The markets continued to grind higher, with the S&P 500 Index creeping out a slight gain climbing 5 points to 1145. Again the Nasdaq market was the big winner on the day, moving up 18 points or .8%. Oil climbed slightly and the Euro gained half a big figure.
Traders were happy to see better than expected US inventory news. U.S. wholesalers’ inventories unexpectedly fell 0.2% in January, according to the Commerce Department, as surging demand pulled goods off shelves in the first month of the year. Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December’s inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported. Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries. The decline in inventories is good news for the U.S. economy. As inventories are reduced, they will need to be replaced which creates more employment. The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.
In the UK market is clearly buying into the weaker sterling story, this morning’s January industrial production figures give fresh ammunition. UK January industrial production contracted by 0.4%, much worse from the +0.3% expected outcome and after a 0.5% reading previously. This left the yearly rate well in negative territory, at -1.5% (from -3.7%). It was a similar story for the manufacturing sector, with production contracting by 0.9% (from +0.9%) and for a yearly rate at a very sluggish 0.2% (from -1.9%). Of course, the poor weather had a lot to do with this highly disappointing performance in the UK industrial sector, but it is not just a weather story. In fact, yesterday’s highly disappointing January trade figures (and considering the highly manufacturing orientated nature of the UK external sector) hinted at a likely disappointment on the industrial production front too. Moreover, it should be noted that the French January industrial production also released this morning came out on the strong side of expectations (at +1.6% m/m, yet the weather conditions were dreadful in France too in January).
China reported stronger export and import figures for February than expected, with the net result of a smaller than expected trade surplus. In fact, February’s trade surplus of $7.6 bln is the smallest in a year and a bit more than half of the January surplus. This is consistent, however, with an under-appreciated development that we think is important. In terms of global imbalances, the US trade deficit and the Chinese trade surplus have been roughly halved as a percentage of GDP over the last couple of years. In the US case, it seems largely cyclical and the growth differentials that we expected to close the output gap in the US before Europe and Japan will likely see the US trade deficit grow again, though from a lower base. In China’s case, the possibility of a structural shift is greater, though too early to tell. China’s exports rose 45.7% in February from the depressed year-ago levels. Yet this is more than twice the pace in January and may also have been distorted by the earlier lunar New Year. Imports jumped almost 45%, better than the 39.7% expectations, but well off the mind-boggling 85.5% pace reported in January.
Japan’s economy may be benefiting from the revival in its neighboring Asian economies, but domestic demand remains very sluggish and deflationary forces continue. February machinery orders were softer than expected at down 3.7% m/m (vs. +20.1% in December.) That put the yearly rate at -1.1% (vs. -0.6% expected). Machinery orders are a good proxy for business investment, so this disappointing January performance is not particularly promising for Q1GDP.