The Japan Factor

We noted just a few days after the tsunami that its net impact on US activity would be minimal, perhaps a wash, that supply shortages to US industry, especially vehicle assembly, would be at least partly met by Japanese competitors, and at any rate, this negative would be offset by Japanese demand for concrete and other building materials later in the year. Today’s April Durables release indicated that vehicle production was off considerably, especially - no surprise - by those facilities owned by Japanese, due to component shortages. We may have under-estimated this factor, and it’s too early to judge if we’re right on demand from rebuilding.

Robert Craven

Durables Orders

Today’s April print fell far south of expectations (-3.6% vs -2.2%, consensus) with broad-based weakness. Stock futures at this moment are greatly worried, fearing this indicates trend and an economic lull. One key component is so-called Nondefense Capital Goods Shipments, a proxy for capital spending. This series is only slightly above its Q1 average, indicating that key capital spending has only expanded modestly into Q2.


Robert Craven

Today’s Durables Orders Number - An Alert

We noted in the Week Ahead that this number carried a greater potential to worry the market, than to cheer it. That is because another weak report, on top of the last, would be taken as trend setting, bothering equities and firming bond prices.

Instead, today’s release for March, +2.5% was nearly double expectations, and the prior month was revised to a small gain (vs - 0.9%). There was but modest market reaction.

Durable Orders are notoriously volatile, flying in every which direction month to month.

Perspective: Trend is key and we see that these hard goods orders have risen 29.8% since bottoming in Mar/09. This is pretty good news, although the level is still 16% below its Dec/07 peak.

And the key non-defense capital goods shipments component, the proxy for capital spending, is slightly above the Q4 average. We can assume then that capital spending expanded modestly in Q1.

Robert Craven

Potential For Worry - The Week Ahead

We’ve got a full week of economic indicators and the first ever post-meeting press conference given by a Fed president.

Indicators are important if they carry market-moving muscle. We’d rather our clients be armed up front, than not.

We have several housing related numbers this week (beginning with today’s March New Home Sales) but none of these carry much muscle.

March Durable Orders (new orders for hard goods) on Wednesday however carries plenty of muscle, and the greater potential to worry the market than to cheer it. This key number was off 0.9% in February when it was expected to be up 1.2%. A component of this release is so-called Non-Defense Capital Goods Shipments, something which is really a proxy for capital spending so it’s important. That February component was better by 1.1%. Thus, the February release was mixed but another decline in the headline number for March combined with a decline in the Shipments component will greatly worry the markets, indicating a stall.

Thursday’s Q1 GDP advance report is also key. Q4 was up 3.1%. Estimates for Q1 have been significantly reduced due to higher energy prices. Consensus is now + 2%. But even a number through expectations won’t cheer much because the market crowd is becoming a believer in our piano just overhead. Also key on Thursday is the Jobless Claims report. Recall that this number disappointed last week (higher than expected). An improvement is expected (390 vs 403). Both of these releases then carry more muscle to worry the market than to cheer it.

Wednesday we will have Bernanke’s testimony. The FOMC meets for two days this week (Tues, Wed). The policy statement will be released early (12:30 pm ET) then Bernanke’s press conference at 2:15. World markets will hang on every word. We’ll have a special issue prepping our clients for this event.


Robert Craven

Today's key releases, a mixed bag - An Alert

Today’s Feb Durables number came in less than expected, -0.9% vs + 1.2%, consensus. We noted (incorrectly) in the Week Ahead that the risk was for the release to exceed expectations.  However, it is known that this number can be volatile, so we suspect this result will be ignored.

Note as we are on the subject that there is a component of this release called Non-Defense Capital Goods Shipments, a good proxy for capital spending. This measure is just a bit above its Q4 level, suggesting capital spending rose only modestly in Q1.

Today’s key Claims number was a tad stronger than expected (fewer claimants); this as predicted. Over the near term the number of claimants will head even lower, our view.

We know the economy is hitting on 6 of 8, and heading, or was heading to 7. We know that two key areas felt to be destined for the dumpster a few months ago - jobs and spending - were gaining momentum.

A new element was inserted into the equation in Feb - our friends in the Mid East. This is why we warned clients yesterday to look for forecasters to shave their forecasts for 2011 GDP.

It wasn’t fun to write those lines; hopefully we are wrong, but this is the risk.

Robert Craven

The Week Ahead

Events offshore will muscle our markets this week, perhaps eclipsing domestic considerations. The Mid East was reviewed earlier. We take a look at Japan, following our guide to the week’s data.

We have Feb Existing Home sales on Mon (expected to be lower), Feb New Home sales on Wed (expected to be higher). We have Feb Durable Orders on Wed. This key number reflects orders placed with manuf’s for delivery of hard goods. The number is expected to be up 1.5% but the risk is for something more. The unemployment Claims release on Thus is also key. The risk is that this release will cheer the market, falling below expectations. The third revision for Q4 ‘10 GDP is on Friday - ancient history. Also on Fri we have the Mar Univ of Mich sentiment figure, something to be ignored by planners and traders as it carries few leading characteristics.

Now to Japan. Anyone who bets against Japan does so at their peril.

True to the anchor set earlier we can expect the nuclear emergency to continue to diminish, we can expect the gov’t to rapidly set machinery in place for resuscitation, a process that will flatten St estimates. GDP may take a hit near term (maybe 1%) aggravated by a temporary national power shortage, but can be expected to surge, Q4. A major rescue package is nearing completion, including tax breaks. We expect the Bk of Japan to monetize the deficits needed to fund construction (although they currently deny such a step) and with that, pressure the yen lower, also a plus.

Production constraints associated with the crisis will be concentrated in Asia. Observers have highlighted supply considerations for US manufacturers; there will be little impact on our economy in this regard as Japan’s competitors move quickly to fill the gap. Look for headlines this week to cooperate with that view. This tragedy will provide an immediate spark to US industry. There will be some added pressure to energy prices as Japan will rely more on natural gas for power generation, at least for the near term. There will also be added pressure to materials prices - cement and re-bar come to mind.

We likely over-estimated the US price risk associated with repatriation but we do know accompanying yen strength would have retarded the Japanese recovery. Japan requested and received G-7 assistance in this regard. That potential crisis has passed. Look for further weakening, this currency.

Longer term implications for the US will be determined by the extent the growth of nuclear projects worldwide is impaired. From the Telegraph, we understand that the world has 442 reactors, with 65 under construction. “They generate 372 GW, covering 13.8pc of global electricity. The share is higher in the rich world: France 75pc, Belgium 52pc, Ukraine 47pc, Korea 35pc, Japan 29pc, the US 20pc, and the UK 18pc. In China it is just 2pc.” In the most general sense, output was expected to double over the next twenty years. A set back obviously translates back to conventional energy prices. Our view is that after some examination, nuclear will recover.

Robert Carven

Week Ahead

This week we’ll see a moderate flow of gov’t and private data related to consumer attitude (two surveys, both to be ignored as there is very little correlation between consumer response and spending activity ahead, our view), orders for so-called durable items or factory hard goods, unemployment claims, data on both new and pending home sales, and finally, the advance look at Q4 GDP. There will also be a two-day FOMC meeting ending Jan/26.

When the week is finished and the dust settles there will be further evidence to support our anchor - consumer activity will have exceeded expectations. Not robust, but certainly much stronger than practically anyone predicted end of Q3.

We should remain constructive on spending. Some of our clients are held hostage to consumer discretionary activity, something which evaporated ‘09. We predicted early Q4 for a resumption of this activity; that was the result. We can now expect a gathering of momentum for this sector. For example, HI vacation property sales, once moribund, will accelerate through H1 into H2.

On the whole any surprises over the intermediate term for the US economy will be to the side of more vigor, not less. We can say this despite still huge imbalances in housing, despite the well-publicized mess in states’ finances, despite surging commodity prices.



Background: Never during our time in this business have politics and economic reality ahead been so intertwined. Obama inherited a bad situation (in which he had a hand in creating) and then make it a lot worse.

Yet despite that and the housing mess, consumption began to recover into 2010. But it was the Nov/2/10 election results which fired employers and consumers, extending hope that individual tax cuts might be maintained, that corporate tax cuts might be initiated and that Obama’s smothering legislation might be overturned.

Now we see that Obama has suddenly switched from gov’t planner to pretended free-mkt maven. As a result employers have become even more optimistic.

Obama will never be a Reagan or even a JFK but with his re-election in mind he’s at least saying the right words, some of them. Immelt’s appointment leads one to question his actions, but at least Obama’s no longer an outright hindrance to the recovery.

Robert Craven