February 2013 Currency Exchange Rates

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In February the U.S. dollar depreciated by 0.3 percent (monthly average basis) against the euro, but appreciated 1.3 percent relative to Canada’s loonie and 4.7 percent against the yen. On a trade-weighted index basis, the dollar strengthened by 0.7 percent against a basket of 26 currencies. 

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Canada: The loonie has been dragged lower by several factors. For example, although real GDP edged up by 0.2 percent in 4Q2012, the economy contracted by 0.2 percent in December. Wholesale trade shrank by 0.9 percent in December (relative to November) while retail sales fell 2.1 percent -- marking the largest drop in nearly three years. Weaker oil futures prices put a dent in the value of the country’s biggest export at the same time Bank of Canada Governor Mark Carney indicated planned interest rate hikes have become less urgent.

Europe: Despite comments by Lars Seier Christensen, co-CEO of Danish bank Saxo Bank A/S, that "right now we're in one of those fake solutions where people think that [Europe’s] problem is contained or being addressed, which it isn't at all," the euro gained relative to the dollar on expectations of better economic conditions in Germany during the next several months. The ZEW Indicator of Economic Sentiment for Germany increased by 16.7 points in February (to 48.2 points) -- the third increase in a row. "The financial market experts have made their peace with the weak fourth quarter of 2012", said ZEW President Prof. Wolfgang Franz. “In their opinion the German economy faces [weaker] headwinds from the euro crisis than throughout the last months.”

Although Franz believes German business activity “may pick up speed moderately,” it may be hampered by factors elsewhere in Europe. London-based Markit Economics reported that Eurozone manufacturing shrank again in February, with all but Germany and Ireland experiencing a downturn. Moreover, the European Commission expects the Eurozone economy to contract for a second consecutive year in 2013. Finally, as if to prove Christensen’s point above, European banks are having difficulty repaying the money they borrowed from the European Central Bank; only about half the expected amount was repaid in the latest round.

Japan: The yen took another “header” against the dollar when news broke that Asian Development Bank President Haruhiko Kuroda had been nominated to head the Bank of Japan. Kuroda has called for pumping more money into the Japanese economy. Other factors contributed to the yen’s decline, including a third quarter of contraction during October-December (instead of the expected modest expansion) and a record trade deficit in January.

China: If official estimates are to be believed (cautions are given here and here), the yuan/renminbi overtook the Russian ruble in global trade transactions during January. The use of the yuan increased 24 percent in January from December and 171 percent from a year ago, while that of the ruble declined 5.4 percent on the month, according to the Belgium-based Society for Worldwide Interbank Financial Telecommunication. The Chinese currency accounted for an all-time high of 0.63 percent of the global payments, making it the 13th most-used currency, compared with 0.56 percent for the ruble, now the 15th most-used. The euro leads the list, followed by the U.S. dollar and British pound.

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.

February 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil nudged higher in February, advancing by $0.63 (0.7 percent) to $95.32 per barrel. That rise occurred despite a slight strengthening of the dollar, the lagged impacts of a drop in consumption of 474,000 barrels per day (BPD) -- to 18.1 million BPD -- during December, and a continued increase in already-plentiful crude stocks.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in January (February Brent data was not yet available when this was written), to $18.27 per barrel. Brent and WTI prices had been essentially identical until the end of 2010. 

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While traders pushed futures prices noticeably lower in recent days, it is apparent they think the crude oil market is going through another transition. As a result, near-term contracts are in “contango” (each subsequent contract is priced higher than its predecessor) while latter contracts are in “backwardation” (each subsequent contract is priced lower than its predecessor). Our interpretation of this pattern is that traders anticipate tight oil markets through mid-year 2013, but loosening supplies thereafter.

Although oil futures prices are retreating, gasoline prices have been buoyed by a “perfect storm” of factors including: refineries switching to summer blends, reduced capacity from maintenance and unexpected shutdowns/closures, continued strife in countries that produce significant amounts of oil, and expectations of improvement in the global economy.

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.

January 2013 U.S. Construction

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Overall construction spending in the United States decreased by 2.1 percent during January, to a seasonally adjusted and annualized rate (SAAR) of $883.0 billion. Although private residential spending was unchanged, the other categories retreated.

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Total housing starts fell in January, to 890,000 units SAAR (-83,000 units or 8.5 percent relative to December). The decrease originated in the multi-family sector (-88,000 units or 24.1 percent) as single-family units rose modestly (+5,000 units or 0.8 percent). 

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December’s “raw” starts aligned with their seasonally adjusted counterparts. Total unadjusted starts were at their lowest level since March 2012, thanks to a 6,400 unit (24.4 percent) drop in the multi-family category.

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Sales of new single-family homes jumped by 59,000 units (15.6 percent) to 437,000 (SAAR). The median price of new homes sold retreated, however, by 9.4 percent, to $226,400. Although the change in single-unit starts (+5,000) was exceeded by that of sales (+59,000), the three-month average starts-to-sales ratio remained essentially unchanged at 1.5 in January.

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Single-unit completions advanced by 7.0 percent, while -- despite remaining unchanged in absolute terms -- the inventory of new single-family homes fell in months-of-sales (to 4.1 months) terms.

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Existing home sales advanced to 4.92 million units (+20,000 units or 0.4 percent, SAAR) in January. The share of total sales comprised of new homes showed some life when jumping to 8.2 percent. The median price of previously owned homes sold in January fell by $6,600 (3.7 percent), to $173,600.

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Housing affordability remained essentially unchanged as the median price of existing homes for sale rose by a modest $900 (+0.5 percent) in December. Simultaneously, Standard & Poor’s reported that both the 10- and 20-City Composites in the S&P/Case-Shiller Home Price indices posted monthly gains of 0.2 percent in November. The 10- and 20-City Composites reported respective annual returns of 5.9 and 6.8 percent for all of 2012.

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"Home prices ended 2012 with solid gains," said David M. Blitzer, chair of the Index Committee at S&P Dow Jones Indices. "Housing and residential construction led the economy in 4Q2012. In December's report all three headline composites and 19 of the 20 cities gained over their levels of a year ago. Month-over-month, nine cities and both Composites posted positive monthly gains. Seasonally adjusted, there were no monthly declines across all 20 cities.

"The National Composite increased 7.3 percent over the four quarters of 2012. From its low in the first quarter, it surged in the second and third quarter and slipped slightly in the 2012 fourth period. The 10- and 20-City Composites, which bottomed out in March 2012 continued to show both year-over-year and monthly gains in December. These movements, combined with other housing data, suggest that while housing is on the upswing some of the strongest numbers may have already been seen.

"Atlanta and Detroit posted their biggest year-over-year increases of 9.9 percent and 13.6 percent since the start of their indices in January 1991. Dallas, Denver, and Minneapolis recorded their largest annual increases since 2001. Phoenix continued its climb, posting an impressive year-over-year return of 23.0 percent; it posted eight consecutive months of double-digit annual growth."

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With builders’ confidence in the residential market steady in January, the number of permits applied for nudged higher on a SAAR basis. Total permits rose to 925,000 units (+16,000 units or 1.8 percent) on the strength of single-family units (+11,000 units or 1.9 percent, to 584,000 units); multi-family units also rose by a more meager 5,000 units (+1.5 percent), to 325,000 units. Total permits were 40.5 percent higher in January than a year earlier.

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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.

4Q2012 Gross Domestic Product: Second (Preliminary) Estimate

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The Bureau of Economic Analysis (BEA) estimated 4Q2012 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of +0.1 percent, nearly 0.3 percentage point higher than the previous (advance) 4Q estimate and 3.0 percentage points lower than the current 3Q estimate. Personal consumption expenditures (PCE) and net exports (NetX) were positive, while government consumption expenditures (GCE) -- especially defense-related purchases, and private domestic investment (PDI) subtracted from 4Q growth, in that order.

Reactions to the report were mixed. “We still believe that the fourth-quarter GDP figures were a lot better than the headline stagnation suggests,” said Paul Ashworth, chief U.S. economist at Capital Economics. The firm had previously called the initial fourth-quarter report showing a decline “the best-looking contraction in U.S. GDP you’ll ever see.” Ashworth may have a point, because the BEA assumed annualized net aggregate inflation of 0.88 percent for this set of revisions. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been 1.77 percent. Alternatively, if data for online prices from the Billion Prices Project had been used to deflate the BEA's nominal data, the growth rate would have been 1.02 percent annualized.

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The nod to Ashworth notwithstanding, Consumer Metrics Institute’s (CMI) observation that “neither this 0.14 percent positive growth rate nor the previously published -0.14 percent contraction rate show an economy that is statistically in anything other than a dead stall” fits better with our view. Moreover, CMI wrapped up its GDP report with the following prediction: “This data is still reporting 4Q-2012, a quarter that in retrospect may be viewed as the last gasp of the ‘Great Recovery’ -- before there were significant economic headwinds created by reductions in consumer take-home pay, rising gas prices, sequestered federal spending and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove something like 3 percent from real-time economic "growth" by the end of the first quarter of 2013: the normalization of FICA deductions alone could reduce consumer spending enough to pull the headline number down by 1 percent, the $.50 per gallon increase in gas prices could similarly remove another 0.5 percent from the headline number, weakening exports could easily reduce the headline number by another 1 percent and the federal budget sequestrations -- if fully implemented and sustained -- should eventually pull (at maximum, despite doomsday rhetoric) an additional 0.5 percent from 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.

January 2013 Consumer and Producer Price Indices

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The seasonally adjusted Consumer Price Index (CPI) remained unchanged in January. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

The index for all items less food and energy increased 0.3 percent in January. This increase offset another decline in the gasoline index and resulted in the seasonally adjusted all items index being unchanged, as it was last month. Increases in the indexes for shelter and apparel accounted for much of the increase in the index for all items less food and energy, with advances in the indexes for recreation, medical care, and airline fares also contributing.

The energy index fell 1.7 percent in January. Along with the gasoline index, the natural gas and fuel oil indexes also declined, while the electricity index increased. The index for food was unchanged in January after increasing in each of the previous ten months. The food at home index was unchanged with major grocery store food group indexes mixed.

The all items index increased 1.6 percent over the last 12 months; the 12-month change has been slowing since its recent peak of 2.2 percent in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as the last two months. The food index has risen 1.6 percent over the last 12 months while the energy index has declined 1.0 percent.

The seasonally adjusted Producer Price Index for finished goods (PPI) advanced 0.2 percent in January. Prices for finished goods declined 0.3 percent in December and 0.4 percent in November. At the earlier stages of processing, the index for intermediate goods was unchanged in January, and crude goods prices increased 0.8 percent. On an unadjusted basis, the finished goods index advanced 1.4 percent for the 12 months ended January 2013. 

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Prices received for intermediate goods is nearly unchanged relative to a year earlier (+0.4 percent); so, too, is the cost of wood fiber (+0.3 percent).Prices for softwood lumber, by contrast, are dramatically higher (+24.8 percent). 

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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.

December 2012 International Trade

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December exports of $186.4 billion and imports of $224.9 billion resulted in a goods and services deficit of $38.5 billion, down from $48.6 billion in November (revised). December exports were $3.9 billion more than November exports of $182.5 billion. December imports were $6.2 billion less than November imports of $231.1 billion. The deficit fell to its lowest level since January 2010 largely on exports of petroleum products and commercial jetliners.

Interestingly, China reported a December trade surplus with the United States of $18.7 billion at the same time the United States reported a Chinese trade deficit of $24.5 billion. This disparity has been an ongoing problem, and is of sufficient magnitude to influence U.S. GDP estimates.

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Exports of pulp, paper and paperboard advanced by 261,000 tons (10.4 percent). Imports, meanwhile, fell by 117,000 tons (14.3 percent). Exports were 46,000 tons (1.7 percent) higher than a year earlier while imports were down by 67,000 tons (8.8 percent). 

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U.S. pulp exports to China were nearly an order of magnitude larger than exports to the second-largest country in the list above (i.e., Mexico), and nearly on par year-to-date with 2011. Asia is the destination for over three-fourths of U.S. pulp exports, with the rest of North America running a distant second. 

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Paper and paperboard exports are somewhat more evenly split; the combination of Mexico and Canada receive a little more than one-third of U.S. exports, while Asia (especially India and Japan) is the destination for just under a third. 

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Canada supplies over two-thirds of pulp imports into the United States, followed distantly by Brazil. 

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Pegging at nearly 90 percent, Canada absolutely dominates paper and paperboard imports into the United States.

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Softwood lumber exports rose by 12 MMBF (9.2 percent) in December while imports shed 83 MMBF (10.1 percent). Exports were 20 MMBF (15.8 percent) higher than year-earlier levels; imports were 58 MMBF (7.3 percent) lower. 

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North America (Canada and Mexico), followed by Asia (especially China and Japan), continue to be the primary destinations for U.S. softwood lumber exports. Meanwhile, Canada is far-and-away the largest source of softwood lumber imports into the United States. 

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Just over half of U.S. softwood lumber exports left the country through West Coast (especially Seattle, WA) customs districts during 2012. At the same time, however, Great Lakes customs districts (especially Duluth, MN) handled most of the softwood lumber imports coming into the United States. 

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Douglas-fir made up nearly one-quarter of all softwood lumber exports for all of 2012, followed by southern yellow pine. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased by 0.8 percent in November while prices fell by nearly 1.0 percent.

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.

January 2013 Industrial Production, Capacity Utilization and Capacity

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Industrial production edged down 0.1 percent in January after having risen 0.4 percent in December. In January, manufacturing output decreased 0.4 percent following upwardly revised gains of 1.1 percent in December and 1.7 percent in November. For 4Q2012 as a whole, manufacturing production is now estimated to have advanced 1.9 percent at an annual rate; previously, the increase was reported to have been 0.2 percent. In January, the output of utilities rose 3.5 percent, as demand for heating was boosted by temperatures that fell closer to their seasonal norms. At 98.6 percent of its 2007 average, total industrial production in January was 2.1 percent above its level of a year earlier.

Industrial production of Wood Products decreased by 1.3 percent, and Paper fell by 0.4 percent relative to December.

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The capacity utilization rate for total industry decreased in January to 79.1 percent, a rate 1.1 percentage points below its long-run (1972--2012) average. Capacity utilization fell by 1.1 percent for Wood Products while Paper decreased by comparatively modest 0.4 percent.

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Capacity at the all-industries and manufacturing levels moved higher (0.2 percent). By contrast, Wood Products dropped by 0.2 percent while Paper remained unchanged.

The outlook for U.S. manufacturing remains clouded. Some analysts believe the United States can “decouple from the rest of the globe and act as an island of economic prosperity.” However, wrote Lance Roberts, “with 40 percent of corporate profits tied to international exposure it is unlikely that the United States can remain decoupled from the rest of the global community for long.”

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.