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Wednesday, June 04, 2008


Oil: Crude inventories are due out later, but prices have been falling pretty fast. Overnight Brent for July dropped down to the $123 range. One thing that is happening is that Asian countries are beginning to hike fuel prices a bit, and demand from the developed countries has been constricted by prices. So reality has come knockin'.

Euro: Cold ugly realities are beginning to settle in. One thing the Europeans could do is drop some of their fuel taxes - there have been major demonstrations on that issue. It's complicated, because every country has to agree. Here's the latest. European retail sales were reported to be down 0.6 MoM and 2.9 YoY. That is a very major drop which calls into question second half economic growth estimates.

Carrefour reported that its non-food sales dropped 8.8% for the first quarter. The March drop was revised up to 2.3%. One thing to remember is that these are reported with inflation adjustments, in contrast to US retail sales which are reported on a nominal basis. These statistics indicate that there is not much forward momentum. These numbers also don't include car sales, and I know that car sales are dropping sharply in Spain.

UK Services
slipped into the contraction zone and companies were cutting jobs. At this point, those talking about recession are gaining credibility. UK home prices were reported to have dropped 2.5% in May. OECD issued a statement saying that the UK was extremely vulnerable to a housing slump and also predicted that home prices would fall around 10% by the end of 2009. Consumers in the UK economy are carrying very high debt loads. BRC has been reporting price-adjusted retail sales declines, but UK Retail Sales has been somewhat more positive, although now reporting two negative months.

US: ADP released its May employment report showing an increase of 40,000 jobs. They note, however, that this is consistent with a slackening economy. The distribution of job losses between firms of different sizes is interesting:
>= 500 workers: -18,000
50-499 workers: -3,000
Well, we all know that more trouble is ahead for automakers and big financials! However FUT receipts are so low that I'm dubious about these figures, and I suspect that in part ADP is picking up job replacements from illegals exiting, an interim, and then replacement. The acceleration in job replacements is marked for anyone who wanders around and looks at the people on sites, in stores, etc. I believe that in part the phenomenon of job replacement is now supporting the US economy, because more of the wages cycle back internally. Challenger reports an acceleration in layoffs.

US ISM Services is due out today. If you believe ADP, which I do in part, Services will show surprising strength.
Treasury receipts are mixed YoY. YoY WIET for May looked decent, but FUT is really bad. Excise taxes rose. Compare May 30 07 to May 30 08. Significant layoffs in large firms can sometimes boost WIET receipts temporarily on withholding from large severance checks. Needless to say, corporate taxes dropped, but the decline is not that bad.

I still maintain that what the US is experiencing is a separated recession. We went through a long period in which manufacturing was in a recession, and then that started to cycle up. Now we are moving into the consumer recession, but it is somewhat moderated by production expansion in areas. Any manufacturing dependent on consumer consumption (like cars!) will continue to move downward. Whether the rest of the production expansion can continue is dependent upon other factors.

I have given up hope that the ECB will grasp the idea that they can moderate inflation by moving away from biofuels and cutting fuel taxes, so I suppose the EU is doomed to go through a monetary-policy-inflicted recession. I hope that Germany, which has a manufacturing base targeted to fundamental production, will come out pretty well. It's only a hope because of the banking pullback. We'll see. If Germany can hang on with its production, it will help the EU in general.

Update: ISM Services(Business) rises to 51.7 with strong readings on growth and business activity, but contraction in employment. A 5.5 increase in export orders. Overall, a different direction than European Services.

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