Expecting the next record trade deficit

Monday, May 09, 2005

After the surprising employment figures, doubted by Barry Ritholtz for good reason, markets face a week with stiff headwinds ahead. Apart from technical problems - the Dow turned south in sight of the 10,400 mark and the S&P 500 did not manage to get the 1180 out of the way, where the sell-off had started - upcoming economic indicators will give little fundamental reason for another bounce after Friday's initial rally petered out and share markets closed barely unchanged, shrugging off the strong employment growth numbers. Bonds softened as the yield curve steepened again because of inflationary fears.
First a compilation of the numbers to come.
Wholesale inventories March: previous o.6 %, estimate 0.8 %
Wholesale trade March: previous 291.4 billion or minus 0.4 percent

Trade deficit March: previous 61.0 billion, estimate 61.5 billion dollars
Treasury budget April: previous minus 71.2, estimate minus 58 billion dollars

Jobless claims: previous 333,000, estimate 327,000
Retail sales April: previous 0.3 %, estimate 0.8 %
Retail sales ex autos: previous 0.1 %, estimate 0.6 %

Business inventories March: previous 0.5 %, estimate 0.6 %
Import prices April: previous 1.8 %, estimate 0.5 %
Consumer sentiment May: previous 87.7, estimate unchanged to 88.1
, depending on consensus.
With no other foreseen events to trade on, Monday's wholesale figures will be taken as an indicator for retail sales and business inventories at the end of the week.
Tuesday's trade deficit is seen at a new record as the average crude oil price peaked in March above 54 dollars (and has not declined much since). The budget deficit could come in a bit better because of rising tax receipts - saw the carnival on CNBC on Friday? The petroleum status report on Wednesday could bring some relief for oil prices. It might do so every week until July. At this point the strategic reserve will be topped up to the maximum, according to the presidential agenda. But any one-day decline in crude oil prices gives other oil-dependent nations a good bargain buying opportunity.
Jobless claims on Thursday will prove or not prove last week's surprisingly good employment report. Retail sales will probably lift the market as vehicle sales are growing again with consumers trading in their SUV's for of more gas efficient cars. Mortgage applications are still in high gear, this should help retail sales as well.
Business inventories, read also this post by Kash at AngryBear for a good analysis, will react inversely to the preceding retail sales figures. Import prices should be in the expected lower range with the dollar treading water in the last month.
Why should China hurt itself with a revaluation?
In regard of import prices take also note of the heatening debate when China will revalue the Yuan. The question should rather be, if, as they cannot have a vested interest in dearer export prices. Leaving the booming coastal regions where six-lane highways narrow down to pot-holed regional roads, China's vast hinterlands are still very much a 1-dollar per head per day economy.
Hopes for a revaluation seem to be overdone when the economists in Beijing look at the same statistics as we do. As they need an outlet for all the goods they produce they will most certainly acknowledge the fact that US and European consumers are buried under mountains of debt that won't get smaller in the wake of higher interest rates (risk premiums) in the US and the fear of rising unemplyment, now also threatening Europe's middle class. Price sensitivity on the consumer level is a critical factor, and a spike in import prices could deteriorate consumer spending at an instant.
The China trade surplus of 162 billion dollars last year, 38 billion more than in 2003, with the US is first of all a problem for the latter as US exports cover only 16.3 percent of Chinese imports. Linear projections based on trade figures from January and February result in a modestly rising trade surplus of 168 billion dollars. China has been running a trade surplus with the US for the last 20 years, albeit starting from a very modest level ot 6 million dollars in 1985, according to data from the US Census Bureau.
Because of massive commodities and energy imports, China's overall trade surplus was only 25.5 billion dollars in 2004, roughly the same as the year before and Chinese authorities see it shrinking to 15 billion in 2005. The Chinese are encountering the problem that their insatiable appetite for raw materials has driven up commodity prices so much that this cuts deeper and deeper into their export margins. This is not going to stop soon, remembering the continuing strength of the Chinese economy which grew again at a rate of 9.5 percent in the first quarter of 2005 and is expected to stay on that course.
Proposed protectionist measures, like a tariff on Chinese textile exports discussed by US policy makers, could backfire. China's Trade Minister Bo Xilai has charged the United States and Europe with double-standards in their trade dealings and said restricting Chinese textile exports will be a blow to the global trading system. "Double standards should not be adopted in international trade where you demand free trade for your own products, while restrictions are placed on the competitive products of developing countries," Bo is quoted on his ministry's website. "This kind of trade protectionism will only harm the healthy development of international trade," he said. China began to book trade surpluses only 12 months ago. For a more detailed look into China's expectations for international trade, read this and this story from chinadaily.com.


Wikinvest Wire