March 2013 Currency Exchange Rates

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In March the U.S. dollar appreciated “across the board:” by 3.0 percent (monthly average basis) against the euro, 1.9 percent against the yen and 1.4 percent relative to Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.9 percent against a basket of 26 currencies. 

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Canada: Real GDP growth regained in January (+0.2 percent) the ground lost in December (-0.2 percent). Manufacturing was the largest contributor to January’s GDP uptick even though manufacturing sales edged lower, the fourth drop in five months.

The view forward is rather cloudy. On one hand, Canada’s finance minister released a plan that would eliminate the deficit in two years by limiting spending growth (and assuming a continued economic recovery). The list of nations is very short that would be in that position and, ordinarily, such a plan would boost the loonie’s “stock.” As Everbank’s Mike Meyer put it, however, “A good portion of Canada’s expansion over the next year hinges on increased business investment since consumer spending (via retail trade) has done a lot of the heavy lifting recently.”

On the other hand, outgoing Bank of Canada Governor Mark Carney renewed his commitment to maintaining the country’s “ultra low” interest rates. According to strategists at both UBS and Citigroup, international investors have responded to the news by starting to move out of the Canadian dollar in search of higher yields. Strategists have cut their estimates for the loonie by over 2 percent during the first quarter. Those expectations may soften further if investors begin to suspect Canadian banks are in trouble and take seriously the possibility of a forced, Cyprus-style “bail-in” (see Europe section below) from depositors’ accounts.

Europe: The euro took a real hit after the European Commission’s leadership decided to recapitalize Cyprus’ troubled banking sector by confiscating bank depositors’ funds (known as a “bail-in”). Details have been very fluid, but (at the time of this writing, at least) it appears that accounts containing more than €100,000 will have 60 percent of the funds in excess of that €100,000 threshold transferred to ownership by the bank in which the funds are deposited.

Originally billed as targeting the offshore funds of wealthy, tax-evading Russians, the policy has instead devastated Cypriot businesses and senior citizens who retired to the island with their life savings. In fact, Russian citizens appear to have been among the least affected; they used Russia-based branches of Cypriot banks to repatriate their cash during the bank holiday. Many politically well-connected Cypriots also escaped essentially unscathed, perhaps including the current President Nicos Anastasiades himself. Anastasiades’ family businesses allegedly transferred “dozens of millions” from their Laiki Bank accounts to London a week in advance of the depositor haircuts.

Now that what was done to Cyprus may be replicated elsewhere in Europe (and even Canada, as noted above), keeping funds in any Eurozone bank is becoming a riskier proposition. Unless and until faith is restored in Europe’s banking system, the euro could continue to weaken against the dollar.

Japan: Data out of Japan was a mixed bag: Although GDP was revised to show modest growth (+0.2 percent, from the previous estimate of -0.4 percent) during the final three months of 2012, core machinery orders fell 13.1 percent in January (relative to December). The country’s February trade balance ran a deficit for an eighth month (the longest spell since 1980) and, by some accounts, hit a seasonally adjusted all-time high deficit. Moreover, Japan's industrial production confounded expectations for a sizeable gain and instead showed a surprise contraction (-0.1 percent) in February.

With the Tankan survey of business sentiment showing broad pessimism among large Japanese companies during the January-through-March period, and the government pledging to implement policies that weaken the yen, we see no real reason for the yen to reverse course against the dollar.

China: The debate continues over whether China’s economy is expanding or contracting. HSBC’s Flash PMI for China printed above expectations at 50.4 (50 is the breakpoint between contraction and expansion), but February’s year-over-year change in electricity production calls that assumption of modest expansion into question. The PMI posted for March came in at 51.6, though, which caused Everbank’s Chuck Butler to conclude “the Chinese recovery is being sustained [which is] a good thing for global growth.” Bloomberg was less enthusiastic, observing that China’s economic data show the weakest start since 2009.

Of greater implication for the dollar is the revelation that Australia and China have entered into a trade agreement enabling direct convertibility of the Australian dollar into Chinese yuan, without U.S. dollar intermediation. Past deals between China and other countries involved currency swap arrangements, so the outright convertibility of the yuan and Australian dollar is unique -- for now. This is just the latest of many steps China has taken in the past few years to chip away at the U.S. dollar’s reserve currency status.

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 U.S. Construction

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Overall construction spending in the United States increased by 1.2 percent during February, to a seasonally adjusted and annualized rate (SAAR) of $885.1 billion. Private residential spending exhibited the largest gain (2.2 percent), although the other categories “came along for the ride.”

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Total housing starts were nearly unchanged in February, rising to 917,000 units SAAR (+7,000 units or 0.8 percent relative to January). The absolute increase was about evenly split between the single-family (+3,000 units or 0.5 percent) and multi-family sectors (+4,000 units or 1.4 percent).

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February’s “raw” starts aligned with their seasonally adjusted counterparts. Total unadjusted starts rose off their lowest level since March 2012 in February, thanks primarily to a 2,200 unit (5.6 percent) increase in the single-family category. Starts were up 25.6 percent over year-earlier levels.

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Sales of new single-family homes dropped by 20,000 units (-4.6 percent) to 411,000 (SAAR). The median price of new homes sold advanced, however, by 3.0 percent, to $246,800. Although the change in single-unit starts (+3,000) exceeded that of sales (-20,000), the three-month average starts-to-sales ratio fell back to 1.47 in February.

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Single-unit completions advanced by 3.6 percent, while the inventory of new single-family homes ticked higher in both months-of-sales (by 0.2 month, to 4.4 months) and absolute (+2,000 units) terms.

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Existing home sales advanced to 4.98 million units (+40,000 units or 0.8 percent, SAAR) in February. The share of total sales comprised of new homes fell back to 7.6 percent. The median price of previously owned homes sold in February also rose by $3,000 (1.8 percent), to $173,600.

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Housing affordability jumped back to a near-record high as the median price of existing homes for sale dropped by $6,200 (-3.4 percent) in January. Simultaneously, however, Standard & Poor’s reported that the 10- and 20-City Composites in the S&P/Case-Shiller Home Price indices posted respective monthly gains of 0.2 and 0.1 percent in January (7.3 and 8.1 percent, respectively, relative to a year earlier).

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“The two headline composites posted their highest year-over-year increases since summer 2006,” said David Blitzer, chair of the Index Committee at S&P Dow Jones Indices. “This marks the highest increase since the housing bubble burst.

“After more than two years of consecutive year-over-year declines, New York reversed trend and posted a positive return in January. The Southwest (Phoenix and Las Vegas) plus San Francisco posted the highest annual increases; they were also among the hardest hit by the housing bust. Atlanta and Dallas recorded their highest year-over-year gains.

“Economic data continues to support the housing recovery. Single-family home building permits and housing starts posted double-digit year-over-year increases in February 2013. Despite a slight uptick in foreclosure filings, numbers are still down 25 percent year-over-year. Steady employment and low borrowing rates pushed inventories down to their lowest post-recession levels.”

Some are arguing that the Federal Reserve’s monetary policies are leading to higher housing prices (especially single-family units). As reported by ZeroHedge, “Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg, to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000 [units], is putting $2.2 billion to work.

“‘We recognized that prices were moving faster than people expected,’ explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, they’re still ‘finding opportunities to buy.’ They might not be able to rent them out very quickly, but they’d rather not be ‘missing out on a few points in home price appreciation.’ The race to buy is on. The next housing bubble is inflating,” Zerohedge concluded.

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Although builders’ confidence in the residential market held steady or softened during the past couple of months, the number of permits applied for nudged higher on a SAAR basis in February. Total permits rose to 946,000 units (+42,000 units or 4.6 percent), mainly on the strength of multi-family units (+26,000 units or 8.1 percent, to 346,000 units); single-family units also rose by a more meager 16,000 units (+2.7 percent), to 600,000 units. Total permits were 28.5 percent higher in February 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: Third (Final) 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 +0.4 percent, nearly 0.3 percentage point higher than the previous (preliminary) 4Q estimate and 2.7 percentage points lower than the current 3Q estimate. Personal consumption expenditures (PCE), net exports (NetX) and private domestic investment (PDI) added to 4Q growth, in that order; government consumption expenditures (GCE) -- especially defense-related purchases -- dragged on growth. We should emphasize that this report merely represents an improved understanding of 4Q2012 data, not improved economic activity.

Although the headline number showed both an upward revision and positive growth, Consumer Metrics Institute (CMI) pointed out the 0.4 percent number is statistically indistinguishable from a stalled economy. The positive revisions came primarily from fixed investments, with "less negative" exports providing an additional boost. Consumer activities were marginally weaker than previously reported, and governmental spending continued to shrink.

For this revision the BEA assumed annualized net aggregate inflation of 0.97 percent. In contrast, during 3Q the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a -0.75 percent annualized inflation rate. As a reminder: an overstatement of assumed inflation decreases the reported headline number -- and in this case the BEA's relatively high deflator (more than 1 percent above the CPI-U) trimmed the headline GDP growth estimate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been a 1.51 percent growth rate. 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 1.35 percent annualized.

Previously reported improvements in real per capita disposable income were essentially sustained, with the annualized growth rate for per-capita disposable income a still-healthy +5.36 percent. More than half of this increase in disposable income was offset by increased personal savings (up about $131 billion per year -- or roughly 1 percent of GDP), however, as households spent cautiously in anticipation of the fully restored FICA deductions that will take back most of the 4Q's net disposable household cash gain during 1Q2013.

Among the notable items in the report (again, from CMI):

-- The contribution of consumer expenditures for goods to the headline number was revised downward slightly to 1.02 percent (from 1.03 percent in the previous estimate).

-- The contribution made by consumer services dropped by over a third to 0.27 percent (down from 0.44 percent previously reported).

-- The growth rate contribution from private fixed investments was up sharply to 1.69 percent (from 1.36 percent in the previous report), providing more than the entire boost to the headline number. Instead of productive capital spending, though, all of that revision was in non-residential construction (i.e., commercial real estate, which has grown back to its highest "real" level of activity since 2Q2009).

-- Inventory draw-downs moderated slightly, removing -1.52 percent from the headline number (-1.55 percent previously). Since the inventory data in the BEA's reports are often impacted significantly by not-fully compensated commodity price changes, it is difficult to tease out of these numbers the true source of any changes (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).

-- The previously reported sharp contraction in government spending became even slightly more negative, removing -1.41 percent from the headline number.

-- Declining exports removed -0.40 percent from the headline number (an improvement, however, of +0.15 percent from the -0.55 percent negative contribution previously reported). The net drag from exports continues to be consistent with a generally weakening global economy, and is a trend we might expect to have been continuing in the current quarter.

-- And reduced imports actually added +0.73 percent to the headline growth rate (down slightly from the 0.79 percent in the previous report). Again, this shows as a positive component in the GDP equation even though weakening demand for imports is often actually a sign of a slowing economy.

-- The annualized growth rate of "real final sales of domestic product" was revised upward to 1.90 percent, still some -0.46 percent below the prior quarter. This is the BEA's "bottom line" measurement of the economy.

-- And real per-capita disposable income was revised downward a net $35 to $33,138 per year (although that revised number is still about $430 per year above the numbers published for 3Q2012. From an economic standpoint however, a significant share of that was absorbed when the personal savings rate soared from 3.6 percent to 4.7 percent, pulling $365 of that annual improvement into savings or deleveraging activities instead of consumptive spending. 

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Expectations for 1Q2013 vary widely. The U.S. is expected to expand at a 2.5 percent rate, according to a MarketWatch forecast, "though a large slice of the gain could stem from higher inventories and a snap-back in government spending." Karl Denninger is less sanguine, however. After highlighting the following sentence from the BEA’s report: “Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $89.8 billion, in contrast to an increase of $32.5 billion,” Denninger commented, “That's not what you want to see; cash flow is the 'real deal' and it does not look positive at all.”

“At the end of the day only profits matter and corporations have been floating higher in stock price based on squeezing every possible gain out of their people and process,” Denninger continued. “That must eventually end simply due to the lack of additional fat to be cut and we've been running into the end of that now for the last six to nine months, with the inevitable push-back coming now from a roundly abused labor force.” MarketWatch agreed, saying that, “The sluggish growth in wages, combined with recent payroll tax increases and higher gas prices, could act as a drag on consumer spending. Americans could also decide to set more money aside to rebuild a low savings rate.”

“Facing the economy is a triple-whammy in the form of relentless currency debasement engaged in by [Fed Chair] Bernanke that has trashed consumer purchasing power (witness the unbridled rise in both disability claims and food stamps; there's no 'recovery' evident in either of those programs!), the flat population employment ratio that confirms people are not being hired at a rate sufficient to reduce government dependency and grow organic final demand along with historically high and unsustainable margins,” Denninger concluded.

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 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted Consumer Price Index (CPI) increased 0.7 percent in February -- the biggest month-to-month increase in more than a year. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment -- the largest annual change in three years.

The gasoline index rose 9.1 percent in February to account for almost three-fourths of the seasonally adjusted all-items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent. A sharp increase in the fruits and vegetables index was the major cause of the 0.1 percent increase in the food at home index, with other major grocery store food group indexes mixed.

The index for all items less food and energy (i.e., the “core” index) increased 0.2 percent in February. Analysts polled by MarketWatch had expected the overall CPI to increase 0.6 percent and for the core reading to increase 0.2 percent. The indexes for shelter, used cars and trucks, recreation, and medical care all rose in February. These increases more than offset declines in the indexes for new vehicles, apparel, airline fares, and tobacco.

The seasonally adjusted Producer Price Index for finished goods (PPI) increased 0.7 percent in February. Prices for finished goods moved up 0.2 percent in January and declined 0.3 percent in December. At the earlier stages of processing, the index for intermediate goods advanced 1.3 percent in February, and crude goods prices decreased 0.3 percent. On an unadjusted basis, the finished goods index moved up 1.7 percent for the 12 months ended February 2013, the largest 12-month increase since a 2.3-percent rise in October 2012.

Karl Denninger highlighted a potential red flag in the PPI report: namely, that “energy was up big.  While energy is quite volatile this change is unwelcome.  The bigger issue is that the trend in intermediate goods has shifted from stability to increases, and ex-food-and-energy it was up 0.7 percent on the month. Core intermediate price advances are extremely unwelcome as they tend to translate right into profit margins -- in the wrong direction.” 

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Forest industry-related price indices are either at or near their highest levels since at least 2005. In the case of Softwood Lumber, the rate of month-to-month change may have slowed, but it was quite substantial nonetheless. 

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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.

February 2013 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.7 percent in February after having been unchanged in January. Manufacturing output rose 0.8 percent, and the index revised up for the previous two months. In February, the output of utilities advanced 1.6 percent, as temperatures for the month were near their seasonal norms after two months of unseasonably warm weather. At 99.5 percent of its 2007 average, total industrial production in February was 2.5 percent above its level of a year earlier.

Industrial production of Wood Products increased by 1.6 percent while Paper rose by 0.2 percent relative to January. 

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The capacity utilization rate for total industry increased to 79.6 percent, a rate that is 0.6 percentage point below its long-run (1972--2012) average. Capacity utilization jumped by 1.7 percent for Wood Products while Paper nudged higher by a comparatively modest 0.3 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 fell by 0.1 percent.

It is always useful to compare one data source with another. A contemporary source (despite the different geographic reach and time frame) can be found in the New York Fed’s Empire State Manufacturing Survey. The March 2013 survey indicated that conditions for New York manufacturers continued to improve modestly. As usual, however, closer inspection below the headline revealed some less-cheerful details. ZeroHedge explains (emphasis in the original):

“Following last month's surprising surge in the Empire Fed from a deep negative number to 10.04, the March print was less exciting, declining modestly to 9.24, on expectations of an unchanged number. The new orders and shipments indexes remained above zero, though both were somewhat lower than last month’s levels, dropping from 13.31 to 8.18 and 13.08 to 7.76, respectively. Price indexes showed that input price increases continued at a steady pace while selling prices were flat. Employment indexes suggested that labor market conditions were sluggish, with little change in employment levels and the length of the average workweek. The Number of Employees index dropped from 8.08 to 3.23, back to September 2012 levels. Naturally, with reality worse than expected, all hopes were put in the future as indexes for the six-month outlook pointed to an increasing level of optimism about future conditions, with the future general business conditions index rising to its highest level in nearly a year. This is only the 4th year in a row in which optimism about the future is orders of magnitude higher than the current reality.”

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 International Trade

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January exports of $184.5 billion and imports of $228.9 billion resulted in a goods and services deficit of $44.4 billion, up from $38.1 billion in December (revised). January exports were $2.2 billion less than December exports of $186.6 billion. January imports were $4.1 billion more than December imports of $224.8 billion.

Interestingly, exports to the United States as a percentage of total Chinese exports has fallen to an all-time low. This calls into question the argument that the United States is pulling the rest of the world out of recession.

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Exports of pulp, paper and paperboard declined by 169,000 tons (6.1 percent). Imports, meanwhile, rose by 57,000 tons (8.1 percent). Exports were 104,000 tons (3.9 percent) lower than a year earlier while imports were up by 22,000 tons (3.0 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), 6.7 percent lower than January 2012. Asia was the destination for over three-fourths of U.S. pulp exports in January, with the rest of North America running a distant second.

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Paper and paperboard exports were somewhat more evenly split; the combination of Mexico and Canada received nearly one-half of U.S. exports, while Asia (especially India and Japan) was the destination for just over one-quarter.

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

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

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Softwood lumber exports fell by 15 MMBF (9.9 percent) in January while imports added 53 MMBF (7.2 percent). Exports were just 5 MMBF (3.8 percent) above year-earlier levels; imports were 114 MMBF (16.8 percent) higher.

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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. Although relatively small by comparison, exports to Jamaica jumped significantly relative to the same month in 2012. Meanwhile, Canada is far-and-away the largest source of softwood lumber imports into the United States. Imports from Sweden also increased substantially in January relative to a year earlier.

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One-half of U.S. softwood lumber exports left the country through West Coast (especially Seattle, WA) customs districts in January. At the same time, however, Great Lakes customs districts (especially Duluth, MN) have 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 in January, 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 decreased by 0.5 percent in December while prices rose by 0.8 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.

February 2013 Retail Sales

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The Census Bureau reported that seasonally adjusted retail spending increased by a robust $4.4 billion or 1.1 percent (MarketWatch had expected +0.7 percent) during February as higher sales at gas stations trumped the drag from food service & drinking places. The gain was the largest in five months.

“It appears that, for now at least, consumers are willing to run down savings or take on additional credit to maintain spending,” said Andrew Grantham of CIBC World Markets. “However, with the savings rate already extremely low, it may be a matter of when, rather than if, consumers need to curtail their enthusiasm for shopping.” 

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As was the case in January, however, February’s increase can once again be largely attributed to seasonal adjustments since -- on an unadjusted basis -- overall sales fell by $1.3 billion (0.4 percent). Cells with a yellow background in the figure above indicate a decline from the previous month; green indicates an increase from the previous month. February marked the first time since 2010 that unadjusted retail sales retreated in consecutive months, which reinforces our hypothesis that elevated gasoline prices and higher taxes are, in fact, taking a bite out of consumers’ wallets. 

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Although February’s seasonally adjusted retail sales reached a new all-time high in nominal terms, adjusting the data to account for inflation and population growth shows that sales have yet to recover their November 2007 high; moreover, sales are less than 2.5 percent above their January 2000 level.

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.