And if the high bids drove this auction, where do you think rates are going over the next couple of years as there is a tremendous level of bond issuance coming? It’s increasingly difficult to gauge these days with the Fed printing money to monetize the debt and heightened geopolitical risks that can drive the safety trade again. Notwithstanding, it is pretty obvious interest rates will go much higher, but for all of the issues such a move in borrowing costs has for economic growth over the next couple of years, it does create opportunities on the fixed income side of the portfolio for investors willing to be patient.
Utilities, energy, telecom and basic materials were among the 10 major industry groups that managed to close on the plus side. It’s fairly bizarre that interest-rate sensitive utility shares performed so well on a day in which yields across the curve rose, but a Republican measure to block the mandatory cap on carbon emissions, which is contained in legislation passed by the House Energy and Commerce Committee last month, offered the shares support.
Financials, consumer-related and industrial shares led the decliners.
Market Activity for June 10, 2009
Crude Continues to Run
The weekly Energy Department report showed U.S. oil supplies fell 4.38 million barrels to 361.6 million – an increase of 100,000 barrels was expected. Crude stockpiles remain 11% above the five-year average, but this is down from 27% just two weeks back. Gasoline inventories also fell, down 1.5 million barrels as an increase of 750,000 was expected; they are now 4% below the five-year average. Refining activity has begun to pick up, which is a main reason oil supplies fell. Gasoline supplies failed to rise as gasoline demand rose last week.
The wholesale price of gasoline has returned to $2.00 per gallon, the first time it has hit that mark since October – this results in a $2.50-$2.60 pump price, most of that spread goes to taxes. I’ve got a feeling $2.60 per gallon is going to look pretty darned good several month out. One can see these prices exploding to the upside when global production comes back, not to mention even the scare of a hurricane hitting the Gulf coast this summer.
In the meantime, it’s likely we’ll see a pullback in prices, as is normally the case after a run such as the one we’ve seen over the past few months, before resuming the march higher. We’ve done nothing though to ease the chances of price spikes.
We continue our dangerous policy of domestic production restrictions – it seems to me if policymaker have a real desire to create jobs (as opposed to creating work via public programs), removing these restrictions would have been a great way to boost high-paying manufacturing positions; alas, nothing. In addition, we have both fiscal and monetary policies that have poured in the ingredients for the perfect storm of much higher energy prices. Oil tanker rates on the Saudi Arabia to Asia route have increased every day since May 27, up 50% during this period (but still at just half of the elevated average of the past four-years). Only a continued state of severe economic weakness will keep energy prices from charging ahead. Or, actions by the Fed could put a lid on the commodity run – I can fit only so much into these daily letters, we’ll touch on this idea tomorrow.
Mortgage Applications
The Mortgage Bankers Association reported their index of mortgage applications fell for a third-straight week, declining 7.2% for the week ended June 5. This followed declines of 16.2% and 14.2% in the previous two weeks.
Re-financing activity, which made up 75% of the index just a few weeks back is all but dead right now as mortgage rates have moved well above the magically 5.00% level – that is the line of demarcation, anything below means the refi wave rolls; above it, forget about it. Now refis make up less than 60% of the index after consecutive weekly declines of 11.8%, 24.1% and 18.9%, respectively. The 30-year fixed mortgage rate has jumped from 4.43% (although the actually market rate was more like 4.65%) to 5.57% last week – and is likely to come out at 5.75% next week. While this remains an extremely low level from a historical perspective, housing market activity will shut down at a rate that approaches 6.00% based on the still very fragile labor market environment.
The good news is that purchases continue to increase, up 1% last week and the third-straight week of gains. I doubt though that purchase will continue to roll if the 30-year mortgage rate goes much beyond this level.
Trade Figures
The U.S. trade deficit widened just a bit in April as the decline in exports outpaced the decline in imports for the second-straight month. (Normally trade deficits widen when imports rise more than exports but this is not the case currently as global trade has been smashed due to the economic distortions related to last fall’s financial crisis and all that has occurred hence)
For the month, the deficit rose 2.2% to $29.2 billion, but remains at a low level especially when one looks at the real (inflation-adjusted) figure excluding petroleum. (As we continue to restrict domestic energy production – and reality will at some point slap us silly and reverse this destructive and idiotic policy – we now import 70% of our petro-related energy needs. As oil prices rise -- average price per barrel was $46.60 in April and now we’re at $70 -- this will push the trade deficit wider over the course of the next 18-24 months, so we watch the price-adjusted ex-petro reading to see how the figures are behaving outside of this policy induced effect)
We look at these trade figures for two main reasons right here. First, is too view the direction imports take as this is a great indication of what the consumer is doing. While imports fell 1.4% in April, the pace of decline has eased substantially from the 5%-7% monthly declines of the past two quarters. Second, exports give us a sign of what is occurring in overseas markets, specifically we’re looking for improvement within the Pacific Rim as China’s stimulus is substantial and infrastructure focused.
U.S. exports fell 2.3% in April, following a 2.0% decline in March – these figures were posting 6% declines at the beginning of the year. Imports fell 1.4% (down 2.0% when excluding petro) after coming in flat for March (and down 1.2% ex-petro). So while the import data has improved from the deep contractions of the fourth and first quarters it actually worsened on a month-over-month basis when excluding petro imports.
Consumer goods imports did rise 1.1% in April but this was driven by a 6% rise in pharmaceutical imports; apparel, autos, food and beverages were down. On the business side of imports, capital goods fell a substantial 3.1%, which was worse than the 1.9% decline in March.
In terms of exports, consumer goods fell 3.1%, capital goods fell 3.4% and industrial supplies fell 5.6% -- the declines in consumer and industrial supplies worsened on a month-over-month basis, while the decline in capital goods improved a bit. Overall, these figures do not illustrate a jump in activity has occurred (at least as of April) as a result of global stimulus plans. I believe these numbers, particularly from the Pacific Rim, will improve markedly as we get into the summer months; the industrial production and manufacturing figures in Asia have bounced nicely and this should show up in the next few monthly trade figures.
In terms of U.S. exports to regions and countries:
Exports to Europe fell 9.8%; exports to Mexico down 4.4%; to Brazil down by 5.6%; to the Pacific Rim, down 8.6% (down 7.2% for China, down 13.5% for Japan and down 4.5% for Asia NICS – newly industrialized countries). All of these figures were worse than the previous month and on a year-over-year basis as well.
So, still no evidence via these trade figures of re-merging economic activity on the international scene, although this data has a huge lag to it; we’ll see how the May and June data shapes up. Again, we suspect by June we’ll see improvement, particularly from Asia.
Budget Deficit for May
The Treasury Department reported that the budget deficit for May came in at $189.7 billion and $991.9 fiscal-year-to-date (FYTD), putting the fiscal 2009 shortfall on pace to come in at 12-13% of GDP (double the previous post-WWII record) – although it’s difficult to gauge as just 6% of the $787 billion stimulus program has been sent out thus far; the deficit could go higher than one can currently extrapolate.
Individual tax receipts came in 23% lower FYTD (the government’s fiscal year ends in September). Corporate tax rates have been obliterated, off by 61% FYTD.
On the other side of the old ledger, spending rose 5.8% -- not bad relative to what’s to come – and is up 18.7% FYTD; yikes!
I guess over the next few couple of years I can just save us all time by skipping the specifics on this dating and simply state: It’s large, period.
Today’s Watch List
This morning we get jobless claims, May retail sales and Bank of America CEO Ken Lewis on Capitol Hill.
Jobless claims are expected to remain above the very elevated 600k level and continuing claims are expected to make a new high – that would be a big blow in my opinion as continuing claims finally halted the 17-week streak of making a record high just last week.
Retail sales may offer the market a boost today as it is likely activity bounced after two-straight months of decline. These retail figures are going to be all over the map for a while; pretty much two-three months of decline followed by a one-two month bounce; with the labor market in the shape it is in and the time it will take for the consumer to get things right in terms of debt (now that joblessness is high and incomes flat) I don’t see how retail activity goes on a sustained upswing.
Finally, we have Mr. Lewis on Capitol Hill as he will be grilled as to what he knew and when he knew it in terms of the Merrill deal, specifically referring to the big time losses BofA shareholders had to absorb almost immediately after the deal was done. The big news though is not about Lewis, but whether or not the government threatened BofA to do the Merrill deal. It’s ultimately BofA’s fault for initially rushing into the thing, but when they began to have some doubts about the acquisition there are reports that Bernanke and Paulson threatened the firm not to back out.
I think Bernanke will end up taking the political fall for this; he’s already going to take the fall if the economy fails to bounce back substantively. His term is up in 2010. At which point, enter Larry Summers. If this turns out to be the case, it will erase even the remote chance that the Fed is currently independent from the political class (and there are some readers out there, I know, that believe this is a joke of an assumption anyway, and I agree).
Have a great day!
Brent Vondera
