The markets are unhappy with excessive amounts of government debt that have to be funded and how that may negatively impact economic growth rates across the globe. Credit may also be less available for the emerging markets and the marginal borrower. But in the USA, consumer confidence figures are still moving higher despite the tough stock market, and this improving sentiment has been reflected in the higher retail sales numbers in the last couple of months. Job growth is beginning to develop, and even though we have a long way to go for a full recovery, commerce is growing and capital is flowing again in the USA.
The Conference Board Consumer Confidence Index, based on a survey of 5,000 households, increased from 57.7 last month to 63.3 in May. The Present Situation Index increased to 30.2 from 28.2, and the Expectations Index improved to 85.3 from 77.4 last month. Those who anticipate more jobs in the future increased to 20.4 percent from 17.7 percent, while those who see fewer jobs decreased from 19.9 percent to 17.7 percent. Given the lack of reliable numbers recently from the DOL and the upcoming elimination of census jobs, the improvement in Consumer Confidence employment numbers should be heartening. NASDAQ made an interesting point based on numbers in the expanded report they were given…. “Those seeing their income rising six months from now edged up 8 tenths to a still very weak 11.3 percent. Those seeing a decrease edged down 1 tenth to a still very high 16.6 percent. This question on future income remains inverted, that is pessimists outnumbering optimists in what is unprecedented in more than 40 years of data.”
Existing-home sales rose again, up 7.6 percent in April, with buyers motivated by the tax credit, improving consumer confidence, and affordability, according to the National Association of Realtors. Lawrence Yun, NAR chief economist, said “The upswing in April existing-home sales was expected because of the tax credit inducement, and no doubt there will be some temporary fallback in the months immediately after it expires, but other factors also are supporting the market. For people who were on the sidelines, there’s been a return of buyer confidence with stabilizing home prices, an improving economy and mortgage interest rates that remain historically low.” However, the market was surprised by the increase in inventory. Total housing inventory at the end of April rose 11.5 percent representing an 8.4-month supply, up from an 8.1-month supply in March. The national median existing-home price was $173,100 in April, up 4.0 percent from April 2009. Distressed homes accounted for 33 percent of sales last month, compared with 35 percent in March.
BP today announced a commitment of up to $500 million to an open research program studying the impact of the Deepwater Horizon incident, and its associated response, on the marine and shoreline environment of the Gulf of Mexico. A first grant to Louisiana State University will initiate the program.
CB&I announced it has been awarded a project, valued in excess of $280 million, by Occidental of Elk Hills, Inc. for a new gas processing plant at the Elk Hills oil and gas field in Central California. CB&I’s work includes the engineering, procurement and construction of the 200 million cubic foot per day natural gas processing plant, including fractionation, storage tanks and export pipelines. The project is scheduled for completion in the first half of 2012.
The Coca-Cola Company made the following presentation at the Goldman Sachs Consumer Products Symposium
Diageo announced that Nick Rose will leave his position as Chief Financial Officer and be replace by Deirdre Mahlan, currently Diageo’s Deputy Finance Director,
Sources: Coke, CBI, Diageo, BP, NAR, NASDAQ, and Conference Board websites
You would never know it from the market, but today’s economic indicators are positive. The CPI, the Philadelphia Fed report, and the Leading Indicators should be reasons to cheer. The negatives are the drop in mortgage applications, which can be explained by the stimulus expiration, and the uptick in the unemployment claims number which is still significantly less than last month’s 4-week moving average.
According to the firms polled for this month’s Philadelphia Fed Business Outlook Survey, regional manufacturing activity continues to expand. Firms reported some expansion of overall employment again this month. The survey’s broad indicators of future activity continue to suggest that the region’s manufacturing executives expect growth in business over the next six months. More firms reported an increase in employment (21 percent) than reported a decline (17 percent). The workweek index declined slightly but has now remained positive for seven consecutive months. The future general activity index remained positive for the 17th consecutive month, although it fell from 44.2 in April to 37.0 this month. The future employment index increased 8 points and is at its highest reading since May 2004.
In the week ending May 15, the advance figure for seasonally adjusted initial claims was 471,000, an increase of 25,000 from the previous week’s revised figure of 446,000. The 4-week moving average was 453,500, an increase of 3,000 from the previous week’s unrevised average of 450,500. This increase sounded alarms in market news today, but it should be remembered that last month’s moving average was 460,000. The advance number of actual initial claims under state programs, unadjusted, totaled 407,940 in the week ending May 15, a decrease of 1,819 from the previous week. There were 540,925 initial claims in the comparable week in 2009.
The Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 14, 2010 showed, ‘“Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “However, refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.”’
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. The index for all items less food and energy was unchanged.
Conference Board Leading Economic Index declined 0.1 percent in April, but the Board’s Coincident Index, a measure of current economic activity, rose 0.3 percent, and the Lagging Economic Index increased 0.1 percent in April.
Sources: Conference Board, BLS, MBA, DOL, Phili Fed. websites
Yesterday’s Treasury report on foreign demand for U.S. Treasuries puts to rest any fears that China would slow their purchase of Treasuries, raising interest rates. In fact, China purchased a whopping $895.2 billion in Treasuries (an increase of 2%) in March, reversing a decline of 1.3% in February. The report shows a very strong demand for U.S. government debt, especially T-bonds and notes. Total Treasuries purchased by foreigners increased by $132.4 billion in March (the beginning of the Greek-sovereign debt problem), compared to a $43.6 billion increase in February.
The ICSC-Goldman Sachs chain store sales index for the week ending May 15 fell 2.5% due mainly to colder temperatures around the country.
The Empire State Manufacturing Survey shows slow growth from manufacturers in New York in May. The general business conditions index fell 13 points, to 19.1, and the new orders and shipments indexes slowed, but remained positive. The inventories index was near zero, although the index for number of employees rose for a fifth consecutive month, reaching its highest level since 2004.
The U.S. Census Bureau’s new residential construction statistics for April 2010 showed builders are cautious about building now that the tax credit has expired, but they are still building. Building permits for private homes increased 11.5 percent over March. Single-family permits rose 10.7 percent from March.
The Producer Price Index for Finished Goods declined 0.1 percent in April, following a 0.7-percent advance in March. Food and energy which had increased last month, decreased in April.
Sources: BLS, census, NYfed, NOAA, ICSC, and Treasury websites.
Trade numbers, retail sales, employment numbers, and even the Treasury’s budget report show improved corporate activity. The bad news is that the budget deficit is much larger than expected.
The four-week average of retail sales, according to ICSC-Goldman, is up almost 5 percent as of May 8. Chain store sales for the week were up 0.1 percent due to warmer weather in the South and East as well as Mother’s Day.
The March trade gap widened to $40.4 billion from $39.4 billion in February. March exports were $4.6 billion more than February exports of $143.3 billion. March imports were $5.6 billion more than February imports of $182.7 billion. The nonpetroleum exports increased, only partially offsetting more expensive petroleum imports. The unadjusted crude oil barrel price rose to $74.32 (see page 22).
The Treasury reported that April’s deficit was $82.7 billion, well above last April’s $20.9 billion, deficit due to a drop in individual tax receipts, down 11.6 percent. Corporate tax receipts, which comprise only 5 percent of total receipts, are up 9 percent.
The Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 7, 2010, showed The Market Composite Index, a measure of mortgage loan application volume, increased 3.9 percent on a seasonally adjusted basis from one week earlier. The Refinance Index increased 14.8 percent from the previous week.
The Department of Labor’s jobless claims showed a small decrease in initial claims for the week ending May 8, from the previous week’s revised figure of 448,000. The 4-week moving average was 450,500, a decrease of 9,000 from the previous week’s revised average of 459,500.
Sources: Department of Labor, Mortgage Bankers Association, Treasury, BEA, and ICSC websites
The Greek debt problem is significant in that it tests the resolve of the EU and places a strain on the world economy. Currently Greece’s debt is 13.6 percent of GDP. While other European countries have higher debt (Ireland’s is 14.3 percent of GDP; Spain is 11.2 percent of GDP and Portugal is 9.4 percent of GDP), Greece’s ability to repay its debt was questioned, and led Standard & Poor’s to downgrade Greece’s sovereign rating to junk status, below the minimum BBB- required by the European Central Bank’s rating companies. At the time, Greece carried 300 billion Euros debt and needed 60 billion Euros in loans annually, with the IMF willing to loan 10-20 billion Euros a year.
The world economy continues to feel the ripple effects of the Greek debt crisis. Prime Minister, George Papandreou pointed out in his speech at the meeting of the cabinet, “that it (Greek stability) concerned the stability of the financial system of Europe and the Euro, that it concerned the functioning of the international financial system and that a small fire could kindle a firestorm….Today the problem has assumed greater proportions. We see that the fire threatens to spread harming Greece even more, but also spreading to other countries and economies of the Eurozone and even further afield….. If we do not finance this debt, Greece will go bankrupt.”
With Greece facing bankruptcy, the International Monetary Fund came to the rescue with strict requirements for fiscal reform, which were not well-received by many Greeks. The IMF plan is as follows: “Fiscal consolidation—on top of adjustment already under way—will total 11 percent of GDP over three years, with the adjustment designed to get the general government deficit under the 3 percent level by 2014 (compared with 13.6 percent in 2009). Spending measures will yield savings of 5 ¼ percent of GDP through 2013. Pensions and wages will be reduced and frozen for three years, with payment of Christmas, Easter, and summer bonuses workers abolished, but with protection for the lowest-paid. Revenues measures will yield 4 percent of GDP through 2013 by raising value-added tax, and a tax on luxury items, and tobacco and alcohol, among other items….The plan envisages a significant reduction in military expenditure during the period.”
Sunday night, in response to the Greek debt problem, the Federal Reserve established a dollar swap facilities with other central banks. The announcement was:
“In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.
Federal Reserve Actions
The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank. The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously.
These swap arrangements have been authorized through January 2011.”
We will continue to monitor the situation and its effects on our economy.
UBS reported a first quarter pre-tax profit of CHF 2,810 million
Merck’s worldwide sales for the first quarter of 2010 were $11.4 billion. Net income for the first quarter was $299 million.
Spectra reported 2010 first quarter net income from controlling interests of $358 million, compared with $298 million in the prior year quarter.
CBS revenues were up 12%.
Sources: Federal Reserve, Bloomberg, IMF, CBS, Spectra, Merck, UBS, and Prime minister’s websites