trading activity.

Market Activity for April 10, 2009

Ahoy, Miscreants!

The pirate encounter ended successfully as everyone knows by now; one couldn’t have hoped for a better conclusion, at least regarding this specific incident – certainly we have much work to do still in deterring this activity from taking innocent people hostage and keeping the shipping lanes free-flowing.

The whole incident was becoming worrisome as it looked as if we’d refrain from using our overwhelming power in this confrontation and the messages the wrong decisions would send to our enemies, who were surely watching.

No one knows the extent to which a bad outcome would have had on the economy, it may very well have given certain regimes the confidence to challenge us, which lead to events that diminish confidence in the future and hence results in both businesses and consumers reigning in spending plans to an even greater degree than has already occurred. Of course, the higher insurance costs and likelihood that ships would choose more circuitous routes are the direct economic burdens to bear. A serious effort to make pirates pay for their decisions via direct and harsh confrontations instead of simply surrendering and paying ransoms will diminish the increased costs that piracy puts on the global economy – a number of historical events shows us to path to defeating this problem.

But whether it be how the crew of the Maersk Alabama largely thwarted the pirate attack, to the bravery and wherewithal of the captain, to the U.S. Navy’s operations, the message to the world regarding every aspect of this encounter was very American – exceptional in every degree.

Chinese Stimulation

China is in the process of massively stimulating their economy. There is the much talked about $600 billion stimulus over the next two years (which will end up being far more than that as they use their state-run banks to offer easy credit – probably spells trouble for them down the road but for now will provide a huge boost). This level of stimulus amounts to 18% of their GDP, which would be the equivalent of us engaging in a $2.5 trillion stimulus program – and all infrastructure-based. Chinese demand for raw materials (base metals, oil etc.) are showing signs of life again.

We have previously talked about how Geithner should offer a quid pro quo to the Chinese – we will stop calling them a currency manipulator, which is a waste of time anyway since we’re all currency manipulators in a world of fiat money – and in turn they are to triple their stimulus plans. This way we get the economic benefit, but without driving debt levels even higher than they are already going.

But it appears the Chinese are engaging in this anyway, not to the extent that it triples the program but they are using their banks to really foment a boom – loan activity was up six-fold from the year-ago period, according to Bloomberg News.

This means we should see an export boost (exports to China were strong in the latest trade figures and there should be more of this to come) and thus the economy should show life more quickly. This event may just ease the degree of GDP contraction in the first-quarter – it looked like we were headed for another decline of 6%-6.5% at a real annual, the latest trade figures may help that contraction a bit, something closer to 5% may be the reading. And for the current quarter we may even see a slight increase, another decline has been the consensus view. (The caveat is the consumer, which I think will continue to put a drag on GDP as the private sector components of personal income are showing significant declines, but we shall see.)

Economic Data

We don’t have a release today, but get to it tomorrow with producer prices and retail sales (both March data).

PPI is expected to come in flat for the month. Core prices, which exclude the food and energy components, are expected to rise 0.1% for the month and remain at 4.0% on a year-over-year basis.


Retail sales are expected to rise 0.3% for March, after a 0.1% decline in February. The ex-auto reading is expected to show a 0.1% increase after rising 0.7% in February.

I think there’s a good chance this reading will disappoint, and it will be very interesting to see how the market deals with this if indeed it fails to meet expectations. There has been a lot of optimism of late that consumer activity is on the rebound after a 1.0% gain in January, followed by a 0.7% gain on the ex-auto reading for February – after a significant retrenchment during the previous six months, notice the gap in negative territory as identified by the green circle (chart below). It is unusual to see such a gap in negative territory, normally a decline in retail sales is quickly followed by an increase. Unfortunately, this data only goes back to 1992, we would have to go back to the 1980 recession to get a comparable contraction in consumer activity.

I’m just not sure we’re back on the road to a sustained consumer upswing as the private-sector components of income remain in decline. We’ll see months of nice gains simply as we come off of these weak levels, but it won’t be consistent for quite a while still in my view. .


Have a great day!


Brent Vondera, Senior Analyst