The US dollar appears to be unfazed by this morning’s mixed economic data. An improvement in consumer confidence has failed to help the dollar while the weaker news has pretty much been baked into the markets.
Christmas and New Years week is a time when traders are more focused on seeing family than making profits. It is probably truer this year than most because of the sharp volatility in the financial markets and the deep losses endured by most investors.
Third quarter GDP remained unrevised at -0.5 percent even though personal consumption slipped and core prices eased. Investors are more worried about the Q4 numbers than the Q3. The global recession and the stronger dollar could take a big bite out corporate earnings and growth.
The housing market also remains weak with new home sales falling for the fourth consecutive month and existing home sales falling by the largest amount on record. Sharp discounts on new homes is helping to slow the pace of falling demand.
The one piece of good news that we did see this morning was consumer confidence which was revised upwards in the month of December. Given that almost everyone knows someone that has been laid off, the price of gasoline is the only reason to cheer this holiday season. Prices at the pump have fallen close to 60 percent from its summer highs. For drivers, lower gas prices is like a tax cut. At a time when salaries are being frozen and bonuses are being reduced, a tax cut in the form of lower gasoline prices is welcomed with open arms.
I was in New Jersey this weekend and was amazed to see gas prices at $1.89 a gallon! Sometimes reality doesn’t set in until you venture outside of the Big Apple because at the Mobile Station on the corner of the West Side Highway and Canal Street in NY, a gallon is still selling at $3.10.
The national average is $2.087 a gallon, down 50 percent from summer highs – 16 states have average gas prices below $2 a gallon.
With everyone crying about a global recession and retail sales seeing a record decline, the fall in gas prices is a silver lining. Although gas station receipts will a take a hit, lower prices at the pump will free up money for Americans to spend on basic necessities and holiday purchases. In no way will it single-handedly turn the economy around, but it will help in other ways such as reducing heating bills going into the winter season.
With Hurricane Gustav being downgraded to a tropical depression, the Hurricane Premium is off the table. Oil prices have plunged more than $10 a barrel since Friday with $100 a barrel now within striking distance. The rally in the US dollar is a direct result of the fall in oil prices. Since the beginning of the year, we have seen a 70 percent correlation in the price of the EUR/USD and crude.
The last time crude prices were at these levels was back in April. Falling crude prices has widespread benefits for the US economy. Like the correlation between oil and the EUR/USD, the correlation between annualized US CPI growth and oil prices has been more than 70 percent since 2006. This supports our belief that inflation going forward will ease. Today’s manufacturing ISM number is the first example of that. The prices paid component of ISM dropped for the second month in a row with the index now at the lowest level since February.
How Does Oil Impact Growth?
According to a study by the International Energy Agency a few years ago, a sustained $10 a barrel rise in oil prices reduces world GDP by at least 0.5 percent, other things being equal. Since the middle of July, oil prices have fallen approximately $40 a barrel, which means that the recent drop in oil prices could add as much as 2 percent to GDP. We do not expect the reverse contribution to be as great, but if oil prices remain at current levels or continue to fall, a 1 percent contribution to GDP is certainly reasonable.
Here is the “In the Financial Papers Radio Broadcast” (Length: 7:02 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
China’s Export Machine Threatened by Rising Costs
Business Scrambe to Offset Rising Costs of Transportation
Jobs Report will Provide Clues on Growth and Inflation
Fed’s Priority is Likely to be Oil Price Shock
Oil Rises to Record Above $143 on Concern Iran Supplies May Be Disrupted
Stock, Bond Slumps Signal Worse Than ’94 on Inflation
Yuan’s Path Seems Up Eventually
Dollar May Well Survive the Perfect Storm
Central Banks Focus on Rising Prices
Australian Wages Stable Amid Tight Market
Here is the “In the Financial Papers Radio Broadcast” (Length: 4:14minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
US Retail Sales Increase More than Expected
Japan to Raise Meat Prices as Corn Boosts Feed Costs
ECB Tells Market Rate Hike Likely to be One-Off
The topics at G8
Beige Book Report mixed results
Citigroup Shuts Down Hedge Fund
Floods Threaten Midwest Economy, Corn Prices Hit New Highs