FORTIGENT, LLC

Economic & Market Update: 

august 11, 2008

Chip Norton

Managing Director of Fixed Income & Economic Analysis

chip.norton@fortigent.com

“Oil & Gas Retreat, Dollar Advances”

Last Week’s Highlights:

FOMC:                               Holding steady at 2%

Stocks:                                Huge rally – Dow +302

Bonds:                                Treasury 10-yr at 3.95%

Oil:                                     Retreat to $115

Gas                                    Regular now at $3.85

Dollar:                                1.50 euro, 110 yen

Economics This Week:

Date      Item                                  Est.                     Comment

8/12       Trade Balance                    -$59bil                  Narrows again on exports

8/13       Retail Sales                         0.5%                     Uptick expected

8/14       CPI                                    0.4%                     Rising trend slows

This week brings some important news on consumer spending in the form of retail sales, as well as another look at inflation via the CPI data on Thursday. The market expects retail sales to improve by 0.5% after last month’s weak 0.1% increase. The year-over-year rate is now holding near 3% compared to the nearly 9% levels seen during the summer of 2006.

On the inflation front, we get CPI data this week with an expected 0.4% increase in the headline data and 0.2% in the core reading. If it comes in near expectations, it will leave the year-over-year rate near 5%, with the core rate close to 2.5%. Despite the decline in oil prices and gas prices over the last few weeks, the inflation data will take longer to settle back and may continue to show rising rates for months to come.

Oil & Gas Slide

The retreat from the $150 per barrel level in crude oil continues with closing levels last Friday near $114.5 per barrel in the futures market, ending the week with an 8% decline and the lowest price levels in three months. The decline of almost $5 on Friday again shows just how powerful and volatile the energy markets have become with so much speculative trading in place. It’s also important to note that all measures of US energy consumption continue to show conservation and demand reductions. The slide in oil is now about 22% from the top and still going. However, the break-out of war in northern Georgia over the weekend has the energy futures market on edge as we enter this week’s trading. Gasoline prices have also been falling almost as fast. The national average now stands near $3.85, still more than a full dollar higher than prices this time last summer.  These are both very good signs for consumer sentiment as we head toward the fall and school spending season again. 

 Dollar on a Tear

 Source: Tradingcharts.com

If you haven’t been watching the currency market lately, you should. The dollar posted a $1.50 level against the euro last week in one of its strongest rallies in many months, reaching its strongest level in six months. After bottoming out just shy of $1.60 per euro this time last month, the dollar has gained almost 6.3% in the last several weeks. Much of the dollar’s advance has been on the heels of the European Central Bank’s decision not to raise rates in the near-term. While seen as a good sign for the recovery in the US markets, it could also be problematic for export gains, which have been the engine of GDP growth the last few quarters. Later this week, the euro zone will get a view of their second quarter growth. If it shows expected weakness, traders indicate the dollar could rally well beyond $1.5.  The dollar also advanced to its highest level in seven months against the yen, topping over 110 last Friday.

Fed Stays on the Sidelines

As expected, the FOMC left interest rates unchanged last week at the FOMC meeting. The continued concern over inflation, as well as the tenuous nature of economic growth, has the Fed holding tight to a policy level of 2% on the fed funds rate. The FOMC meets next on September 16th.  At this point, the fed fund futures suggest a 70% probability for the current 2% level and only about a 15% chance for a rate increase to 2.25%.

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