The catalyst for today’s red ink on Wall Street is widely explained as IBM and its disappointing earnings report. Big Blue earnings per share in fact did surprise on the downside with 85 cents a share for this year’s first quarter, well below the roughly 90 cents that analysts were generally expecting.
But there’s more to the sharp fall in the major stock market indexes today, which shaved about 1.7% off the S&P 500 and nearly two percent from the Nasdaq.
How to explain the S&P, now at its lowest since last November? Perhaps part of the answer resides offshore. In the search for clues behind the sell-off, the continuing rise in import prices could be a suspect. Today’s report from the Labor Department reveals that import prices for March rose 1.8%, the highest monthly increase in over two years and more than double February’s advance. On a year-over-year basis, import prices are advancing at a 7.1% pace. As recently as February 2004, the comparable year-over-year number was under 1%.
But wait—this just in! High oil prices are the leading cause behind the price hike. Prices for non-petroleum imports rose just 0.3% in March while prices for petroleum imports skyrocketed by 10.6%. A barrel of crude now changes hands in the nearby futures contract in New York for just over $50, down from as much $58 on April 4. More than a few hopeful souls are looking at the trend and concluding that it’s the start of a correction that will bring energy prices back down to something approaching fair value.
Promoting no less, Opec today released a report that emphasizes that oil production in the cartel will grow by 1.6 million barrels to 32.7 million this year courtesy of new capacity coming on line in several member countries. “Even with the high expected demand for OPEC crude,” the cartel’s web site counsels today, “Member Country production should be more than adequate to meet projected requirements, according to the OPEC Monthly Oil Market Report for April.”
Bucking the trend of late, traders are actually taking the cartel at its word. As a result, the crowd believes that selling oil is preferable to buying at the moment. The turn in sentiment, as oil analyst Neil McMahon of Sanford C. Bernstein in London wrote yesterday in a note to clients, is quite reasonable. Opec, he explains, is “ensuring the market remains supplied well above current demand levels, as demonstrated by the continuing ascent of total oil inventories in the U.S., while this month’s International Energy Agency report casts doubts on the ability of China to sustain double-digit demand growth.”
Bottom line: McMahon predicts oil prices are headed for a $40-to-$50 range in the second quarter. With today closing just 49 cents above that upper limit, who can argue?
If the trend in falling oil prices has legs, today’s inflationary news with import prices doesn’t mean much. If fact, it’s downright irrelevant, if you buy into this line of thought. The bond market is certainly buying that notion, along with every Treasury security in sight. Adding to the fresh joy in bond land is the suggestion by way of IBM that earnings may increasingly face headwinds. “We’ve had bad news for stocks and bad news for the economy and that’s been very supportive for the bond market,” Orlando Green, a fixed-income strategist in London at Calyon, tells Bloomberg News today.
Whatever the reason, the fixed-income set today ignored the jump in import prices and instead aggressively bought the benchmark 10-year Treasury Note. The yield on the 10 year fell again on Friday, and sharply so, falling to roughly 4.24%, the lowest since mid-February. But there was no confirmation of the bond rally in the dollar, which slipped today, based on the U.S. Dollar Index.
In fact, time isn’t necessarily on the bond market’s side, and for more than a few reasons. We’ll just consider one, and let Bernstein’s McMahon do the talking, again quoting his research note from yesterday:
We are growing in confidence that the market should become much tighter towards the fourth quarter and into 2006. We believe the IEA remains overly optimistic in their outlook for levels of spare capacity, and production growth in Russia. Moreover, an analysis of IEA revisions to non-OPEC supply forecasts reveals that, contrary to recent history, an incremental supply response to $50/bbl is failing to materialize.
No less a voice on energy matters than the U.S. Energy Secretary said as much today, warning that Americans should expect high prices for gasoline in the years to come. “A simple explanation of this very complex problem is that we’re using energy faster than we’re producing it,” Secretary Bodman explains via Reuters.
And that brings us back to imports, namely, rising oil imports. But today, at least, that’s nothing to worry about, or so the bond market suggests.