WTI Crude Prices Are Plunging (Again)
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World View & Market Commentary.
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University of Washington fund beats bigger rivals.
Amid the financial gloom of the past three years, one part of the University of Washington has rebounded: Growth of the UW’s endowment fund has outpaced those of Harvard, Yale and other giant schools.
The value of the university’s consolidated endowment fund rose to $2.14 billion on June 30 at the end of the third quarter of 2011’s fiscal year, the latest number available, up 10 percent from a year earlier. That follows an 11 percent rise in 2010.
Like many investment pools, the UW endowment has bounced back since it lost 23 percent of its value during the financial crisis…
An eye popping minus 30.7 headlines a troubling manufacturing report from the Philly Fed. The reading indicates very significant month-to-month contraction in general business conditions for August, one consistent with a shock and one compared against a small gain of 3.2 in July. But the report cites no particular factors behind the contraction, contraction that's evident throughout the details of the report.
New orders fell to minus 26.8 from plus 0.1, shipments minus 13.9 from plus 4.3, number of employees minus 5.2 vs plus 8.9, unfilled orders minus 20.9 vs an already dismal minus 16.3. Price data show a contraction for output prices and a much slower rate of inflation for input prices. Delivery times improved significantly which is another sign of weakness.
The six-month outlook also crumbled, coming in above zero but just barely at 1.4 vs July's 23.7. The Empire State report, released Monday and covering the New York manufacturing economy, also showed contraction but at a much less severe rate. Next week and the week following eyes will be on a run of other regional indicators to see if the outlook for the national manufacturing economy has suddenly taken a turn for the worse.
Initial claims rose in the August 13 week but today's report still points solidly to month-to-month improvement for the August employment report. Initial claims came in at 408,000 for a 9,000 rise from 399,000 in the prior week which was upwardly revised by 4,000. But the four-week average fell for the seventh straight week, down 3,500 to a 402,500 level that is nearly 20,000 lower than the month ago comparison.
Continuing claims were little changed, up 7,000 to 3.702 million with the four-week average down 5,000 to 3.716 million. The unemployment rate for insured workers is unchanged at 2.9 percent.
There are no special factors distorting the data which again point to improvement in the labor market.
Consumer price inflation surged in July on stronger gasoline and food costs. The consumer price index in July jumped 0.5 percent. The June number topped the median estimate for a 0.2 percent increase. Excluding food and energy, the CPI increased 0.2 percent after a 0.3 percent jump the prior month.
Turning to major components, energy rebounded 2.8 percent after dropping 4.4 percent the month before. Gasoline jumped 4.7 percent, following a 6.8 percent plunge in June. Food price inflation accelerated, jumping 0.4 percent, following a 0.2 percent rise in June. Within the core the shelter index accelerated in July (largely lodging, up 0.9 percent), and the apparel index again increased sharply ( up 1.2 percent). In contrast, the index for new vehicles was unchanged after a long string of increases.
Year-on-year, overall CPI inflation worsened to 3.6 percent from 3.4 percent (seasonally adjusted) in June. The core rate rose to 1.8 percent from 1.6 percent on a year-ago basis. On an unadjusted year-ago basis, the headline number was up 3.6 percent in July while the core was up 1.8 percent.
Despite a sluggish economy, inflation is back but most of the acceleration is supply related, notably for food. And energy rebounded only partially from the prior month. The lodging subcomponent, however, probably is seeing some improved demand which is actually a good thing. Inflation is up but not much is related to a surge in demand.
The ongoing drop in interest rates is driving refinancing demand higher but, unfortunately, has yet to drive up demand for home purchases. The refinancing index extended its run of jumps in the August 12 week with an 8.0 percent gain. But the purchase index continues to show weakness, down a very steep 9.1 percent. The report, which is produced by the Mortgage Bankers Association (MBA), cites stock market volatility and weak economic data as possible reasons for the drop in purchase activity.
The rate for 30-year mortgages fell five basis points in the week to 4.32 percent with the 15-year rate also down five basis points, to 3.47 percent for a new survey low. Next housing data will be tomorrow with existing home sales for July, which based on prior gains in the pending home sales report and not any strength in MBA's purchase index, are expected to show improvement.
Producer price inflation surprised on the high side despite a softening in energy costs. The culprits included food, motor vehicles, and tobacco. Producer prices in July rebounded 0.2 percent, following a 0.4 percent drop the month before. The July pace came in higher than the market median estimate for no change. By major components, energy dipped 0.6 percent after a 2.8 percent fall in June. Gasoline declined 2.8 percent after dropping 4.7 percent the month before. In contrast, food costs jumped another 0.6 percent, following a rebound of 0.6 the previous month.
At the core level, PPI inflation accelerated to a 0.4 percent rise after jumping 0.3 percent in June. Analysts had forecast a rise of 0.2 percent. Strong gains were seen in tobacco products, light trucks, and pharmaceutical preparations. Nearly one-quarter of the July advance can be attributed to a 2.8 percent increase in prices for tobacco products. Light truck prices jumped 1.0 percent in the latest period while pharmaceutical preparations surged 3.2 percent. Passenger car prices rose but a more moderate 0.2 percent. Still, shortages of motor vehicle models dependent on parts from Japan continued to put upward pressure on prices.
For the overall PPI, the year-ago pace in July posted at 7.2 percent, compared to 7.0 percent in June (seasonally adjusted). The core rate in July rose to 2.5 percent from 2.3 percent the month before (seasonally adjusted). On a not seasonally adjusted basis for July, the year-ago headline PPI was up 7.2 percent while the core was up 2.5 percent.
Overall, inflation has picked up due largely to food costs and despite softer energy costs. The core rate is up significantly but likely due to temporary factors.
New housing construction in July headed back down to trend sluggishness after an unexpected boost in June. Housing starts dipped 1.5 percent in July, following a 10.8 percent jump in June (originally up 14.6 percent). The July annualized pace of 0.604 million units beat expectations for 0.600 million units and is up 9.8 percent on a year-ago basis. The decline in July was led by a 4.9 percent drop in the single-family component, following a 7.5 percent surge in June. The multifamily component continued upward, gaining 7.8 percent after jumping 21.2 percent the prior month.
By region, the drop in starts was led by a monthly 37.7 percent decrease in the Midwest with the West declining 3.0 percent. The Northeast gained 34.7 percent while the South rose 5.6 percent.
Homebuilders remain cautious as housing permits slipped 3.2 percent, following a 1.3 percent rise in June. The July pace of 0.597 million units annualized came in below the median forecast for 0.606 million. Permits in July are up 3.8 percent on a year-ago basis.
The bottom line is that housing is still extremely anemic with perhaps mild strength in the multifamily component. Until labor markets improve significantly, this sector is likely to remain in the doldrums.
On the news, equity futures edged up but remained significantly negative due to disappointing news on second quarter growth in Europe.
A monthly upswing in prices of petroleum products drove import prices up 0.3 percent in July vs June's revised 0.6 percent decline in a month when petroleum prices fell. Prices for imported petroleum products rose 0.6 percent in July and fed through to a 0.2 percent rise in industrial supplies excluding petroleum. The latter is a closely watched component which in June fell 0.4 percent. Prices for imported finished goods are mixed showing no change for capital goods though consumer goods do show a less-than-moderate gain of 0.4 percent.
Prices for US exports, down 0.4 percent in the month, were pulled down by a big fall in agricultural prices which fell 4.3 percent in July. Excluding agricultural prices, export prices rose an incremental 0.2 percent.
A look at year-on-year rates, which are the highest since 2008, shows the longer term effects of this year's high prices for both petroleum and agricultural products. Import prices, reflecting petroleum, are up a year-on-year 14.0 percent with export prices, reflecting agricultural products, up 9.8 percent. But the monthly readings in general are tame and should not upset expectations for tame readings in tomorrow's producer price report and Thursday's consumer price report.
Manufacturing appears to be on the mend as production improved sharply in July and June was not as soft as earlier believed. Overall industrial production in July posted a 0.9 percent gain, follow a 0.4 percent rise the prior month (originally up 0.2 percent). The latest figure topped analysts' forecast for a 0.5 percent boost.
By major industry, manufacturing showed significant improvement, advancing 0.6 percent, following rise of 0.2 percent in June (originally no change). The auto component finally made a comeback, jumping a monthly 5.2 percent after three consecutive declines including June's 0.9 percent decrease. And production was moderately healthy outside of autos. Excluding motor vehicles, manufacturing rose 0.3 percent, following a 0.2 percent rise in June.
Turning to other major sectors, utilities output rose 2.8 percent after increasing 0.8 percent in June. Mining output advanced 1.1 percent after growing 1.2 percent in June.
Overall capacity utilization in July improved to 77.5 percent from 76.9 percent the prior month. The June number came in higher than the median estimate for 77.0 percent.
Today's industrial production report is probably the strongest argument so far that second half growth is improving from a sluggish first half.
On the news, equity futures rose but remained negative on disappointing news on second quarter growth in Europe.
The first indications on the August manufacturing sector are strongly negative. The Empire State index fell nearly four points into more deeply negative territory, at minus 7.72 to indicate monthly contraction in general business conditions. Details show a third straight monthly contraction in new orders, down more than two points to minus 7.82. Unfilled orders are contracting very deeply, to minus 15.22 vs July's minus 12.22. With new orders on the slide and backlog having been worked down, the outlook for the region's shipments and employment is negative.
The six-month outlook is in fact the most negative aspect of the August report. The six-month outlook for new orders, at plus 6.52, and for shipments, at plus 7.61, are the lowest since 9/11. The overall outlook reading at 8.70 is down nearly 25 points in the month for the lowest reading since early 2009.
Hopefully the six-month readings will be only be temporary, tied specifically to the debt-ceiling drama and what is hopefully now faded market volatility. Industrial production data tomorrow will offer hard data on the manufacturing sector during July while the Philly Fed's report on Thursday will offer more anecdotal data on this month's conditions.
Selling of US securities by private foreign accounts drove net inflow of long-term securities to a very weak plus $3.7 billion in June vs an already weak and revised plus $24.2 billion in May. Private foreign accounts sold a net $23.0 billion of US long-term securities in the month for the lowest reading on record. Official foreign accounts were an offset at plus $11.5 billion though down from the prior month's $23.2 billion. Foreign demand for US Treasuries, agencies, and corporate bonds was weak across the board though demand for equities was down but still respectable. In a positive, demand for foreign securities by US residents ended a run of outflows with a net $15.2 billion inflow. Low US yields had been pushing domestic investment overseas and limiting investment at home.
But foreign participation in US financial assets is essential for the nation to funds its government and trade debts. And given the effects of the debt-ceiling crisis on investor confidence, the outlook for the July and August TIC reports is not positive. Other details for June show a second straight outflow for total securities which include short-term securities, at minus $29.5 billion vs May's minus $48.8 billion. One positive in today's report is a slight uptick in Chinese holdings of Treasuries, at $1.17 trillion with Japanese holdings only fractionally lower at $911.0 billion.