Market Talk

Anyone betting that manufacturing will continue to lead the US economic recovery might think twice after reading comments from survey respondents in Dallas Fed’s April Texas manufacturing outlook.

Similar to Philly Fed’s gauge last week, Dallas headline number tanked, to 8.1 from 24.1 in March. The Philly survey’s headline number fell to 18.5 from 43.4 in March, but unlike the Dallas survey, Philly doesn’t include respondent comments in its report.

Down in Texas there’s a fair measure of cautious optimism among survey respondents, and plenty of concern about high costs and soft demand. Here’s one from a plastics and rubber products manufacturer that sounds pretty good:

“We are very encouraged by the breadth of activity with our cross section of customers in the Dallas–Fort Worth area. It is not just a few companies with increased requirements for plastic parts, but pretty much all of our diverse customer base.”

Now here’s one from the other end of the spectrum, a furniture/related product manufacturer: “Our industry has hit another brick wall. Rapidly increasing costs and fuel costs have shocked the consumer away from any nonmandatory spending. They normally adjust, but it may take several months.” Continue reading…

Compliments to the Bank of Japan, for keeping it real.

While the Federal Reserve continues to pretend its easy money policies aren’t juicing commodity markets, the BoJ isn’t afraid to acknowledge the obvious. Colleague Kevin Kingsbury alerted us to this commentary issued by the BoJ last week titled: “Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accomodative monetary conditions.”

And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.

The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”

Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

Another listless day of trading for stocks, as bull-bear duel produces what’s essentially a flat session. Both sides seem as if they’re waiting for something to happen, with bears maybe looking for another big shoe to drop, while bulls sift for some catalyst to reenergize the months-long uptrend.

Volume again suggests little conviction, with NYSE composite trading volume only slightly better than yesterday’s year low. Ramped-up M&A action not creating as much zing for markets overall as deal parade continues.

Materials sector performs well, while health-care and industrials decline most. DJIA slips 6.13 to 12393.90, and Nasdaq Comp edges up 2.00 to 2791.19. S&P 500 ends 0.24 lower at 1332.63. Continue reading…

Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.

Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”

Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”

Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.

“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.”  Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.

Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”

If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.

The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.

It’s almost embarrassing to watch the contortions the Federal Reserve is engaging in to absolve itself of any role in fueling the run-up in commodity prices since the end of August.

The latest comes in the form of an “Economic Letter” from San Francisco Fed economists Reuven Glick and Sylvain Leduc. That’s right, who better to objectively state that the Fed’s policies aren’t pumping up commodities…than a branch of the Fed? This four-plus pager, best I can tell, rests on the conclusion that the Fed’s QE measures aren’t to blame for the spike in commodity prices because “commodity prices actually tended to fall” following Fed announcements on large-scale asset purchases.

Sounds as if Glick and Leduc aren’t familiar with the old adage “buy on rumor, sell on news.”

For my money, the only “announcements” that mattered were Bernanke’s late-August Jackson Hole speech, which got the whole commodities complex (not to mention stocks) a-running, and the fait accompli announcement November 3rd with the program details. And whether or not commodities dipped on those days — or any other LSAP announcement days — is irrelevant because the trend has remained higher since Jackson Hole.

While some Fed officials have been more frank about the role of QE II in pushing up commodity prices, others have dismissed it out of hand, instead placing the blame squarely on supply and demand and surging growth in emerging markets. Indeed, that’s the official story from the central bank, as if that global growth trend only became obvious seven months ago, coincidentally at the same time Fed chair Bernanke first suggested QE II was a real possibility.

We’ve taken issue with the Fed a few times before (here, here and here) over this “don’t-look-at-me” attitude, pretending its free-flowing liquidity measures aren’t affecting commodity prices. In some cases, like cotton, we’re sure there are legitimate supply and demand issues. But we’re not buying that story for every commodity across the board.

Silly exercises like the one from the San Fran Fed are wholly unconvincing and, as we’ve noted before, only serve to further undermine the central bank’s credibility.

Bottom line on the February jobs report: better, but nothing to spark a celebration. In fact, the report was insubstantial enough to be quickly overwhelmed by sharp gains in crude oil.

Of course, the jobs report did offer enough to get some economists excited, which isn’t too hard considering how long they’ve been gazing at a bleak picture.

February’s job gains “represent the first cog in the labor market gear that will drive the economy into a self-sustaining expansion this year,” economists at PNC say. From where we sit here at MT, it’s very premature to talk “self-sustaining expansion” while the Fed still has the liquidity pedal pinned to the floor, so PNC’s getting a little bit giddy. Firm says “solid gain of 192,000 net jobs reflects strength across most employment categories,” except, of course, government  employment, which ditched 30,000 state and local jobs.

PNC does note wages were “unspectacular” though, “gaining just 1 cent, and not keeping up with the inflationary push from energy and food.” Flat workweek and limp increase in earnings were key points of weakness most economists noted.

Bernard Baumohl, chief global economist at Economic Outlook Group, was much less impressed than the gents at PNC. Digging into the numbers shows companies “in a holding pattern when it comes to hiring. Nothing more, nothing less,” he said. Continue reading…

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

“Only don’t tell me you’re innocent. Because it insults my intelligence — and makes me very angry…”
-Michael Corleone, The Godfather

Listening to Ben Bernanke repeatedly deny that the Fed’s QE2 program has played any role in jamming up commodities prices stirs the same emotions Michael felt when his brother-in-law Carlo denied fingering Sonny for Barzini’s people.

Bernanke continues to insist that rising commodity prices are due to supply and demand dynamics, and denies any culpability of the Fed’s easy money monetary policy. Senators at today’s testimony on the Hill let that assertion go unchallenged. Would’ve been nice if someone asked Bernanke to reconcile ISM’s February manufacturing survey today, listing roughly 30 commodities up in price, none down, but only three commodities — capacitors, cocoa powder and electric components — in short supply.

It’s a simple enough question: Dr. Bernanke, there’s a laundry list of commodities up in price, and many of their run-ups began in late August, coincident with early mentions of potential QE2. Less than a handful of commodities were reported by manufacturers as being in short supply. So how can supply and demand dynamics alone explain the sharp run-up in commodities during the past six months, when there appear to be few, if any, supply constraints?

For an organization like the Fed where credibility is crucial, it’s amazing that its officials continue to stand by such a flimsy rationale for high commodity prices. Continue reading…

No evidence that the run-up in commodities prices is soon to abate. Crude oil higher today, rice futures limit up, corn up, soy products rally and wheat up big, too.

Expect to hear more comments down the road like this one yesterday from Safeway’s (SWY) CEO Steve Burd during the company’s quarterly conference call. Responding to a question about passing on rising costs to consumers, Burd said, “we are not the only one passing along cost increases and it is not confined to the supermarket industry. And it’s called preservation.”

Catch that? It’s called preservation, he says. After at least a year of walking on eggshells over raising prices, scared that customers will just run for lower prices at the competition, businesses are collectively (“…not confined to the supermarket industry,” as Burd says) raising prices. Out of (self) preservation. Continue reading…

Missed this item earlier, which crossed the tape while I was sleeping at 3:43 a.m. EST today, from Andrea Hotter, DJ Newswires assistant managing editor in London:

The current overall commodity markets find themselves near the most historically overvalued levels, on a short-term basis, in over 200 years, says Shawn Hackett of commodity brokerage Hackett Financial Advisors.

Adds that if history does repeat itself, “then a major correction in commodities can begin at any moment without warning.” Sees “extreme caution” as being necessary with only natural gas, coffee, milk and rice being attractive, although “all would suffer to some degree if a major intermediate term correction were to unfold in overall commodities.” LME copper, tin are at record highs above $10,000 a metric ton and $31,300/ton respectively, Liffe May sugar recently hit 30-year highs around $750/ton.

But don’t sweat it folks, it’s all supply and demand. Has nothing to do with oceans of hot money looking for a home.