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VERSACE: From the Beige Book, a murky picture emerges
Question of the Day
Midweek, the U.S. stock market rebounded following better than expected first-quarter earnings from aluminum maker Alcoa Inc., traditionally the company that kicks off quarterly earnings, and a calming of renewed concerns over Europe.
European worries were one of the drivers behind the steep falloff in the stock market indices early this week as bond yields in Italy and Spain climbed. Commentary from Benoit Coeure, a European Central Bank executive board member, suggested possible intervention to help ease tension over rising borrowing costs.
As I shared in this column recently, the combination of stock market strength, which saw the best first-quarter performance in nearly 15 years, with a U.S. economy that the Fed’s April Beige Book sees growing at a “modest to moderate pace,” equates to at best a balanced reward-to-risk outlook in stocks for the near term. The Beige Book, which is released eight times a year and is based on surveys by the Fed’s 12 regional banks, used the same language — “modest to moderate” — it employed in the January and March surveys
While many pundits tried to make Wednesday’s Beige Book into something bullish, the reality is the commentary from the Fed’s dozen regional banks revealed relatively modest growth.
Consider the following:
• While many Fed districts described the improvements as only moderate, most stated that gains were widespread across sectors.
• Higher commodity costs were widely reported to be putting increasing pressure on prices. Input prices rose in most districts, particularly for cotton and other agricultural commodities, petroleum-based products and industrial metals.
• Shippers added fuel surcharges in several districts.
• The San Francisco district reported a limited ability to pass through higher input prices on anything other than food and gasoline. Kansas City Fed officials stated that more manufacturers and retailers expected to raise prices in coming months.
• Most districts saw signs of improvement in at least some of their labor markets and Boston, Richmond, Chicago, and Kansas City cited growing concern among their contacts about being able to obtain certain types of skilled workers.
The feedback that labor market conditions improved in recent months led to renewed questioning of the government March employment report, which came in well below economist forecasts and revealed that more than 2.3 million people have left the workforce in the last 12 months. In addition to falling short of expectations, the March report marked yet another sequential dip in the number of net new jobs being added to the economy.
Also spiraling out of the March Beige Book was renewed inflation concerns, particularly since import prices jumped 1.3 percent in March, the largest increase since April 2011. Much of the gain came from a surge in oil prices, which have abated slightly in recent weeks, but non-oil import prices still rose during the month, up 0.5 percent.
The commentary in the March import price report suggests that large-scale discounters (who tend to be the biggest buyers of imported products) have been unable to pass along price increases to wary consumers. As the anecdotal evidence from the April Beige Book shows, however, it appears that companies are poised to attempt another round of price increases as their cost structures rise.
Friday’s consumer price index for March will be closely scrutinized and contrasted to the Thursday’s producer price index (PPI) to see if prices paid by consumers rose faster than those paid by goods and services providers. Given the 5.7 percent increase in March energy costs according to the U.S. Energy Information Administration, the CPI for March is slated to rise month over month, but if consumer prices jump more than expected or above the flat performance for the March PPI, investor concern over the consumer’s ability to spend will reignite.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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