The complexities of America’s green shoots economic recovery were in their full glory this week, confusing and confounding investors and analysts alike.
The Fed helped set the hares running, saying America’s recession may be easing in almost half of its 12 reporting regions across the country.
But its latest so-called Beige Book of anecdotal reports from its 12 districts also reported that “weak” labor market persisted and credit was still hard to get.
The Fed’s comments came as oil prices reached close to $US73 a barrel in New York, closing at $US72.82; copper hit a new seven month high well above $US5,400 a tonne and US interest rates spiked on a difficult bond sale.
As well US mortgage rates continue to rise, cutting new mortgage deals and refinancings to a four month low.
Treasury bond yields spiked once again as an auction of $US13 billion of 10 year bonds sold at a yield of 3.99%, before settling back at 3.94%, up almost 1.5% since mid-March when the Fed unveiled its plan to boost lending by buying government debt. That’s up 0.80% from the yield on a smaller auction on May 6 of 10 year bonds.
The 3.99% was actually higher than what the same issued bonds were trading at in the market, a sign of the growing nervousness among investors about the US debt and deficits.
That was also the highest rate for the key bond in 2009 and the highest since last October when yields were falling in the wake of the collapse of Lehman Brothers.
Retail sales rose in May, thanks in part to the rise in petrol prices, and the number of new jobless claims fell to its lowest weekly level since the start of January.
Business inventories again fell, with stocks of cars down sharply as GM and Chrysler liquidated their stocks of unsold cars.
But the number of people remaining on unemployment benefits hit a record 6.82 million in the week to May 30, the 19th consecutive record and a sign of the confusing signals from the economy.
The number of new jobless might be falling, but there’s just not enough jobs to start cutting back the pool of unemployed because the economy remains too weak to generate new demand.
The latest couple of days of trading have seen some exhaustion of sentiment among investors in the US.
They seem to be growing increasingly wary of the green shoots and the value of the message they are sending.
Rising oil and petrol prices are starting to intrude into investor concerns, as are rising interest rates.
The rising level of oil and other commodities prices had been welcomed as a green shoot by investors who saw them signalling a recovery later in the year; but in recent days they have become a harbinger of a possible downturn in the eyes of some economists.
There’s a growing realisation the surge in prices has little to do with economic fundamentals and more to do with speculation by hedge funds, banks and other investors looking to generate easy trading profits using the cheap money on offer, courtesy of the Fed’s attempts to force banks to lend.
“Rising commodities prices are a tax on consumers just when income growth and employment is weak,” Michael Lewis, head of commodities research at Deutsche Bank in London, told the Financial Times in a quote that sums up the renewed fears that the price rises will see the green shoots wither.
Some US economists reckon the price rise could cut US consumer spending (which is already weak) by $US60 billion if prices stay above $US60 a barrel (they have risen by more than 110% since the low reached in February).
But other analysts say the fears are overdone: commodity prices (as measures by most indexes, such as the CRB Index) are more than 35% lower than a year ago (and prices are only up 15% this year, thanks mostly to the surge in oil).
Wholesale petrol prices hit the $US2 a gallon mark for the first time since October, having risen 80.4% this year.
Retail prices are already heading towards $US3 a gallon in something of a replay from last year.
But this year US consumers have less financial clout to resist the rise and will be much quicker to cut other spending to pay for the higher cost of petrol.
Car sales could take another hit, just as they seem to be steadying at just under 10 million units a year (annual).
Foreclosures eased in May, dropping 6% on April, but were still the third highest on record and 18% higher than May 2008, according to the RealtyTrac company.
“Economic conditions remained weak or deteriorated further” from mid-April through May, the Fed said in the latest Beige Book.
It said that five of the 12 Fed districts noted that the downward trend is showing signs of moderating.
The Beige Book survey is published two weeks before the Fed meets to look at the economy and interest rates.
The trade deficit rose to $US40.5 billion in April after adjusting for price changes, rather than $US39.4 billion originally reported.
But US exports fell 21% year-on-year to their lowest level since July 2006.
They were weaker to the eurozone, China and Japan. Exports to South and Central America have been doing a bit better than other economies (especially Brazil).
The TNS Media Intelligence group reported that US advertising spending fell 14.2% to $US30.2 billion in the Match quarter, compared with the same period of 20
