THE ECONOMY:
Wholesale inventories for March rise less than expected.
One sign of a slower economy after a good spurt of growth are rising inventories. In Q1 inventories rose and boosted GDP, giving more credence to the idea of a slow patch for the economy. Reports from wholesalers Monday showed a 0.4% rise in inventories, below the 0.8% expected and the 0.6% climb in February. That shows less inventory build up as businesses are quick to react to the Q1 slowdown in demand. Indeed, computer and auto inventories fell (-2.3%, -0.3%). Durables rose just 0.1%, a very good sign. Nondurable goods, specifically oil, rose 1% overall with petroleum jumping 9.3%. That is that strong inventory build showing up week after week. But for petroleum the number would have been very weak, and that is not a bad sign for the economy.
It was not all wonderful news as sales barely edged up 0.2%, but that was a lot better than the 0.5% drop in February (a 0.7% swing is noteworthy). Thus even with inventories rising a big, the inventories to sales ratio (how long it would take to sell out the current inventory at current sales rates) held steady at 1.19 months. That is a historically low level.
While that shows the soft patch may not have been all that soft, it does not do a lot for getting demand and supply more in line. Manufacturers are showing agility in their ability to juggle their inventory and they still have an understandable aversion to building large inventories lest the Fed does to them what it did in 2000, leaving them with no demand for products and having to write off their goods, at least those that were left to have something to write them off against. Thus inventories show there is still some life in this economy yet they also continue to fuel the current imbalance in favor of demand over supply. Thus the economy will continue to show inflationary tendencies and the Fed will continue to hike for now.
Fed funds futures pricing in more Fed action.
The combination of jobs and other indications that the late Q1 slow patch is dissipating started working on the futures contracts Monday. The contract had priced in just two more 25BP rate hikes over the next three meetings, but as the bond sold some Monday it started pricing in three hikes over the next three meetings, definitely leaning that way at the close.
There were more than a few undercurrents that could have impacted this number. First, there is a refunding auction this week, and the market is somewhat nervous ahead of that as it has been for the past few months. That nervousness started with that one weak auction in March; now each one is approached with trepidation but since that one, each has shown very strong buying.
In addition, there was a lot of speculation that China might float the yuan against the dollar over the weekend given the Chinese holiday and comments from China that it could do so 'very soon.' That did not happen, and that gave the dollar some strength and also put some pressure on bonds.
Some view the de-linking of the dollar and yuan as a good thing, believing it will cure much of our trade imbalance in relatively short order. The reason is because if the yuan is tied to the dollar it does not matter how far the dollar falls; it won't impact the trade with China because as the dollar falls so does the yuan, and thus there is none of that natural correction back to equilibrium Greenspan likes to talk about.
If they are unhooked, however, the estimates are that the yuan will rise 30% or so versus the dollar. That would jump our costs of Chinese goods dramatically, and until the US consumer decided enough was enough that would mean rising costs here in the US, i.e. more inflation. That inflation would happen overnight as well. That would allow the 'natural' corrective measures to work, but at first it would feel like getting whacked by a 2 by 4.
Moreover, if we even do back off buying what China is selling, will that be a good thing? The Chinese may have to consume their own goods, and they have the populace to do it. They could raise their standard of living in short order by simply using the goods they produce. Of course it is na ve to believe the entire population could buy what the US no longer buys, but the Chinese may just wake up and realize they were rich and were a great opportunity for investment by the Chinese themselves. Would they need the US then? Not nearly as much. Are the Chinese already looking around for partners other than the US, planning ahead for their economy? Yes.
With a graying population and with the giveaway of our economic lead in the early 2000's with the induced recession, the US is in a consumption pickle. We won't have the big Baby Boomer engine to drive the economy as we had from the 1950's on. We needed to solidify our technological lead and make the rest of the world come to us for technology; that would have been our key to future prosperity, i.e. a world market and not just relying on the US consumer. The engineered 'slowdown' that cost us trillions in retirement dollars and a technology sector that struggled to survive in the follow years. Now we are running with the pack and very vulnerable to rising economies such as China and India that will one day realize they have power and will use that economic power to our detriment. |
