What is Macro Pulse?

Macro Pulse highlights recent activity and events expected to affect the U.S. economy over the next 24 months. While the review is of the entire U.S. economy its particular focus is on developments affecting the Forest Products industry. Everyone with a stake in any level of the sector can benefit from
Macro Pulse's timely yet in-depth coverage.


Tuesday, October 30, 2018

September 2018 Residential Sales, Inventory and Prices

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Sales of new single-family houses in September 2018 were at a seasonally adjusted annual rate (SAAR) of 553,000 units (625,000 expected). This is 5.5% (±12.1%)* below the revised August rate of 585,000 units (originally 629,000) and 13.2% (±13.6%)* below the September 2017 SAAR of 637,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was -18.0%. For longer-term perspectives, not-seasonally adjusted sales were 60.2% below the “housing bubble” peak and 21.6% below the long-term, pre-2000 average.
The median sales price of new houses sold in September was $320,000 (+$800 or 0.3% MoM); meanwhile, the average sales price dropped to $377,200 (-$7,300 or 1.9%). Starter homes (defined here as those priced below $200,000) comprised 9.8% of the total sold, down from the year-earlier 12.0%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 2.4% of those sold in September, up from 2.0% a year earlier.
* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 
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As mentioned in our post about housing permits, starts and completions in September, single-unit completions fell by 80,000 units (-8.7%). Although the drop in completions outpaced that of sales (-32,000 units; 5.5%), inventory for sale expanded in both absolute (+9,000 units) and months-of-inventory (+0.6 month) terms. 
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Existing home sales tumbled in September (-180,000 units), to a SAAR of 5.15 million units (5.300 million expected). Inventory of existing homes for sale shrank in absolute terms (-30,000 units) but expanded in months-of-inventory (+0.1 month) terms. Because new-home sales fell by a proportionally greater amount than resales, the share of total sales comprised of new homes fell to 9.7%. The median price of previously owned homes sold in September retreated to $258,100 (-$7,500 or 2.8% MoM). 
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Housing affordability marginally improved as the median price of existing homes for sale in August settled by $4,600 (-1.7%; +4.9 YoY), to $267,300. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices slowed to a not-seasonally adjusted monthly change of +0.2% (+5.8% YoY) -- but still marked a new all-time high for the index.
“Following reports that home sales are flat to down, price gains are beginning to moderate,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Comparing prices to their levels a year earlier, 14 of the 20 cities, the National Index plus the 10-city and 20-city Composite Indices all show slower price growth. The seasonally adjusted monthly data show that 10 cities experienced declining prices. Other housing data tell a similar story: prices and sales of new single family homes are weakening, housing starts are mixed and residential fixed investment is down in the last three quarters. Rising prices may be pricing some potential home buyers out of the market, especially when combined with mortgage rates approaching 5% for 30-year fixed rate loans.
“There are no signs that the current weakness will become a repeat of the crisis, however. In 2006, when home prices peaked and then tumbled, mortgage default rates bottomed out and started a three year surge. Today, the mortgage default rates reported by the S&P/Experian Consumer Credit Default Indices are stable. Without a collapse in housing finance like the one seen 12 years ago, a crash in home prices is unlikely.” 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Friday, October 26, 2018

3Q2018 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 3Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +3.50% (3.3% expected), down 0.65 percentage point (PP) from 2Q2018’s +4.15%.
On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 3Q2018 was 3.04% higher than in 2Q2017; that growth rate was slightly faster (+0.17PP) than 2Q2018’s +2.87% relative to 2Q2017.
Three groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 3Q growth. Net exports (NetX) detracted from growth.
The BEA’s real final sales of domestic product growth, which excludes the effect of inventories, tumbled to +1.42%, down by a substantial 3.91PP from 2Q. 
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“After last quarter's happy news, this report is somewhat sobering,” wrote Consumer Metric Institute’s Rick Davis. “The headline still looks good, but a wild swing in inventories has masked material deterioration in private fixed investments (in both commercial and residential construction) and foreign trade.”
“This report is very different from the good news and solid numbers reported for 2Q2018,” Davis concluded, adding 3Q “certainly looks more like an economy in transition than what was reported for 2Q. And we are always a little nervous when inventory growth is providing more than half of the headline number.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Thursday, October 18, 2018

September 2018 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in September at a seasonally adjusted annual rate (SAAR) of 1,201,000 units (1.216 million expected). This is 5.3% (±11.3%)* below the revised August rate of 1,268,000 (originally 1.282 million units) but 3.7% (±12.1%)* above the September 2017 SAAR of 1,158,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +1.6%. 
Single-family housing starts in September were at a SAAR of 871,000; this is 0.9% (±8.9%)* below the revised August figure of 879,000 (+2.3% YoY). Multi-family starts: 330,000 units (-15.2% MoM; 0.0% YoY).
* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category. 
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Completions in September were at a SAAR of 1,162,000 units. This is 4.1% (±11.3%)* below the revised August estimate of 1,212,000, but 7.0% (±12.9%)* above the September 2017 SAAR of 1,086,000 units; the NSA comparison: +5.7% YoY.
Single-family completions were at a SAAR of 844,000; this is 8.7% (±8.4%) below the revised August rate of 924,000 (+7.3% YoY). Multi-family completions: 318,000 units (+10.4% MoM; +1.8% YoY). 
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Total permits in September were at a SAAR of 1,241,000 units (1.272 million expected). This is 0.6% (±1.2%)* below the revised August rate of 1,249,000 (originally 1.229 million units) and 1.0% (±1.2%)* below the September 2017 SAAR of 1,254,000 units; the NSA comparison: -6.0% YoY.
Single-family permits were at a SAAR of 851,000; this is 2.9% (±1.2%) above the revised August figure of 827,000 (-2.9% YoY). Multi-family: 390,000 (-7.6% MoM; -13.1% YoY). 
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Builder confidence in the market for newly-built single-family homes rose one point to 68 in October on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Builder confidence levels have held in the high 60s since June.
“Builders are motivated by solid housing demand, fueled by a growing economy and a generational low for unemployment,” said NAHB Chairman Randy Noel, a custom home builder from LaPlace, La. “Builders are also relieved that lumber prices have declined for three straight months from elevated levels earlier this summer, but they need to manage supply-side costs to keep home prices affordable.”
“Favorable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases,” said NAHB Chief Economist Robert Dietz. “Unless housing affordability stabilizes, the market risks losing additional momentum as we head into 2019.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, October 17, 2018

September 2018 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.3% in September (+0.3% expected), about the same rate of change as in the previous two months. Output growth in September was held down slightly by Hurricane Florence, with an estimated effect of less than 0.1 percentage point (PP). For the third quarter as a whole, total industrial production advanced at an annual rate of 3.3%. In September, manufacturing output moved up 0.2% for its fourth consecutive monthly increase, while the output of utilities was unchanged. The index for mining increased 0.5% and has moved up in each of the past eight months. At 108.5% of its 2012 average, total industrial production was 5.1% higher in September than it was a year earlier. 
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Industry Groups
Manufacturing output moved up 0.2% in September. Factory output advanced 2.8% at an annual rate in the third quarter, a slightly faster gain than in the second quarter. In September, the indexes for durables and for other manufacturing (publishing and logging) rose, while the index for nondurables edged down. Production rose for most major categories within durable manufacturing. The largest increases were posted by motor vehicles and parts, wood products (+1.7%), and primary metals, while the only sizable decline was recorded by nonmetallic mineral products. Among nondurables, results were mixed, as the indexes for textile and product mills and for apparel and leather fell nearly 2%, but the indexes for printing and support and for petroleum and coal products rose about 1% (paper products: +0.2%).
Mining output increased 0.5% in September. The index has advanced about 24% from its trough in 2016, supported by gains in the oil and gas sector. The index for utilities was unchanged in September, as a decline in electric utilities offset an increase in natural gas utilities. 
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Capacity utilization (CU) for the industrial sector was unchanged at 78.1%, a rate that is 1.7PP below its long-run (1972–2017) average.
Manufacturing CU edged up in September to 75.9% but was still 2.4PP below its long-run average. The operating rates for durables and for other manufacturing increased, but the rate for nondurables decreased (wood products: +1.4%; paper products: +0.3%). The utilization rate for mining edged down to 92.1% but remained well above its long-run average. The utilization rate for utilities moved down to 77.7% and remained more than 7PP below its long-run average. 
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Capacity at the all-industries level nudged up 0.2% (+1.8 % YoY) to 138.9% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.4% YoY) to 138.5%. Wood products: +0.3% (+3.1% YoY) to 162.7%; paper products: -0.1% (-0.7% YoY) to 110.6%.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Thursday, October 11, 2018

September 2018 Consumer and Producer Price Indices (incl. Forest Products)

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in September (+0.2% expected). The shelter index continued to rise (+0.2%) and accounted for over half of the seasonally adjusted monthly increase in the all-items index. The energy index declined 0.5% in September after rising in August. The food index was unchanged in September, as an increase in the index for food away from home offset a decline in the food at home index.  
The index for all items less food and energy rose 0.1% in September, the same increase as in August. The shelter index increased 0.2%, and the indexes for apparel, motor vehicle insurance, recreation, and airline fares also rose. The medical care index increased as well, though its components were mixed. The index for used cars and trucks, which fell sharply, and the new vehicles index were among the indexes that declined in September. 
The all-items index rose 2.3% for the 12 months ending September, a smaller increase than the 2.7% increase for the 12 months ending August. The energy index rose 4.8% over the last year, a notably smaller increase than the 10.2% increase for the 12 month period ending August. The index for all items less food and energy rose 2.2% for the 12 months ending September and the food index increased 1.4%; these were both the same rate of increase as for the 12 months ending August. 
The Producer Price Index for final demand (PPI) increased 0.2% in September (+0.2% expected). Final demand prices declined 0.1% in August and were unchanged in July. In September, the rise in the final demand index can be traced to a 0.3% increase in prices for final demand services. In contrast, the index for final demand goods decreased 0.1%. The index for final demand less foods, energy, and trade services moved up 0.4% in September, the largest rise since a 0.5% increase in January.
On an unadjusted basis, the final demand index advanced 2.6% for the 12 months ended in September. For the 12 months ended in September, prices for final demand less foods, energy, and trade services advanced 2.9%.
Final Demand
Final demand services: The index for final demand services increased 0.3% in September following two consecutive declines of 0.1%. The broad-based advance was led by a 1.8% jump in the index for final demand transportation and warehousing services. Prices for final demand services less trade, transportation, and warehousing rose 0.3%, and the index for final demand trade services inched up 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.)
Product detail: In September, over one-third of the advance in prices for final demand services can be traced to the index for airline passenger services, which rose 5.5%. The indexes for food and alcohol wholesaling; deposit services (partial); outpatient care (partial); apparel wholesaling; and lawn, garden, farm equipment, and supplies retailing also moved higher. Conversely, margins for apparel, jewelry, footwear, and accessories retailing fell 2.5%. The indexes for automotive fuels and lubricants retailing and for traveler accommodation services also declined.
Final demand goods: The index for final demand goods edged down 0.1% in September, the first decrease since a 0.5% drop in May 2017. Leading the September decline, prices for final demand energy fell 0.8%. The index for final demand foods decreased 0.6%. In contrast, prices for final demand goods less foods and energy rose 0.2%.
Product detail: Leading the September decline in the index for final demand goods, gasoline prices fell 3.5%. The indexes for electric power; iron and steel scrap; canned, cooked, smoked, or prepared poultry; and fresh and dry vegetables also moved down. Conversely, the index for light motor trucks rose 0.8%. Prices for liquefied petroleum gas, pharmaceutical preparations, and unprocessed and prepared seafood also increased. 
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The not-seasonally adjusted price indexes we track were mixed on a MoM basis, but all increased YoY. 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, October 10, 2018

August 2018 International Trade (Softwood Lumber)

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Softwood lumber exports turned higher (12 MMBF or +9.1%) in August, while imports declined (20 MMBF or -1.5%). Exports were 17 MMBF (-10.6%) below year-earlier levels; imports were 182 MMBF (+15.7%) higher. As a result, the year-over-year (YoY) net export deficit was 199 MMBF (19.9%) larger. However, the average net export deficit for the 12 months ending August 2018 was 1.3% smaller than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 
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North America (of which Canada: 24.1%; Mexico: 21.2%) and Asia (especially China: 12.3%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 19.8% share. Year-to-date (YTD) exports to China were +9.6% relative to the same months in 2017. Meanwhile, Canada was the source of most (91.5%) of softwood lumber imports into the United States. Imports from Canada were 1.4% lower YTD than the same months in 2017. Overall, YTD exports were up 7.7% compared to 2017, while imports were down 0.4%. 
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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (35.8% of the U.S. total), followed by the Eastern region (28.4%) and the Gulf (26.1%) regions. Moreover, Seattle maintained its lead (20.3% of the U.S. total) over Mobile (14.8%) and Savannah (9.3%) as the single most-active district. At the same time, Great Lakes customs region handled 62.6% of softwood lumber imports -- most notably the Duluth, MN district (28.2%) -- coming into the United States. 
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Southern yellow pine comprised 26.1% of all softwood lumber exports, Douglas-fir (13.7%) and treated lumber (13.1%). Southern pine exports were up 10.8% YTD relative to 2017, while treated: -6.4%; Doug-fir: -6.0%.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Friday, October 5, 2018

September 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 134,000 jobs in September -- well below expectations of +180,000. However, combined July and August employment gains were revised up by 87,000 (July: +18,000; August: +69,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) dipped to 3.7% because the number of unemployed persons fell (-270,000) while the labor force expanded (+150,000). 
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Observations from the employment reports include:
* The household (420,000 more people employed) and establishment (+134,000 jobs) survey results were again out of sync. Given the disruptions from hurricane Florence, this outcome is not entirely unexpected.
* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; that appears to have occurred in September. Imputed jobs from by the CES (business birth/death model) adjustment were the most negative for the month of September (since 2000), but the BLS also applied the smallest seasonal adjustment to the base data. Had average September adjustments been used, employment may have contracted by 87,000 instead of the reported +134,000.
* As for industry details, Manufacturing expanded by 18,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in September at a faster pace than in August. Wood Products employment gained 1,300 jobs (ISM was unchanged); Paper and Paper Products: +300 (ISM increased). Construction employment added 23,000 (ISM increased). 
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* The number of employment-age persons not in the labor force (NILF) advanced by 74,000 (+0.1%), to a new record of 96.4 million. However, the employment-population ratio increased fractionally to 60.4%; thus, for every five people being added to the population, roughly three are employed. 
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* Similarly, the labor force participation rate (LFPR) was stable at 62.7% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.08, to $27.24, resulting in a 2.8% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.06, to $22.81 (+2.7% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours, average weekly earnings increased by $2.76 (+0.3%), to $939.78 (+5.0% YoY). With the consumer price index running at an annual rate of 2.7% in August, workers may finally be gaining ground -- officially, at least -- in terms of purchasing power. 
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* Full-time jobs gained ground when rising by 317,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- also rose by 263,000; non-economic reasons: -317,000. Those holding multiple jobs fell by 237,000. 
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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld declined in September, by $13.3 billion (-7.0% MoM; -4.7% YoY), to $177.9 billion; it is difficult to conclude anything meaningful from the data beyond observing that the YoY drop occurred in the context of adverse weather, and lower withholding rates from the Tax Cuts and Jobs Act of 2017. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending September was 1.8% below the year-earlier average -- well off the peak of +13.8% set back in September 2013.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Thursday, October 4, 2018

August 2018 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in August increased $2.3 billion or 0.5% to $504.0 billion. Durable goods shipments increased $1.8 billion or 0.7% to $253.1 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.6 billion or 0.2% to $250.9 billion, led by chemical products. Shipments of wood products slipped by less than 0.1%; paper: +0.9%. 
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Inventories decreased $0.5 billion or 0.1% to $675.6 billion. The inventories-to-shipments ratio was 1.34, down from 1.35 in July. Inventories of durable goods decreased $1.4 billion or 0.3% to $407.2 billion, led by transportation equipment. Nondurable goods inventories increased $0.8 billion or 0.3% to $268.4 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.2%; paper: +0.2%. 
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New orders increased $11.5 billion or 2.3% to $510.5 billion. Excluding transportation, new orders rose by 0.1% (+7.7% YoY). Durable goods orders increased $11.0 billion or 4.4% to $259.6 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- tumbled by -0.9% (+7.5% YoY). New orders for nondurable goods increased $0.6 billion or 0.2% to $250.9 billion.
As can be seen in the graph above, real (inflation-adjusted) new orders were essentially flat between early 2012 and mid-2014, recouping on average less than 70% of the losses incurred since the beginning of the Great Recession. The recovery in real new orders is back to just 64% of the ground given up in the Great Recession. 
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Unfilled durable-goods orders increased $10.4 billion or 0.9% to $1,176.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.68, down from 6.72 in July. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders then jumped to 102% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders gradually declined and are only now turning higher.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, October 3, 2018

September 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged up in September, by $2.18 (+3.2%), to $70.23 per barrel. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of an 84,000 barrel-per-day (BPD) decline in the amount of oil supplied/demanded during July (to 20.6 million BPD), and minor slippage in accumulated oil stocks (monthly average: 398 million barrels). 
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From the 1 October 2018 issue of Peak Oil Review:
Oil prices continue to increase primarily on concerns that the sanctions on Iran and the collapse of Venezuelan production will lead to shortages in the coming year. Last week London futures, which are more vulnerable to the Iranian situation, climbed by about $2 a barrel to close at $82.78. London futures are on track for a fifth quarterly advance, a streak not seen since the first half of 2008. Iranian exports of crude and condensates have declined by 800,000 b/d from April to September, according to the Institute of International Finance. Analysts expect a reduction of anywhere between 500,000 and 1.5 million b/d in Iranian supply due to the sanctions, with most expecting Saudi Arabia to take the lead in filling any supply gaps.
Last week saw a flurry of stories talking about $100 oil before the year is out. Bank of America Merrill Lynch even wondered if a 2008-style price spike, when oil reached $147 a barrel, was in the offing. However, not all observers are getting so excited about the certainty of a price spike. Barring another unexpected supply outage, the market should ride out the year just fine, according to Goldman Sachs. "We believe another supply catalyst beyond Iran would likely be needed for prices to meaningfully break to the upside," Goldman analysts wrote in a note. "In particular, we continue to expect that production from other OPEC producers and Russia will offset losses out of Iran, as has been the case so far." Goldman's sees Brent "stabilizing back into the $70-80 range into year-end."
The spread between London and NY futures widened during the week's trading as a steep decline in refinery utilization weighed on US crude oil futures. Total US refinery capacity dropped by five percentage points to 90.4% during the week ended 21 September and capacity was at its lowest level since early-March 2018. Lower-than-expected refinery runs are bearish for WTI relative to Brent, and the Brent/WTI spread jumped to $9.81 per barrel following the EIA release. The spread closed the week at $9.48. Given a spread of this size, it is difficult to see how foreign oil demand will not empty out US crude stockpiles until the spread shrinks.
The OPEC Production Cut: Last week the financial press was full of stories about an impending OPEC+ production increase to offset the decline in Iranian and Venezuelan exports. Saudi energy minister al-Falih started the week by rejecting accusations by President Trump that OPEC was keeping oil prices elevated through anti-competitive behavior. The minister also said Saudi Arabia holds about 1.5 million b/d of spare capacity, which it can tap "within days and weeks" and sustain if needed. "Whatever is needed we will do. If it's needed to produce that spare capacity, we will do that." The kingdom pumped 10.49 million b/d in August, according to the Platts survey, and has never produced above 10.7 million b/d.
On Tuesday President Trump again took a shot at Saudi Arabia and its refusal to lead an increase in oil production, by telling the UN that OPEC members were "as usual ripping off the rest of the world." Trump also attacked Iran in his speech, saying its leaders "sow chaos, death, and destruction," as he urged other nations to cut imports of Iranian oil to help isolate the regime. In a rejoinder, Iranian president Rouhani accused the US of actively working to overthrow his government and refused any direct talks with the Trump administration.
By Thursday there were reports that Saudi Arabia and other OPEC members were secretly discussing a half-a-million-barrel increase in their combined oil production to keep a lid on oil prices, amid growing concern that the Iran sanctions will create a severe shortage in global supply. By week's end, it was reported that Saudi Aramco is expected to increase production by an additional 550,000 b/d in the fourth quarter. If production can be increased by 550,000 b/d, it would push Saudi production to new highs above 11 million b/d. Many are skeptical that the kingdom can produce that much oil on a sustained basis.
US Shale Oil Production: The EIA reported last week that US oil production continues to grow to hit an average of 10.964 million b/d in July to break the output record set the previous month when output averaged 10.695 million b/d. Production in July was up 1.73 million b/d from July 2017. Texas again led all states with 4.469 million b/d of output in July, up 46,000 b/d from June and 1.03 million b/d in July 2017. North Dakota was the second largest producing state at 1.26 million b/d in July, up 41,000 b/d from June and 221,000 b/d from July 2017, EIA said. Production in federal Gulf of Mexico waters averaged 1.849 million b/d in July, up 189,000 from June and 92,000 from July 2017, according to EIA.
More attention is being paid recently to production in the Bakken which was hit harder than the Permian during the oil market downturn, with rigs and capital rerouted to West Texas. Oil production from the Bakken hit a temporary peak in late 2014 at 1.26 million b/d, declining for much of the next two years. However, production began to rise again in early 2017, and the EIA expects Bakken production to hit a new record of 1.33 million b/d in October.
Part of this revival is due to problems in expanding production in the Permian Basin with its pipeline bottleneck, the strain on rigs and equipment, completion services, labor, water and even road traffic is causing problems for shale drillers. Some drillers have decided to shift resources to more profitable locations, and the Bakken has received a boost as a result.
However, while production from the Bakken is still increasing, drillers are being pushed away from the "sweet spots" to less productive locations. The result is that the average well in the Bakken is producing less oil at its peak performance as fringe areas are dragging down the average. There is evidence that while the so-called new production techniques such as drilling much longer wells and using more sand can increase initial production, some doubt that despite the higher costs of drilling the new wells, they will produce much more oil overall.
A recent report from the North Dakota government acknowledged that the state is running out of new places to drill in its "sweet spots" but says that doubling the drilling can offset any decline brought about by new wells being less productive. In another two or three years we should know more about the future of the Bakken and other shale oil basins. 
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Selected highlights from the 28 September 2018 issue of OilPrice.com’s Oil & Energy Insider include:
Oil prices are closing out an extremely bullish week on a high, with U.S. sanctions on Iran and a fear of global supply shortages sparking a debate over the possibility of $100 Brent.
WTI and Brent held onto their gains during early trading on Friday and look set to close out the week strongly up. The tension between dwindling Iranian supply and the extent to which Saudi Arabia will increase production is sure to dominate the market narrative over the next few weeks.
Oil traders almost uniformly bullish. The mood at the Asia Pacific Petroleum Conference (APPEC) in Singapore was highly bullish on oil prices in the short-term, largely because of the supply losses from Iran. Bloomberg also noted that the number of Brent options has surged to its highest ever, "driven by record call trading, including bets on $100." Oil traders Mercuria and Trafigura see global production losses of about 2 million barrels per day and 1.5 mb/d, respectively, mostly related to Iran.
EU financing vehicle for Iran probably won't help oil. The "special purpose vehicle" to help Iran continue to do business with European companies may not have much of an impact on the oil trade. Buyers are not likely to be entirely protected from U.S. secondary sanctions. "I think it is a welcome development," Daniel Martin, a partner and sanctions expert at Holman Fenwick Willan in London, told Bloomberg. "But oil is not the arena it is going to be tested and used first."
Total SA sees $100 oil. Total SA CEO Patrick Pouyanne says $100 oil is possible but isn't excited about it. "I'm not sure it's a good news" he told Bloomberg. "Even for the oil industry, because you know, when price goes too high then you open the door to your competitors" while demand will likely decline, he said.
Saudi Arabia fears supply glut. OPEC+ decided against further production gains last weekend, although Saudi Arabia has indicated it would increase production in September and October. However, Saudi Arabia is also wary about creating a new supply glut, as the market will see a seasonal dip in demand in the winter. Riyadh is running the risk of a supply crunch in the fourth quarter, but Saudi officials fear the opposite problem if they increase production too much.
How much spare capacity does Saudi Arabia have? As the oil market tightens, scrutiny over Saudi Arabia's spare capacity is picking up. Saudi Arabia claims it can produce up to 12.0-12.5 mb/d, implying spare capacity of at least 1.5 mb/d. Analysts and industry insiders are skeptical. Bloomberg reports that executives at the Asia Pacific Petroleum Conference in Singapore privately questioned Saudi Arabia's ability to even go beyond 11 mb/d. "Near-term spare capacity is effectively maxed out," Amrita Sen of consultant Energy Aspects Ltd. said.
Permian pipeline woes may not be so bad. The pipeline bottleneck may end sooner than expected as pipelines are being fast tracked, according to a new report from Raymond James. The backlog should ease by late 2019, and the discount for WTI in Midland won't be as wide as feared. The firm downgraded its estimated discount for Midland WTI to just $15 per barrel relative to Brent, down from an earlier estimate of $25.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

September 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated in September. The PMI registered 59.8%, down 1.5 percentage points (PP) from the August reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. "This indicates strong growth in manufacturing for the 25th consecutive month, led by strong production output, continued strength in new orders, improvements in supply chain delivery performance, and better utilization of existing inventory accounts,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. 
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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+3.1PP) to a record-high 61.6%. 
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Of the industries we track, only Wood Products (which went unmentioned in the report) did not expand. Respondent comments included the following --
* Construction: "New residential construction market is still strong, with a good backlog of orders. Labor shortages and tariffs on materials continue to negatively weigh on earnings."
* Paper Products: "Sourcing hourly workers for remote locations continues to be a challenge for both full-time and part-time opportunities. Have implemented a wide variety of recruiting techniques and suppliers to aid us in sourcing this hard-to-find talent."
Relevant commodities --
* Priced higher: Diesel; freight; paper; paper products; corrugate; and lumber.
* Priced lower: Unleaded gasoline.
* Prices mixed: None.
* In short supply: Construction subcontractors; labor (general, construction and temporary); and freight.

IHS Markit’s September surveys, ran counter to ISM’s.
Manufacturing -- Output and new order growth gains momentum in September
Key findings:
* PMI rises to four-month high
* Steeper increases in production and new business
* Backlogs expand at joint-fastest rate for three years
Services -- Service sector activity growth dips to eight-month low
Key findings:
* Business activity expands at weaker pace
* Prices charged inflation at record high
* The pace of job creation at joint-fastest since June 2014

Commentary by Chris Williamson, Markit’s chief business economist --
Manufacturing: "U.S. manufacturing showed resilience in the face of storms in September, with output rising at one of the fastest rates seen so far this year. New orders growth has lifted to the highest since May and is being boosted in particular by strong domestic demand, especially in consumer markets. In contrast, export orders grew only very modestly again.
“Worries about trade wars and tariffs continued to dominate, pushing business confidence in the outlook down to its lowest for a year.
“Tariffs, alongside higher oil prices, were meanwhile a key factor reportedly driving input costs higher. Almost two-third of all companies reporting higher input prices ascribed the increase to tariffs.
“Worries about the impact of tariffs on prices also led to increased incidences of stock building, exacerbating existing supply chain delays and driving prices further higher. Raw material inventories rose at one of the steepest rates seen this side of the global financial crisis. While stock building boosts current sales at suppliers it poses downside risks to growth in future months.”

Services: “Service sector business growth has eased considerably since peaking back in May, but remains relatively solid. Some of the slowdown can be traced to capacity constraints, with new business once again rising at a steeper rate than firms were able to boost output.
“Combined with the manufacturing results, the September survey adds to signs that the pace of economic growth cooled to the lowest since January but continued to run close to a 3% annualized rate over the third quarter as a whole.
“Firms are hiring in increasing numbers to expand capacity, with the employment index from the manufacturing and services surveys rising to a level indicative of a further non-farm payroll rise in excess of 200,000.
“However, despite the increase in employment, many companies are clearly still struggling to meet demand, with strong inflows of new business causing backlogs of work to accumulate across the economy at one of the fastest rates seen since 2014.
“The combination of reduced spare capacity and robust domestic demand is driving prices charged for goods and services higher at a rate not seen since the global financial crisis.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Monday, October 1, 2018

September 2018 Currency Exchange Rates

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In September the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.1%) and euro (-1.0%), but appreciated against the yen (+1.0%). On a trade-weighted index basis, the USD gained 0.6% against a basket of 26 currencies. 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.