Global Economic Snapshot

China pushed up domestic prices of gasoline 16%-18%. Prices of jet kerosene will rise 25% while electricity will rise 4.7%. A gallon of gas in China now costs $3.29, just below the international market price. This increase in gas prices will have an impact on Chinese inflation, which edged slightly down in May and gave policy makers just enough room to increase energy prices.

Global crude prices fell following the announcement, but many still wonder whether pent up demand in China and the reduced costs to refiners who turn crude into petrol may actually increase consumption. Motorists who waited 6 hours in line for gas may actually buy more despite high prices.

Snapshot asks, if there is pent up demand, how much will higher energy prices push up global crude prices and Chinese inflation?

The number of workers filing new claims for unemployment benefits fell by 5,000 last week to 381,000, a smaller decrease than analysts had predicted. The four-week average of new claims, a less volatile measure, rose to 375,250 from 372,000, indicating that the U.S. labor market remains weak and far away from a recovery. Coming after last month's half percent spike in unemployment to 5.5%, these figures add further gloom to the current picture of the U.S economy and will put pressure on the Fed hold its target funds rate at 2% when it meets next week.

Snapshot asks, to what degree will falling consumer spending be exacerbated by labor market weakness?

Wall Street Journal - Jobless Claims Fall in Latest Week
Bloomberg - U.S. Initial Jobless Claims Fell to 381,000 Last Week
Reuters - Treasuries extend losses after jobless claims
Associated Press - Stocks trade mixed after dip in jobless claims

Saudi Arabia reported that it plans to increase its oil production in July by almost half a million barrels a day in an attempt to reign in the long running spike in oil prices that left oil trading at nearly $140 dollars in early trading on Monday. It is unclear whether this ambitious effort will succeed. While Saudi Arabia is by far the largest single producer of oil and played an influential role in previous OPEC machinations, strong demand growth in China and India has left it with little spare capacity available for sudden increases. It must instead rely upon costly and time consuming exploration and exploitation of new reserves. Even with a fourth of known global reserves, Saudi Arabia faces an uphill fight to bring down the sky high prices of the past year.

Snapshot asks, will global oil demand growth abate enough for Suadi Arabia's gamble to work?

Wall Street Journal - Saudi Arabia's Leverage in Oil Market Is Sapped
Financial Times - Oil hits new record near $140
New York Times - Plan Would Lift Saudi Oil Output
Financial Times - Saudis consider boost in oil output

In response to growing inflationary pressure, Chinese officials increased banks' reserve ratio last weekend by 100bp to 17.5%. On Tuesday, the first day of trading following the weekend decision (Monday was a Chinese holiday), the Shanghai stock market fell 7.7%. In Asia excluding Japan, headline inflation for April rose to a nine-and-a-half-year high of 7.5%. As inflation pressures increase and tightening policies become necessary, Asian stock markets will continue to adjust downwards.

Snapshot asks, how much further do Asian equities have to fall as a response to increasing inflation?

Morgan Stanley - AXJ's Inflation Challenege
Bloomberg - Asian Economic Miracle Is at Risk All Over Again: William Pesek
Citigroup - Inflation Risk Invokes Divergence
Financial Times - Asia markets plunge as inflation looms

May payrolls fell 49,000 and the unemployment rate rose to 5.5 percent due to losses in the following cyclically sensitive sectors: construction, manufacturing, retail trade, and temporary help services. Healthcare continued to add jobs. It is the highest unemployment rate since October 2004 and the sharpest rise in unemployment in 22 years.

The most notable fact was the massive increase in household unemployment which rose 861,000 in the month of May, the largest increase in 33 years. This was due to new entrants to the labor force (recent high school and college graduates) as well as workers who lost their jobs.

Snapshot asks, since the Fed is typically very sensitive to unemployment, how will they balance May's unemployment data with inflation risks?

In his most recent speech, Ben Bernanke spoke about the dollar's weakness and its impact on producer and consumer price inflation. Bernanke has moved from focusing entirely on stability and growth to fighting inflation and the dollar decline. Folks such as Martin Feldstein recently said that the US didn't have a strong dollar policy, but it appears as though the Fed may have switched gears to fight inflation, and sees a strong dollar as a means to do so.

Snapshot asks, will the Fed's stance on the dollar continue to push the greenback higher?

The murky state of the U.S. economy became more mixed as new figures from the Institute for Supply Management showed overall manufacturing activity continued to shrink throughout April, but at a much smaller rate than expected. New orders for manufactured goods also jumped 1.1 percent, compared to a predicted .1 percent decline, as a weak dollar and strong growth in the developing world boosted exports. While housing and services continue to decline, manufacturing is proving resilient.

Snapshot asks, will slowing global growth crimp manufacturing's nascent recovery?

Financial Times - US factory orders continue to rise
London Stock Exchange - US Manufacturing Sector Down Less than Anticipated
Bloomberg - U.S. Economy: Manufacturing Shrank Less Than Forecast in May
Financial Times - Cheap U.S. Exports Boost Manufacturing

Three of the largest U.S. investment banks, Morgan Stanley, Merrill Lynch, and Goldman Sachs, had their credit ratings lowered by S&P on the concern that further writedowns lay ahead. Since the beginning of 2007, banks worldwide have written down some $387 billion and raised over $270 billion in new capital. Commercial banks also had a turbulent day with Wachovia's Chief Executive Ken Thompson ousted and Washington Mutual's Kerry Killinger stepping down from his position as chairman (he will retain his position as the CEO).

Snapshot asks, do you agree with the ratings agencies that financial institutions will face further trouble in 2008? Will it be less, more, or equal to trouble they faced in the past few months?

During the past year Angola joined OPEC, Ecuador rejoined, and Indonesia dropped out. Indonesia dropped its membership because it is now a net importer of crude, due to lower production and higher domestic demand. Indonesia produced 1.5-1.6 million barrels/day in the mid-1990s and now produces 800,000 barrels/day. It was the only OPEC member in Southeast Asia. It will save approximately $3.1million in membership fees per year for leaving the organization.

OPEC accounts for 30% of global oil production. Current OPEC agreements are based on maintaining production levels and not setting specific quotas. However, in a meeting at the end of 2007, Angola was given a quota of 1.9 million barrels/day.

Snapshot asks, as oil prices continue to rise, will OPEC set more quotas upon its members?

Bloomberg - Indonesia to Pull Out of OPEC as Oil Output Drops
International Energy Agency - Oil Market Report
Jadwa Investments - Oil's Surge: what's behind it and what it means for Saudi Arabia
Financial Times - Opec Meeting: Angola faces curbs on production

Housing prices continued their downward slide in April with a monthly decrease of 2.2%, a decline of 14.4% from last year's levels. In an unexpected twist, monthly home sales actually rose by 3.3%. Some optimists see this as an indication that the market is nearing its bottom and beginning to work its way through a massive glut of unsold homes as sellers cut their overvalued asking prices and buyers open their wallets to bargains. Others point to worsening consumer confidence and tighter lending requirements as evidence that April's sales figures were a statistical blip in a market that has much further to fall.

Snapshot asks, to what degree will further credit turmoil stop buyers from clearing the housing market?

Wall Street Journal - Home Sales Rise in Hard-Hit Areas
Bloomberg.com - U.S. Home-Price Index Fell 14.4% in March
Washington Post - Existing Home Sales Rise as Prices Plummet
New York Times - Home sales post unexpected April increase
Yahoo News - Home sales unexpectedly rise in April