Economic & Market Update: November 15, 2009

“Economic Calendar Picks Up Following Reprieve”

Chris Maxey, Senior Analyst

http://www.Fortigent.com

Last Week’s Highlights:

Economics This Week:

Investors Reenergized During Quiet Week

It turned out to be another remarkably strong week for the equity indices, with the S&P 500 index closing up 2.3%, while the Dow Jones Industrial Average tacked on another 2.5%.  Both indices hit new 52-week highs, but there was no accepted consensus behind this outcome. 

A lack of economic news to dissect and a light slate of earnings reports likely contributed to the positive tone.  Wal-Mart was one of the last major outfits to report Q3 earnings, showing a 4% increase to $3.2 billion.  Charles Holley, Wal-Mart’s Treasurer, remarked “we have not seen any sign of change in our consumers.”  With only a few short weeks left before the holiday shopping season kicks into full gear, there is concern that consumers are not ready to return to their previously generous ways.  Wal-Mart reinforced that notion by saying that consumers would likely be more “cautious” this holiday season, but some are buying into the idea that “frugal fatigue” will spark higher sales. 

There is a dash of good news for anyone concerned about stretching for an extra buck this Thanksgiving.  The cost of dinner for a family of 10 will be $1.70 cheaper.  An annual survey from the American Farm Bureau Federation discovered that the average cost for turkey, stuffing and other assorted accoutrements is $42.91, a 4% drop from 2009.  Milk turned out to be the biggest loser – down $0.92 per gallon. 

Source: American Farm Bureau Federation

Europe tepidly crawled out of recession based on the most recent GDP figures from Eurostat, the European Union’s statistical arm.  However, the numbers were disappointing to most, as GDP grew at a meager 0.4% rate, just short of the 0.6% increase that economists expected.  Early GDP releases do not provide much underlying statistical detail, but officials in France and Germany cited higher export levels as the main driver behind last quarter’s performance.  Monthly indicators are also pointing to slower inventory reduction as a contributor.  Those two factors will not create a healthy, long-term recovery.  In Europe, as in the US, consumer demand will need to improve in order for growth to stay positive. 

Source: Financial Times

As anticipated, the International Energy Agency (IEA) scaled back their long-term energy demand forecasts, projecting that demand by 2030 would now hover around 105 million barrels per day (mbd), rather than the 106mbd the agency was anticipating last year.  The global financial crisis ushered in a changing of the guard and the IEA now expects the developing world (mostly China and India) will account for 93% of future demand growth. 

During a presentation given to reporters in London, the IEA provided a stark reminder that higher dependence on conventional oil sources is a dangerous proposition.  Production at current oil fields will decline by 2/3 over the next two decades, creating a need develop more expensive and difficult to access oil fields.

Source: International Energy Agency

It was hoped that the upcoming conference on climate change in Copenhagen would usher in a new era of climate discussions, but at the Asia Pacific Economic Cooperation meeting last week, President Obama and various other Asian leaders began expressing doubts about how much could actually be accomplished in the next few weeks.  The IEA is on record saying that we will need to discover 4 new Saudi Arabia’s in the next two decades to merely offset declines in current oil fields.  At that rate, one is left wondering what it will take before world leaders finally open their eyes and begin working on solutions. 

Lending Standards Easing, but Demand Weak

This past Monday, the Fed released the October 2009 Senior Loan Officer Opinion Survey.  Somewhat encouragingly, only 14% of banks reported tighter lending standards, down from a peak of 84% in October 2008.  The chart below shows this cycle following a similar pattern to the last recession. 

Source: Northern Trust

There were no major surprises in the Fed lending data but it did reinforce the notion that consumers are not actively seeking to re-leverage their personal balance sheets.  Demand for consumer loans is in decline, which is supported by the 8th consecutive monthly decline in the consumer credit report from the prior week.  Prime residential mortgage demand did improve in the period, consistent with the notion that low mortgage rates and sluggish prices are enticing buyers to enter the market.  Poor credit demand will create headwinds for future growth levels, but it is a necessary byproduct of more fiscally prudent consumer behavior. 

The Week Ahead

Following a week of rest for the weary, investors will be pelted with economic data during the upcoming week.  Monday brings the release of the October retail sales figures.  Markets will pay close attention to the state of the consumer in advance of the holiday shopping season.  A happy consumer yields a happy economy. 

The Producer Price Index (PPI) and Consumer Price Index (CPI) will be announced on Tuesday and Wednesday, respectively.  Producers are dealing with an inability to raise prices at the wholesale level, a trend that is unlikely to reverse any time soon.  Consumer inflation is also weak at the moment, as the outlook for unemployment weighs on consumer’s propensity to spend.

Manufacturing accounts for about 12% of the economy and Wednesday’s industrial productions figures are expected to show a 0.4% increase.  Recent strength in the new orders component of the ISM index leads economists to believe that factory demand will be strong for the rest of this year. 

Fed Chairman Bernanke will speak to the Economic Club of New York on Monday.  His comments are likely to focus on interest rates remaining low for an extended period, but any deviation from this stance could impact the markets in either direction. 

President Obama continues his Asian tour with a visit to South Korea on Wednesday and Thursday.  US Treasury Secretary Timothy Geithner will testify before the Senate committee on foreign relations to discuss “remaking the international economic architecture.”  Finally, on Friday, the World Economic Forum is gathering to talk about economic and political challenges facing the world economy. 

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