News last week was sparse, and the market didn't react well to the lack of data. Weaker economic import/export statistics out of China and continuing arguments over the Greek debt situation certainly didn't help markets, either.
On the bright side, the US trade deficit improved dramatically, but almost all of that was due to the effects of the Japanese disaster reducing Japanese imports. If sustained, the shrinkage of the trade deficit could help offset at least a part of the negative effects of poor US auto production when calculating second-quarter GDP.
Initial unemployment claims remained elevated at 427,000 but were virtually unchanged from the prior week. Given the Memorial Day holiday, I would have expected a little more improvement (fewer days to process claims and firms tend to make adjustments prior to holidays to avoid having to pay workers for the days off).Consumer credit managed another month of expansion, indicating a greater willingness for consumers to buy and borrow. However, total consumer debt including mortgages, credit cards, and bank loans decreased about 2% in the first quarter, representing its seventh quarter of decline according to the Fed's Z1 report. Meanwhile consumer net worth (all assets minus debts) managed a 4% (annualized rate) improvement during the quarter, no doubt the source of some of the upward movement in consumer spending.
Fed Chairman Blames Supply and Demand Issues for Commodity Inflation
Fed chairman Bernanke also gave a much-anticipated speech that acknowledged a temporary economic slowing. The fact that the speech failed to mention any prospects for additional quantitative easing seemed to unsettle the market. I, on the other hand, was greatly relieved that more easing was not immediately forthcoming. To me, the programme didn't do much more than inflate a lot of asset and commodity prices, which in turn started to kill the recovery.
Bernanke did address the commodity bubble in his speech. He went through great pains and a lot of ink to declare that the commodity price gains were due to supply and demand problems, not QE2. Rising emerging-market demand combined with bad weather and issues in the Middle East were the true causes of ballooning commodity prices, according to Bernanke. He does have a point, but I would note that emerging markets were growing even faster at several points earlier in the last decade without a similar rise in commodity prices. The quick spike down in commodity prices when margin increases were implemented for silver and other commodities seems to suggest that there was at least some speculative element to the 2010-11 surge in commodity prices.
US Short-Term Rates Could Remain Low for Some Time
Bernanke did convince me that he would keep short-term interest rates low for some time. Commodity prices are largely set on a world market where demand is increasing. US commodity demand, especially for gasoline, has decreased over the past two quarters. Therefore, rate increases in emerging markets (which are now well under way) will be necessary to slow worldwide commodity demand. Incremental demand from US consumers hasn't been a big source of commodity price increases; therefore, higher rates in the US probably wouldn't do much to slow world price increases.
Trade Deficit Takes a Temporary Dive
As I anticipated two weeks ago, the US trade gap fell meaningfully from $46.8 billion in March to $43.7 billion in April. The March reported deficit was also revised downward, potentially aiding the first-quarter GDP calculation. For some odd reason the market consensus was for a trade deficit of $48 billion despite the well-known problems in Japan (after the March 11 earthquake) and the falling prices of petroleum products. Shrinkage of Japanese imports accounted for over three fourths of the improvement in the trade deficit.
While economists raced to raise their GDP forecasts based on the report, my guess is that the lower imports will mean lower inventories, potentially cancelling the positive effects of the trade deficit "surprise." Also those Japanese imports are likely to skyrocket, perhaps as early as June, when the supply chain issues are more fully addressed. While most of the good news was on the import side of the equation, exports inched up 1.3% to a new record as a strong world economy and weak dollar continue to drive US exports.
