Friday, June 11, 2010

America turning Japanese?

Paul Krugman in New York Times,

What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

................. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

What’s behind this new pessimism? It partly reflects the troubles in Europe, ...............But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

........................................I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Retail Sales in May 2010

Advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased by 1.2 percent  from the previous month, but increased by 6.9 percent from May 2009. Total sales for the March through May 2010 period were up 8.1 percent  from the same period a year ago. The figure of April 2010  was revised from an increase of 0.4 percent to 0.6 percent.

Excluding auto and parts, retail sales in May dropped by 1.1 percent from April but it is still 6.2 percent higher than the same period last year.

So, the question here is, " Have consumers finally run out of steam after 7 months of increased retail spending together with fiscal stimuli? "

By looking at each individual category in retail sales, categories that dropped in May from April include auto and parts, building materials and garden equipment and supplies, gasoline stations, clothing and general merchandise (including departmental stores). Among those that increased were furniture, electronics and appliances, food and beverages, healthcare and personal care, non-store retailers.

Building materials and garden equipment and supplies experienced a very sharp drop (9%), that alone could have led to close to 0.6% decline in total retail sales as the category carries about 0.6% of the total. Together with an increase in sales of furniture and electronics/appliances, it seemed to me retail sales in May was disapproportionately affected by homebuilders rushing to build houses to meet the demand of first time home buyer as home buyer credit was drawing to a close at April 30. This was further supported by the fact that this category had a big jumped of 8.4% in April from March following the previous big jump of 7.8% in March from February.

Furthermore, consumer confidence index of June compiled by University of Michigan showed the highest reading of 75.5 in two years. Although consumer confidence index is known to be fickle, it is one of the key leading indicators of future consumer behavior. I guess we will have to wait till June data to confirm whether consumer spending has really come to a halt.

Saturday, June 5, 2010

It is Hungary This Time!

US stock market dropped precipitously yesterday as Hungary spooked investors with another potential sovereign debt default after Greece.

From Wall Street Journal

Lajos Kosa, vice president of the right-leaning Fidesz party, which won an overwhelming victory in the April elections, said Thursday that Hungary was in a Greek-style sovereign-debt crisis. And Friday, the prime minister's spokesman, Peter Szijjarto, roiled markets by saying the economic situation is severe and that Hungary isn't likely to meet budget-deficit targets prescribed by the International Monetary Fund.

Mr. Szijjarto's remarks clobbered the Hungarian forint and the euro Friday. The reaction spilled over into sovereign debt-insurance markets across Europe and into the currencies of Poland and the Czech Republic, the two other large non-euro countries in the former Communist east.

The euro sank below $1.20 to a fresh four-year low, trading at $1.1966 late Friday in New York. The cost to insure against sovereign debt default rose sharply early Friday in Europe—to the highest levels in nearly a month for Greece and Portugal. Bigger economies, such as Spain and Italy, also saw debt-default insurance costs rise to their highest levels since at least the start of 2009, according to data provider Markit.

Mr. Szijjarto said at a news conference that Hungary's new government is "ready to avert the Greek road," but he added that "there is nobody in the country apart from the previous government who still says the budget deficit of 3.8% of gross domestic product can be reached." That is the IMF's target for this year.

Wednesday, June 2, 2010

Metallurgical Coal is Red Hot

From Business Week,
June 1 (Bloomberg) -- JFE Holdings Inc., Japan’s second- largest steelmaker, and two rivals agreed to a 12.5 percent price increase for coking coal contracts with BHP Billiton Ltd., three people with knowledge of the agreements said.
Prices for the steelmaking ingredient will rise to $225 a metric ton for the July quarter, from $200 a ton for the three months started April 1,...........
Coking coal will be in tight supply globally this year as imports by China, where domestic production can’t meet demand, may reach the second-highest on record, Citigroup Inc. said April 22. Prices may reach $300 a ton in the second half, equaling a record set in 2008, the bank said in the same month.
“The price rise for BHP Billiton is in line with our expectations,” Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst, said by phone in Sydney. “Coking coal is looking like one of the strongest commodity markets.”
From Forexyard

Nippon Steel Corp, the world's No. 2 steelmaker, will likely seek to increase steel prices by an average 25,000 yen in July-September to pass on the rise in costs, the Mainichi newspaper reported.

Nippon Steel will aim to lift prices to 100,000 yen a tonne in talks with automakers and other with automakers and other customers, the paper said, adding that it was in late-stage negotiations for April-June to raise prices by 15,000 yen per tonne to about 90,000 yen