One could point to many reasons for Tuesday's percentage point plucking of the broader indexes. Still, one would be negligent to not attribute at least partial blame to the morning release of monthly import and export price data. Both rose at significantly faster pace than in February. Thus, Central Bankers still dealing with a vulnerable economy and unemployed workforce are faced with creeping inflation at the same time.
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The Bureau of Labor Statistics reported Tuesday on March Import & Export Prices, and the news was not good. Any economist worth his salt would have foreseen an inflationary trend, but the pace of change was quite sharp. Of course, the factors behind the trend have been well document, and they include rising energy prices on the chaos that has unfolded in the Middle East. The catalysts also count rising agricultural and commodity prices.
Somewhere along our "Inflation" thread at the blog you should find warning from us with regard to unfolding events in the commodity space. We definitely felt, and likely stated, that as economic growth revived across emerging markets and renewed within developed ones, supply stresses would once again drive commodity price increase and force inflation down proud central bankers' throats. Well...
March import prices were reported up 2.7%, which compared against the 1.4% February increase. It was the biggest one-month advance since June of 2009, when the entire price spectrum bounced off of the panic-driven floor. The rising trend in import prices has now extended for six months.
This month, Import prices were largely swayed by the 9.0% spike in fuel imports. Fuel imports are up 36.6% over the past six months, which I'm certain has not been lost to you. Petroleum prices drove the advance, which again is no surprise, as prices climbed 10.5% in March. Yet, there was an interesting contrast in natural gas price decline of 14% through the period. Natural gas had made up ground previously, and now as we find ourselves exiting a draw period in good inventory position, prices are in a stress free position, which is a marked contrast to oil. Goldman Sachs' (NYSE: GS) recent report warning of demand destruction would beg to differ, with regard to oil, and certainly there's a point where consumers cut back (as much as they can anyway – would you take a sick day to save gas?).
Import prices excluding fuel were not contained, marking a 0.6% increase in March after a 0.5% rise in February. These prices were up 4.2% over the trailing twelve months, which oh by the way, is the biggest such advance since October 2008. Inflation anyone? Skeptics will find enough reason to contest it nonetheless, as the drivers of non-fuel import prices included industrial supplies and materials (+14.2%) and foods, feeds and beverages (+18.9%). Indeed, the argument still goes unsettled as to whether food and energy price changes deserve consideration in the inflation debate, given the often cyclical and seasonal factors behind price volatility within the two sectors. If you ask Tunisians if it mattered though, you're answer will be that it made a world of difference. We expect that over time, the contest for the earth's limited resources could make the world different.
Price increase was not limited of course to imports, as export prices climbed higher by 1.5%, which followed February's 1.4% price rise. The difference between the two months was pronounced though. In February, agricultural export prices increased by 4.6%, driving the overall rise, but in March, agricultural exports only increased by 2.3%. Instead, non-ag goods contributed more significantly to the overall increase, with those exports getting 1.3% more expensive in March. Over the last twelve months, export prices are up 9.5%, which compares to the summer of 2008 increase. I say, I say, I say, inflation anyone?
Corn and cotton led all agricultural exports in price rise. In March alone, corn prices rose 9.2%, and over the past 12 months, 77.7%. Cotton, which you think you’ve noticed more, rose by 10.5% in March and 154% over 12 months. The thing is that corn is in so many foods, not to mention gasoline, and the feedstock for proteins, so that it has likely driven subtle price increase in food goods across the board. With regard to the non-agricultural export price increase, industrial supplies materials rose 3.2%.
In conclusion, it's clear that prices are rising and have been on the rise for some time now. Later on this week, we will receive better indication of how well commodity and raw materials prices are passing through to end product, as the Producer Price Index and the Consumer Price Index come due Thursday and Friday. That Friday reporting of CPI coincides with the Reuters/University of Michigan Consumer Sentiment reading, and certainly the two go hand in hand. We expect to see price pass through and consumer sentiment destruction (or rather continued malaise), because you cannot take a sick day to save gasoline. Thus, consumers will spend less on discretionary goods.
Central bankers are caught between a rock and a hard place. We have a vulnerable economy that could certainly still use inspiration to expand and hire, consumers that still need help to spend, a housing market that remains supply side heavy, an unfair global trading field, but also creeping inflation driven by a supply constrained / demand diversifying resource environment. Thus, as the ECB raises rates, the US contemplates QE3, though with lessening enthusiasm. Indeed, it would seem we were right when we said the Fed is running out of bullets. Meanwhile, the enemy is surrounding us.
Article should interest investors in Ford (NYSE: F), GM (NYSE: GM), Toyota (NYSE: TM), Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), TD Bank (NYSE: TD), PNC Bank (NYSE: PNC), State Street (NYSE: STT), Janus (NYSE: JNS), T. Rowe Price (Nasdaq: TROW), General Electric (NYSE: GE), Wal-Mart (NYSE: WMT), McDonald's (NYSE: MCD), Alcoa (NYSE: AA), American Express (NYSE: AXP), Boeing (NYSE: BA), Caterpillar (NYSE: CAT), Cisco Systems (Nasdaq: CSCO), Chevron (NYSE: CVX), DuPont (NYSE: DD), Walt Disney (NYSE: DIS), Home Depot (NYSE: HD), Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), Intel (Nasdaq: INTC), Johnson & Johnson (NYSE: JNJ), Kraft (NYSE: KFT), Coca-Cola (NYSE: KO), 3M (NYSE: MMM), Merck (NYSE: MRK), Microsoft (Nasdaq: MSFT), Pfizer (NYSE: PFE), Procter & Gamble (NYSE: PG), AT&T (NYSE: T), Travelers (NYSE: TRV), United Technologies (NYSE: UTX), Verizon (NYSE: VZ), Exxon Mobil (NYSE: XOM). The day also offered news from: Novartis' (NYSE: NVS) new Afinitor cancer treatment gets reviewed by an FDA advisory panel. IPO lockup curbs expire on Body Central (Nasdaq: BODY) and Tower International (Nasdaq: TOWR). Nordson (Nasdaq: NDSN) splits its shares 2-for-1. Analysts meetings are scheduled at Hewlett-Packard (NYSE: HPQ), Posco (NYSE: PKX), Quidel (Nasdaq: QDEL), Supergen (Nasdaq: SUPG) and Transatlantic Petroleum (AMEX: TAT). The ISI Group Retail Summit highlights a presentation by Wal-Mart (NYSE: WMT). IPAA OGIS New York highlights presentations by Pioneer Natural Resources (NYSE: PXD), Range Resources (NYSE: RRC), Berry Petroleum (NYSE: BRY) and Energen (NYSE: EGN). The day's EPS schedule includes Art's Way Manufacturing (Nasdaq: ARTW), Biomet (Nasdaq: BMET), Fastenal (Nasdaq: FAST), Mistras Group (NYSE: MG), Streamline Health Solutions (Nasdaq: STRM) and a few others.
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