May 13, 2005
CALLING ALL CONTRARIANS
The consumer seems to have picked a timely moment last month to cut back on buying imports, an act which helped pare the trade deficit in April. Indeed, import prices rose by 0.8% last month, the Bureau of Labor Statistics reported today. That was twice as high as consensus prediction from the dismal scientists.
On first glance, the 0.8% jump in the prices of foreign goods arriving on America's shores looks like progress since that number's down from the revised 2.0% jump posted in March. But taken outside of that context, there's little to cheer about with an 0.8% rise.
Import prices on a year-over-year basis are now running at 8.1% through April—a pace that's a world above the 3.1% pace for domestic price increases, measured by the March consumer price index.
To the extent that Joe Sixpack continues shunning foreign-made goods, however, today's news on the import-price front will have a limited impact on inflationary pressures in these United States. But Joe, even after his latest bout of forswearing offshore-manufactured trinkets, has a long way to go in proving that he's about to favor domestic.
The challenge starts with the structural reality that is the American economy in 2005, which is to say an economy that's increasingly relying on Asia, among other regions, for satisfying Joe Sixpack's consumptional predilections. Even assuming our middle-class hero's mustered the discipline necessary to help slim the trade deficit going forward, self-control only goes so far short of riding bicycles and dining by candlelight for the foreseeable future.
Indeed, petroleum imports were a leading cause of the last month's rise in import prices. Petroleum import prices surged 3.1% in April, while non-petroleum imports advanced a relatively meager 0.4%.
But therein lies the seed of hope. Indeed, for those seeing the glass half full, there's reason think that better days lie ahead with import prices since oil prices continued falling today. Traders of crude futures in New York saw fit to drop a barrel of oil at one point on Friday to its lowest price since late February. Selling, it seems, has become the path of least resistance in the world's most important commodity.
It's anyone's guess how far oil prices will drop from here on out, assuming they do in fact drop further. But the stakes are crystal clear. For the sake of keeping a lid on inflation, the bond market should start praying that oil prices do in fact stay below $49, as they did today at the close.
In fact, the fixed-income set seems to be expecting no less. The yield on the 10-year Treasury Note slipped again today, effectively dismissing the import price news. The benchmark Treasury's yield settled at around 4.13%, the lowest in nearly three months.
"Excluding petroleum [import prices were] only up 4 tenths [of a percentage point], so really it's the same old-same old story," Patrick Fearon, senior economist at A.G. Edwards, tells Reuters.
Combined with weak oil prices, it's suddenly easy if not fashionable to dismiss inflationary news. Indeed, forex trades were dismissing any and all threats as they bid up the dollar again today to its highest level since last October, based on the U.S. Dollar Index.
The embedded assumption in the bond and forex markets is that oil's down, will stay down, and is probably headed lower still. No one was willing to argue with that presumption as Friday trading drew to a close. Well, almost no one.
The weak link in all of this is that the stock market's looking increasingly ill. Although the S&P 500 was down less than a percent today, the index's rally that began back in early 2003 is looking tired. The S&P is off nearly 5% this year. Is the slippage merely a bit of healthy profit taking after two calendar years of gains, or is something more ominous brewing that as yet is only hinted at in falling equity prices?
Whatever the answer, Wall Street analysts remain bullish, or so the consensus earnings estimate for the S&P suggests. Operating earnings estimates for the S&P 500 for full-year 2005 call for an advance of 11.6%, according to bottom-up numbers posted by Standard & Poor's. Sure, that's below the 23.7% earnings rise logged by the index in 2004. But even 11.6% is nothing to sneeze at, assuming it comes to pass, when measured next to the economy's nominal annualized rise of 6.2% posted in this year's first quarter.
Why then the gathering despair in equity prices? Does the stock market smell an economic stumble afoot? We know the bond market does, or so the falling yield suggests. The question then becomes: who's willing to bet against both the conventional wisdom in stocks and bonds?
Calling all contrarians—this is your softball pitch.
Posted by jp at May 13, 2005 4:22 PM
Great site. Seems to me that the US GDP revision for 1Q should be huge with this imports change.
Posted by: jp at May 17, 2005 10:06 AM
Seems you and I have the same 'hobbies'... Great site.
As for my swing at bat, I see interest rates "normalizing". That should do something to "normalize" the equity markets as well. Easy money brings in certain types of profits. With tighter money, we should, in theory, see that well dry up a bit. That should bring the equities markets a little lower. But, I'm not predicting dire days for stocks. I see a continued depreciation in the price of oil.... At least, for the foreseeable future. The combination of a firmer dollar and lower oil prices, inlfation should come back in check. All-in-all, the economy appears to be firming along at a decent pace. We won't see 1990's style growth, but a normal rate of growth. Eventually, we'll probably see a good surge in equities once things get back to normal. SHould happen right about the time Greenspan passes the torch. Who knows, maybe even his slightly wilted halo will perk up a bit.
Posted by: David Andrew Taylor at May 14, 2005 3:37 PM