David A. RosenbergJune 18, 2009
Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPINGIN THIS ISSUE
• Screening for actualpricing power from the PPI the CPI and the capacityutilization (CapU) reports• No credit, no inflation• Era of the ‘green shoots’is over• Bonds still have potential,in our view• Gas pains for the U.S.consumer• Mortgage applicationsfalling out of bed
Very quiet overnight
European equities flat-ish and Asian markets down for the most part: Nikkeidown 1.4%, Hang Seng off 1.7%, Kospi down 1.1%.Commodities generally firm — outlook now wholly dependant on whether China’sfiscally-induced recovery is sustainable (the World Bank just raised its GDPgrowth forecast to 7.2%, — but is that enough?); also see the article on page 24of the FT (China’s import demand has soared this year for steel, copper and ahost of other raw material).Little action in bond-land, but in the U.S.A., it is absolutely glaring how cheapbonds have become with the
de facto
real yield on the 30-year now a snickabove 550 basis points. Real yields at these levels, notwithstanding the supplybackdrop, are simply unsustainable — the last time we were anywhere close to a5½% percentage point inflation-adjusted long bond yield (November 1994, July1986, and January 1982) the nominal 30-year yield ended up rallying in the nextsix months each time and by an average of 75 basis points.While fiscal policy is a clear hurdle, the headwinds for bonds include a recordoutput gap, which should help bring down inflation expectations; flat to lowsingle digit nominal growth, which is the most important factor in interest ratedetermination; the lack of bullish sentiment, which is a contrary positive; the lowownership of Treasuries in domestic portfolios (less than 7% of the U.S.household balance sheet is comprised of fixed-income securities compared with12% cash, 25% equities and 30% real estate); and the huge positive carry (akasteep yield curve) offered by the Fed and this is not likely to change until after the unemployment rate peaks and that could easily be 1 to 2 years away.Pundits who cling to the inflation view should have a read of
Boston Paper PlansTalks
(see page B4 of today’s Wall Street Journal) and tell the inflation story to the workers who are facing a 23% pay cut.Note too that even as the fiscal shortfall hit new highs, the U.S. current accountdeficit is slip sliding away (to $101bln in 1Q or 2.9% relative to GDP, which is thelowest since 1999) which means that, at the margin, there is less need forforeign investors to fund the budget gap (we just need an awful lot of PIMCOs!).
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June 18, 2009
– BREAKFAST WITH DAVE
On the data front, it looks like the green shoots are turning yellow in the U.K. aswell where we see that retail sales fell 0.6% MoM in May — first setback in threemonths (consensus was +0.3%, so wrong digit and wrong sign). On top of that, the U.K.’s CBI industrial survey came in weak with export orders down to theirlowest level since October 1998! Needless to say, the British Pound took apounding on the release of the data.
SOME IMPORTANT ITEMS TO NOTE REGARDING ENERGY SPACE/UTILITIES
1.
Both the NYT and WSJ ran with articles today on the amount of naturalgas that is going to be available for production in the next few years — upsomething like 58% over the past four years. A Senate panel just voted infavour of an energy bill that is going to also open up new areas foroffshore drilling.2.
The House democrats are pushing for the Department of Energy to sell 70million barrels of light sweet crude (and replace with cheaper heaviercrude) out of the Strategic Petroleum Reserve (SPR) — a bill was justintroduced to this effect.3.
The utilities sector is probably going to like the fact that a Senate panel just approved an energy bill that is going to impose less stringentmandates on utilities. The WSJ reports today that environmental groupsare very upset over the less stringent renewable energy requirements — that’s always a good sign for the utilities space.
SCREENING FOR THE CPI
The consumer price index rose by a much lower than expected 0.1% in May and this, like the PPI, took the YoY trend to a five-decade low, of -1.0%. We are going to see some larger monthly prints due to higher gasoline prices but because of the huge base effects of a year ago, when oil hit $150/bbl, we could still verylikely see the YoY headline inflation rate sink to as low as -2.0% by the end of the summer. It is very clear that we are either in an extremely benign inflationenvironment or on the precipice of a deflationary environment. Either way,pricing power is confined to relatively few sectors. These would include:
!
Restaurants — up 0.2% MoM in May and 4.2% on a YoY basis.
!
Alcoholic beverages — much like the PPI, up 0.3% MoM in May and +3.0% YoY.
!
Sweets — as we said above in the PPI, chocoholics don’t mind paying higherprices, even in a borderline depression — pricing is up a solid 6.0% on a YoY basis.
!
As the PPI also illustrated from the producer standpoint, at the retail level theCPI showed a 0.8% monthly rise and a 7.7% bubbly inflation rate for softdrinks.
!
Prescription drugs — 0.6% MoM and 3.5% on a YoY basis.
!
Pets/pet products — as with PPI, huge pricing power (+10.0% YoY).
!
Telephone services — steady-as-she-goes with a 0.2% monthly increase in Mayand a decent YoY pricing trend of 2.4%.
Page 2 of 12
June 18, 2009
– BREAKFAST WITH DAVE
Page 3 of 12
Items that are in clear deflation mode are personal care products/services, toys,sporting goods, hotels, air fares, delivery services, apparel, jewelry, homeimprovement, appliances, recreation and grocery stores (across every category frombread, to meat, to poultry — restaurants are seeing much better pricing growth).
WHO HAS GOOD PRICING TRENDS AT A TIME OF -5.0% PPI?
We also ran sector screens on actual pricing power using the PPI and as thechart below illustrates, the YoY trend is running at -5.0%, the most pronounceddeflation rate in 50 years. As is the case with capacity utilization (CAPU) rates, the key is to identify the sectors whose pricing is not deflating, let along making new 50-year lows.
CHART 1: PRODUCER PRICES ARE DEFLATING AT A 5% YOY RATE
United States
PPI: Finished Goods
(year-over-year percent change)
0505050505050
20151050-5-10
Source: Haver Analytics, Gluskin Sheff
S
!
How about soft drinks? Pricing grow
o what is hanging in well?
th is slowing but still positive at 3.0% YoY. tIn relative terms, that is a 500bps premium to the rest of the market. Thechart of Coca-Cola is looking just fine (and looking at the intermediate PPI, ilooks like a lot of the run-up in soft drink beverage base costs is behind us).
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Breakfast With Dave June 18
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