Afternoon Note
Finally, some green on the screen! Much of the market reprieve today is centered on the fact that all of the large United States banks passed the Federal Reserve’s annual regulatory exam that aims to assess whether they can make it through another financial or economic meltdown. Not only did the banks pass, but the Fed also approved dividend raises and share buyback programs for most of them. As such, the US dollar is continuing its massive rally, pushing the euro down 6.04% and the US Dollar Index up 4.13% just in the past 5 days.
Aside from retail sales and weekly jobless claims, both discussed this morning, there were two other economic reports and both point to some near-term negatives. Back in January it was lower oil prices that were keeping import prices lower, now it’s the strong dollar doing the trick. Import prices rose 0.4% in February but excluding petroleum import, prices fell by a steep 0.4% after a 0.6% decline in January. Year-over-year, import prices excluding petroleum products were in the negative column at -1.8% and so are total prices which are down a very steep and deflationary -9.4% year-over-year. On the export side, prices are also down at -0.1% for February and for a year-over-year decline of -5.9%. Agricultural prices are the major component on that front, down 2.0% for the month and when they are excluded from the export figure prices actually edged 0.2% higher. On a year-over-year basis, non-agricultural export prices are quite low at -5.5%. Both trends are illustrated in the chart below. The outlook for import prices is not considered favorable given the enormous strength in the dollar and global markets focusing on expansionary policies.
Lastly, business inventories have been rising relative to sales, however the build was not intentional. Overall business inventories which were unchanged in both January and December, versus sizable declines in sales of 2.0% in January and 1.0% in December. This resulted in a high inventory-to-sales ratio of 1.35 for January versus a reading of 1.33 in December and 1.31 in November. Of the three major components, retail showed an inventory-to-sales build of 1.44 which was higher than December’s 1.43. The ratio increased across most categories, except in autos, where the ratio fell slightly and could be indicative of a need for replenishment. However, February’s retails sales points to a softening for autos points to the risk of inventory builds in next month’s report. The other two components, wholesale and factory, showed builds of 1.27 from 1.22 and 1.36 from 1.34, respectively. Other than jobs data, most other inventory and manufacturing data point to a soft patch in the economy. This report on business inventories is a negative data point, for future production and hiring.
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