Category Archives: Inflation

Re: Oil as a % of global GDP

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(an email exchange)

>   
>   On Sun, Jul 20, 2008 at 10:46 PM, Russell wrote:
>   
>   Brad Setser, at Follow the Money, presents a couple of graphs on changes in
>   oil export revenue: The Oil Shock of 2008.
>   
>   The following graph shows the Year-over-year change in oil exports as a
>   percent of world GDP (and in billions of dollars).
>   
>   

>   
>   Year-over-year change in oil exports
>   
>   This calculation assumes that the oil exporters will export about 45 million
>   barrels a day of oil.
>   
>   Each $5 increase in the average price of oil increases the oil exporters’
>   revenues by about $80 billion, so if oil ends up averaging $125 a barrel this year
>   rather than $120 a barrel, the increase in the oil exporters revenues would be
>   close to a trillion dollars.
>   
>   Assuming oil prices average $120 per barrel for 2008, the increase in 2008 will
>   be similar to the oil shocks of the ’70s.
>   
>   

Right, the notion that oil is a smaller % of GDP and therefore not as inflationary was flawed to begin with and now moot.

Two more thoughts for today:

First, the second Mike Masters sell-off may have run its course. The first was after his testimony in regard to passive commodity strategies which I agree probably serve no public purpose whatsoever. The second was last week as markets expect Congress to act to curb speculation this week, which they might. Crude isn’t a competitive market (Saudi’s are the swing producer) so prices won’t be altered apart from knee jerk reactions, but competitive markets such as gold can see lower relative prices if the major funds back off their passive commodity strategies.

Second, just saw a headline on Bloomberg that inflation is starting to hurt the value of some currencies.

Third, the Stern statement will continue to weigh on interest rate expectations up to the Aug 9 meeting.

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Bloomberg: Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

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A minority view but a growing one.

They are thinking the low rates are destabilizing the housing and financial markets via the weak USD channel.

Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

by Vivien Lou Chen
(Bloomberg) Federal Reserve Bank of Minneapolis President Gary Stern said the central bank shouldn’t wait for financial and housing markets to stabilize before raising interest rates.

“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course” and begin raising rates, Stern said in an interview in Minneapolis today. “Our actions will affect the economy in the future, not at the moment. Forecasts play a critical role.”

The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, may reinforce traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

“We’re pretty well-positioned for the downside risks we might encounter from here,” said Stern, 63, the Fed’s longest-serving policy maker. “I worry a little bit more about the prospects for inflation.”

The bank president compared the current credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That’s a more sanguine assessment than others have. The International Monetary Fund has said it’s the worst since the Great Depression and former Fed Chairman Alan Greenspan said it’s the most intense in more than half a century.

17-Year High
Stern spoke two days after government figures showed consumer prices surged 5 percent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 percent, higher than the 2.1 percent average over the last five years.

“Headline inflation is clearly too high,” Stern said. He added that he’s concerned that will feed through to core prices and public expectations for inflation.

As long as energy and food costs level off, core inflation ought to slow over the next year, Stern said.

Crude oil has surged 73 percent in the past 12 months, and rose to a record of $147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the United Nations Food and Agriculture Organization.

Stern declined to say when policy makers may shift toward raising rates. The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 percent, from 5.25 percent last September.

Rate Outlook
Traders estimate 58 percent odds that the Fed will boost its main rate at least a quarter point from 2 percent in October, after keeping borrowing costs unchanged in August and September. There’s a 73 percent probability of a move by year-end, futures prices show.

Minutes of the Fed’s June 24-25 gathering, released July 15, showed that some Fed officials favored an increase in rates “very soon.” Fed Chairman Ben S. Bernanke this week said there are risks to both inflation and growth, abandoning the FOMC’s June assessment that the threat of a “substantial” downturn had receded.

“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.

The Fed on July 13 offered Fannie Mae and Freddie Mac access to direct loans from the central bank in case the firms needed the financing before Congress acts on Paulson’s rescue plan. The Treasury chief is seeking power to make unlimited loans to and purchase equity in the companies if needed.

Stern said the proposals are “clearly designed to bolster Fannie and Freddie.”

Stern is the only FOMC member who’s served with three chairmen: Paul Volcker, Greenspan and Bernanke. He became the bank’s president in 1985.


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2008-07-17 US Economic Releases

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Housing Starts (Jun)

Survey 960K
Actual 1066K
Prior 975K
Revised 977K

Karim writes:

Starts up 9.1%, due to the following.

*New York City enacted a new set of construction codes

effective for permits authorized as of July 1, 2008. In June there

was a large increase in building permits issued for multifamily

residential buildings in New York City.

Multi-family starts in Northeast up 102.6%.

Single family starts down 9.2% in northeast, and down 5.3% nationally.

Same effect on permits (up 73% for mult-family in northeast).

Single family permits down 3.5% nationally.

Initial claims rise from 348k to 366k.4wk average falls from 381k to 376k.

Continuing claims drop from 3203k to 3122k; 4wk average rises from 3126k to 3142k.

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Building Permits (Jun)

Survey 965K
Actual 1091K
Prior 969K
Revised 978K

James writes:

Total starts were up 9.1% but single family was down -5.3% while multi-fam was up 42.5%. Then look at the regional break down. Multi-fams were up 102.6% m/m in the northeast which apparently has something to do w/ a tax abatement for rushing into some starts and permits in the NY area. Don’t know the details there but what matters to the broader market is that single family starts and permits declined. Less supply to compete w/ tons of inventory is what we want to see so the net/net = positive.

Right, thanks, either way housing starts are muddling around the 1 million mark, down from about 2 million not long ago.

Actual inventories of new homes are falling quickly; so seems to me a shortage is developing.

The weekly applications are steady at levels that used to be associated with maybe 1.5 million annual starts.

Starts peaked at 2.6 million units around 1972 with only about 215 million population.

They can return to 1.5 million pretty quickly, and I’d still consider that a depressed level.

4 week average jobless claims again moved down a bit, as did continuing claims.

Corporate earnings pretty good so far.

Q2 GDP looking like maybe 2% to be released July 31.

Government deficit spending moving up nicely -the tide that’s lifting all boats- and supporting prices/’inflation’ which turns the relative value story into an inflation story.

Dems ready with more fiscal packages to fire off as needed.

While shoes do keep falling, each one seems to do less damage and pass more quickly than the prior bumps. The agencies were the latest, the USD at stake were the largest, and the ‘crisis’ didn’t even last a week.

With stocks on the move there will be more talk within the FOMC of the low Fed Funds rate creating an asset bubble like they think it did in 1999 and 2003.

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Initial Jobless Claims (Jul 12)

Survey 380K
Actual 366K
Prior 346K
Revised 348K

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Continuing Jobless Claims (Jul 5)

Survey 3180K
Actual 3122K
Prior 3202K
Revised 3203K

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Philadelphia Fed (Jul)

Survey -15.0
Actual -16.3
Prior -17.1
Revised n/a

Hanging tough off the bottom, but still depressed.

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Philadelphia Fed TABLE (Jul)

Prices paid jumped to 75.6 from numbers that were already way too high.


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2008-07-16 US Economic Releases

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MBA Mortgage Applications (Jul 11)

Survey n/a
Actual 1.7%
Prior 7.5%
Revised n/a

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MBA Purchasing Index (Jul 11)

Survey n/a
Actual 359.7
Prior 365.8
Revised n/a

Minor down tic, still in a range that used to be indicative of 1.5 million housing starts per year, vs today’s approx 1 million.

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MBA Refinancing Index (Jul 11)

Survey n/a
Actual 1474.9
Prior 1379.3
Revised n/a

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Bloomberg Global Confidence (Jul)

Survey n/a
Actual 10.30
Prior 21.01
Revised n/a

Inflation and falling equity markets are getting everyone down.

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Consumer Price Index MoM (Jun)

Survey 0.7%
Actual 1.1%
Prior 0.6%
Revised n/a

Higher than expected.

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CPI Ex Food & Energy MoM (Jun)

Survey 0.2%
Actual 0.3%
Prior 0.2%
Revised n/a

Headline leaking into core.

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Consumer Price Index YoY (Jun)

Survey 4.5%
Actual 5.0%
Prior 4.2%
Revised n/a

Breakout!

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CPI Ex Food & Energy YoY (Jun)

Survey 2.3%
Actual 2.4%
Prior 2.3%
Revised n/a

If it was a relative value story, this would be a lot lower and going down.

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CPI ALLX (Jun)

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CPI TABLE (Jun)

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CPI Core Index SA (Jun)

Survey n/a
Actual 215.526
Prior 214.832
Revised n/a

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Consumer Price Index NSA (Jun)

Survey 217.903
Actual 218.815
Prior 216.632
Revised n/a

Karim writes:

  • Headline up 1.1% and 5.0% y/y

Above Fed’s comfort zones.

  • Core up 0.323% m/m and 2.4% y/y

In the 70’s I recall core passing 3% about the time headline passed 6%.

Click to see CPI Charts and CPI Table from the 1970s.

The difference there is no supply response for crude oil in sight this time.

  • Largest contributor to core was housing, where first 0.3% rise in oer this year was posted, and also a 1.8% rise in the fuel and utility component of housing.

Weak demand isn’t yet bringing CPI down as the Fed has been forecasting.

  • Lodging away from home (0.7%) had its second straight strong gain; this is usually +/- more than 1% each month, so likely to give back next month.

Weak occupancy hasn’t brought this measure down.

  • Tobacco up 1.5% due to tax hike in NY
  • Other items likely to reverse next month based on usual patterns are apparel (0.1%) and vehicle prices (0.1%)

Maybe, but lower car sales may not bring prices down over time due to cost issues.

  • Education (+0.5) also above trend

Costs rising here at well. And most employees probably get CPI increases.

  • Bernanke probably knew this number yesterday when he said inflation would be ‘temporarily higher’ in short-term.

Yes, and he and Vice Chair Kohn will have their hands full with the hawks at the August

  • Also, chain-weighted core CPI rose 0.1% and 2.1% y/y. This is a better proxy for core PCE (Fed’s preferred measure) as its not a fixed-weight time series and thus picks up substitution of one good versus another in consumer purchasing behavior.

Yes. Keeps this series lower than CPI until we’re down to eating bread and water, as deteriorating real terms of trade weigh on our standard of living.

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Net Long-term TIC Flows (May)

Survey $70.0B
Actual $67.0B
Prior $115.1B
Revised n/a

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Total Net TIC Flows (May)

Survey n/a
Actual -$2.5B
Prior $60.6B
Revised $61.6B

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Industrial Production MoM (Jun)

Survey 0.1%
Actual 0.5%
Prior -0.2%
Revised n/a

Better then expected.

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Industrial Production YoY (Jun)

Survey n/a
Actual 0.3%
Prior 0.1%
Revised 0.2%

Seems to be working its way lower over time. May be stabilizing with the weak USD.

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Capacity Utilization (Jun)

Survey 79.4%
Actual 79.9%
Prior 79.4%
Revised 79.6%

Higher than expected. The Fed is counting on slack to bring ‘inflation’ down.

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NAHB Housing Market Index (Jul)

Survey 18
Actual –
Prior 18
Revised –


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Bernanke testimony on inflation

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The last few Michigan surveys had one-year inflation expectations over 5%.

This is not lost on an FOMC that believes inflation expectations cause inflation.

Chairman Bernanke said this yesterday after outlining the inflation expectations/inflation process:

“A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

‘Prevent’ implies action, not ‘monitoring’.

Might just be a poor choice of words.


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Exports, Inflation, and the USD

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This is what happens when non residents are scrambling to reduce their hoards of USD financial assets.

Exports rising like this along with the still falling dollar indicates the current $60 billion monthly trade gap is still too high – non-residents simply don’t want to accumulate USD financial assets at that rate.

This adjustment process continually aligns the ‘real’ (price adjusted) trade gap to levels that equal foreign $US ‘savings desires’.

For the US this currently means a weak USD and a combo of rising exports and rising traded goods prices.

GDP muddles through as government spending and exports support demand, with continuing weak domestic demand and declining real terms of trade crushing the US standard of living.

US Exports

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US Exports YoY


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Deflation forecast

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This is the deflation argument.
(See below)

Never seen a split quite like this with calls for both accelerating inflation and outright deflation.

Which will it be?

My guess is inflation for the US as our friendly external monopolist continues to squeeze us with ever higher crude prices.

The political process is ensuring they will be passed through as sufficient government ‘check writing’ (net government spending) is sustained to support real growth.

(Bear Stearns, housing agencies, fiscal rebates, fiscal housing package, etc.)

And the dollar continues to adjust to the sudden, politically induced shift in foreign desires to accumulate USD financial and domestic assets.

Various private Q2 GDP estimates are now up to 2% – more than sufficient to support demand and pass through the higher headline prices.

Government is never revenue constrained regarding spending and/or lending.

The limit to government check writing is the political tolerance for inflation, which grows with economic weakness.

This inflation looks to me to be far worse than the 1970s.

Back then, we were able to muster a 15 million bpd positive supply response in crude that broke OPEC by deregulating natural gas.

We don’t have that card to play this time around.

From HFE:

July 14, 2008

WORLDWIDE:

  • Global Disinflation Is Going To Be The Next Big Move For The Bond Markets – Weinberg
  • Commodity And Oil Prices Cannot Rise Forever… There Is No Inflation – Weinberg
  • Bonds To Benefit – Weinberg

UNITED STATES:

  • STOP PRESS: Treasury, Fed To Make Credit Available To GSEs; Treasury To Seek Authority To Buy Their Stocks – Shepherdson
  • This Is A Lifeboat, Not a Bailout; Aim Is To Prevent Uncontained Failure – Shepherdson

CANADA:

  • We Cannot Rule Out A Rate Cut Tomorrow – Weinberg

EURO ZONE:

  • Core CPI Shows No Medium-Term Inflation Risks – Weinberg
  • Production Data Will Be Really Soft – Weinberg

GERMANY:

  • Core CPI Still Under 2% And Steady, ZEW At New Record Low – Weinberg
  • … Tighter Money Is Unhelpful Here – Weinberg

UNITED KINGDOM:

  • Starting Point For August QIR Forecasts To Emerge In This Week’s
  • Reports: Most Inputs To The Forecasts Will Be Stronger – Weinberg

FRANCE:

  • Not-Too-Scary Inflation Report Exported: Core Prices Are Steady – Weinberg

JAPAN:

  • Three Soft Report This Week Will Keep Investors Moving Out Of Stocks, Into Bonds – Weinberg

AUSTRALIA:

  • CPI Report For Q2, Due Next Week, May Rekindle Inflation Worries – Weinberg

CHINA:

  • Exploding Foreign Borrowing Diminishes Foreign Currency Reserve Adequacy; Trends Suggest Further Decay – Weinberg
  • GDP Will Be Below Recent Trend In This Week’s Report – Weinberg


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2008-07-15 US Economic Releases

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ICSC-UBS Store Sales YoY (Jun)

Survey n/a
Actual 2.2%
Prior 2.3%
Revised n/a

Fiscal spending seems to have stemmed the decline.

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ICSC-UBS Store Sales TABLE (Jun)

Same.

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Producer Price Index MoM (Jun)

Survey 1.4%
Actual 1.8%
Prior 1.4%
Revised n/a

Looks like a banana republic with a weak currency.

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PPI Ex Food & Energy MoM (Jun)

Survey 0.3%
Actual 0.2%
Prior 0.2%
Revised n/a

Also looks to be working its way higher.

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Producer Price Index YoY (Jun)

Survey 8.7%
Actual 9.2%
Prior 7.2%
Revised n/a

Inflation pouring in through the front door – import prices.

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PPI Ex Food & Energy YoY (Jun)

Survey 3.2%
Actual 3.0%
Prior 3.0%
Revised n/a

Looking like its on the way up, as it’s recovered and surpassed the level of Aug 06 when Goldman changed their commodity index and triggered massive selling of gasoline.

The Fed is watching for headline to leak into core, which they’ve said is already happening.

When only food/crude/import prices go up, it’s a relative value story, as funds to buy that stuff mean less to buy other things, and they lag in price.

But in this case core measures are not going down to offset headline numbers.

True, they haven’t gone up that much yet, but they have gone up rather than down.

That means that yes, demand is ‘weak’ and unemployment creeping up,

But demand is still strong enough to support both higher headline CPI and rising core measures as well,

Supported by government spending which is not revenue constrained nor liquidity constrained,

And supported by booming exports as non residents trip over each other trying to spend their now unwanted multi $trillion hoard of US financial assets.

Current levels of demand are more than sufficient to support much higher levels of housing starts (though still low levels), relatively flat employment, and rising core inflation measures.

And US real terms of trade continue to deteriorate along with the standard of living as a foreign oil monopolist exacts ever higher relative prices.

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Advance Retail Sales MoM (Jun)

Survey 0.4%
Actual 0.1%
Prior 1.0%
Revised 0.8%

Lower than expected, due to weaker than expected auto sales, due to the wrong vehicles on the showroom floors, which will take a while to correct.

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Retail Sales Less Autos MoM (Jun)

Survey 1.0%
Actual 0.8%
Prior 1.2%
Revised n/a

A little weaker than expected but pretty good from a strong previous month.

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Advance Retail Sales YoY (Jun)

Survey n/a
Actual 3.0%
Prior 2.1%
Revised n/a

Once again fiscal policy, not monetary policy, stops the slide.

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Empire Manufacturing (Jul)

Survey -8.0%
Actual -4.9%
Prior -8.7%
Revised n/a

May be on the mend from the lows.

Karim writes:

  • Retail sales a bit softer than expected..up 0.1% headline, up 0.8% ex-autos, and -0.5% ex-gas
  • Control (ex-autos, gas and building materials) up 0.3% and minor downward revisions to prior two months
  • PPI up 1.8% headline and 0.2% core; y/y 9.2% and 3.0% respectively
  • Pipeline pressures remain intense with intermediate up 2.1% m/m and crude 3.7%
  • Medical goods and services component decline (large component of PCE deflator; so June core PCE may come in 0.0% or 0.1%).
  • Empire survey shows modest improvement but stays in negative territory: -8.68 to -4.92

    • Right, Redbook sales show same moderate growth in non-auto sales. The wrong vehicles are on the showroom floors right now and it will take a while for the right ones to take their place.

    I have no idea what’s driving lower medical costs and whether further declines are to be expected, but seems highly unlikely.

    The dollar’s down again today.

    ‘Inflation’ is flowing in through that channel like water through a screen door on a submarine.

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    Redbook Store Sales (Jul 8)

    Survey n/a
    Actual 2.7%
    Prior 2.6%
    Revised n/a

    Moving up as fiscal policy kicks in.

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    Redbook Store Sales TABLE (Jul 8)

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    IBD/TIPP Economics Optimism (Jul)

    Survey 36.8
    Actual 37.4
    Prior 37.4
    Revised n/a

    A little better than expected.

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    Business Inventories (May)

    Survey 0.5%
    Actual 0.3%
    Prior 0.5%
    Revised n/a

    Possible that sales may be exceeding estimates and lowering inventories.

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    ABC Consumer Confidence (Jul 13)

    Survey -41
    Actual -41
    Prior -41
    Revised n/a

    Seems to have bottomed, but remains at low levels, probably due to inflation.


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