Last Week’s Highlights:
Oil: Tops $106
Stocks: Friday slide sets up for another weak Monday
Employment Jobs reports shows further weakness
Economics This Week:
Date Item Est. Comment
3/13 Retail Sales -0.1% Weakening expected
3/14 CPI 0.1/0.2 Lift anticipated due to oil
3/14 Mich Sentiment 70.5 Flat reading
3/18 FOMC 50-75bps Look for the Fed to cut once again
Jobs are Lost but Unemployment Declines:
Last Friday’s jobs’ report was yet another disappointment for the markets and for economists. While
the unemployment rate actually showed a better result, moving from 4.9% to 4.8% (5% is considered
full employment), the jobs’ report was a different story. Friday’s headline news was a 63k reported
job loss. More importantly was the fact that private sector payrolls dropped over 100k. Construction
and manufacturing jobs were again down significantly. If not for the 38k government job increase, it
would have looked a lot worse.
Friday's employment report again confirms a recession in job growth as private sector payrolls have
shown stronger declines over the last 3 months. According to Tim Rodgers at Briefing.com, "The
sharp downward trend over the last four months reflects the potential for worse ahead. Some sources
of growth – the strong pace of exports and business investment – may be enough to keep the
economy out of definitional recession before the start of the government payouts in May provide a
welcome economic lift."
Round II on Inflation & The Consumer
On Wednesday, we get another look at consumer spending via the retail sales numbers. Currently,
the Street thinks the data will be weaker than January’s rebound results. High energy prices (see
below) have had a particularly deflating effect on consumer spending and big ticket durable goods
purchases, say economists. And you may have noticed gas prices are on the rise. The national average
is up to $3.16, 65 cents higher than this time last year. This acts as a drag on sales and hurts
consumer sentiment and confidence.
On Friday we get the CPI data. If the PPI data was any indicator of things to come, CPI may not be
a pretty one. Last month, the overall data showed an annual run rate of 4.2% even though the core
rate was much more moderate at 2.5%. The big question facing the market is whether core demand
for goods and services (including energy) will slow soon enough (with a slower economy) to avoid a
continued higher trend in inflation. If the economy follows traditional behavior, the economic slow
down will help mitigate inflationary pressure. Trouble is, the economy is a different beast than it was
just 10 years ago. The global impact of the Asian and emerging markets, coupled with a central
market euro currency, could force inflation higher through lifts in energy pricing. Even the Fed now
concedes that inflation risks are rising.
Oil Continues its Run
If the jobs data wasn’t enough, the oil markets were there to throw a bit of crude fuel into the fire.
Crude prices moved swiftly to new highs of $106.54 last week before retreating slightly. Much of the
lift last week can be attributed to OPEC’s decision to leave production levels unchanged at its Vienna
meeting last week. Of course, our old pals Iran and Venezuela were opting for production cuts to lift
prices even further. As you probably read, the Bush administration has been putting pressure on
OPEC, and Saudi Arabia in particular, to expand production to help ease the high costs of energy as
the US slows. However, the big driver in pricing is more likely the continued weakness of the dollar.
The oil-producing nations still trade and settle energy transactions in dollars and, of course, sell to
the US in dollars. With the dollar hitting a new low of 1.54 euro, the foreign purchasing power of oil
transactions lessened. In this scenario, the dollar’s weakening will continue to act as a monetary
inhibitor from prices falling very quickly. What will help to lower oil prices is reduced demand from a
slowing US and, soon, the Euro-block economy – at least that’s how it used to work. These days, the
increase in demand from Asia, especially China, may be sufficient enough for OPEC to not be forced
to cut production as much as it has in the past during western economy slow-downs.
Municipal Market Volatility Continues
Two weeks ago, the municipal market experienced one of its most significant liquidity led sell-offs in
its history. Last week, it most likely produced another record, this time for its rally. The AAA Muni
to LIBOR ratio had moved from the high 80s in late Feb to over 110% by the end of the month.
Last week, that same ratio moved all the way back to a level of 98%. While some have viewed this as
the right steps toward bringing back normalcy to the market, even at a 98% ratio level the market
remains in record territory and has a long way to go before reverting to its historic mean levels in the
low 80s.
One of the biggest challenges the market faces is renewed buying from the institutional players who
have been essentially absent from the markets for months. The liquidity and credit crunch these
investors have been experiencing have hindered their normal buying patterns in such distorted
relative yield periods. However, retail buying demand is reportedly very strong, with the abundant
availability of AAA municipal bonds yielding north of 5%. Remember, at today’s federal top rate of
35%, this yield is worth 7.7% when compared to a taxable bond. If tax rates were to rise to say 40%
(think the tax rates will be that low a few years from now?) that equivalent yield rises to over 8.3% –
and that’s without the advantage of state exemption.
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