THE ECONOMY:
A week of positives, but as all of the commercials on CNBC tell us, past accomplishments do not equal future market success. That is particularly true when the Fed is still hiking rates. Thus a string of predominantly positive economic news provided no catalyst for the market. Indeed, stocks struggled and all but gave up the recent break higher and follow through. In short, despite the very solid economic data that indicate the soft patch was not so soft and that the economy is currently in fine shape, the market is not factoring in continued solid growth.
Looking at all of the data there is nothing nefarious. Of sure there are the housing bubble popping theorists, others that claim we have consumed ourselves into bankruptcy, the trade gap worriers, and the born again deficit hawks all proclaiming the end is near, but we have discussed several times in the past how these are really not at the extremes suggested. They are not necessarily signs that everything is coming up roses, but we have somehow managed to not only survive a history riddled with these types of problems, but have built the strongest economy in the world with these types of issues confronting us for over 200 years. It brings to mind the plethora of laws and advisories about what we should let our kids do or how we should discipline them, e.g. bike helmets and the like. How on earth did any of us survive our childhoods, especially those of us who were, heaven forbid, spanked. In any event, as noted Thursday night the dollar is showing renewed strength in spite of these boogey men, and Friday it broke out sharply over the recent February and April highs, ending the string of lower and lower highs. That is not the action of a mortally wounded economy or currency falling into a death spiral.
That leaves a few possibilities to explain Greenspan's 'conundrum.' First, there is something hiding in the woods preparing to jump out and whack the US or the world economies on the head. Hedge fund blowups were the talk this past week after the GM rise and then drop. The fear is one or more big funds has losses so heavy that it has burned all of its assets and is about to go under and lose it all. There is serious rumor and that usually means the trouble is there. Its impact depends upon the size and how many implode. That is definitely weighing on the market right now and we note that its timing coincided with the stall out of this follow through and rally attempt.
Second, there is the same old problem we have discussed since the turn of the year, i.e. a Fed convinced it has to hike further and oil prices that are too high. We discussed in detail Thursday the weatherman-like accuracy of the Fed in fighting inflation without inducing economic recession. And while oil is lower, breaking down through $50/bbl last week and this time sticking there, it has been very high for a very long time. Damage has been done already and oil is still much, much higher than the $40/bbl level that we feel is the minimum for the economy to regroup and maintain solid growth.
Given the probabilities and past history, while the first item can always occur, the second has a lot of historical weight on its side. Maybe it is a combination of both, but with the bond market rallying (yields falling) as the Fed raises rates, the stock market flagging, and gold diving, it certainly looks like the market is pricing in weakness due to a weaker economy, one stalled by the Fed and oil prices that are still too high despite all of the talk about how we are much more energy efficient as an economy. Even with the efficiency, however, at some price the damage is still done. With oil from $50 to $60 for months, that price is taking its toll, if not on the economy, on the psyche of the consumer. While the consumer confidence still remains above levels that historically show trouble, if the trend remains unbroken it will eventually be trouble.
Import prices rise but at a much slower pace than March.
Expectations were for a 0.4% bump, but the 0.8% rise had many abuzz, talking of importing inflation. Of course that is now the buzz given the Fed's rate hiking and its absolute stance that but for its rate hikes inflation would be roaming the streets, devouring little children. The number was actually lower, much lower, than the 2% in March. It was trumpeted that this was the largest 12 month rise (8.1%) since way back in November 2004. Take out oil and prices rose 0.4%. Oil prices are falling now as well, and as oil is dollar denominated that makes each barrel cheaper. Indeed, as we noted last month, the rest of the world has not suffered the same relative price rise in oil because their currencies have risen versus the dollar. Thus even as oil rises for everyone, it disproportionately impacts the US because our dollar is weakening as well.
Still there is the idea that we are importing inflation with each barrel of oil. As noted Thursday and above, if we are, it certainly is not showing up in traditional inflation measures such as gold. Now there are conspiracy theorists who will argue that gold prices are being artificially manipulated lower. We heard this in the late 1990's when gold was low as well. Of course there was no inflation then either and the Fed was hiking interest rates; with no inflation of course gold was not going to move higher.
There is something else to be very concerned about in this situation. Oil spiked in the 1970's as well and the Fed met that with rate hikes. While the combination of events was indeed different than today, the result was disastrous. That is why you near talk of 'stagflation' today: oil is holding historically high levels, the job market has been slow to recover, there is some price inflation as commodities enjoy gains after years of being depressed, and hints of some economic slowing in Q1 that appear to have been very mild. A 5.2% unemployment rate and inflation at roughly 1.7% is not stagflation. Been there, lived through it, and this isn't it.
March business inventories rise less than expected, sales surpass inventory gains.
The 0.4% rise was less than the 0.6% gain expected. Sales rose 0.7%. That is good news. The economy was supposed to be really slowing at that time, and thus you would expect larger inventory gains. It did not happen. Inventory management techniques continue to work wonders. What also works wonders is a still solid economy where sales were up 0.7%. That dropped the inventory to sales ratio, the time it would take to run out of inventory at the current sales rates, to 1.31 months, down from 1.32 months. If the economy was slowing, then that ratio would be rising. This is the same scenario as the wholesale inventories reported earlier last week. Modestly rising with sales outpacing the inventory build. That is not the sign of a weakening economy. |
