The May trade balance showed an unexpected improvement. The smaller deficit of 59.8 billion $ (60.5 billion $ in April and 62.5 billion $ expected) was due to a surprise decline in the quantity of oil imported that overcompensated for the higher oil prices. The quantity of oil imported was the lowest since October 2002. Taking a step backward, the improvement in the real trade deficit was impressive: 43.6 billion $ versus 46.7 billion $ previously. Looking at the April/May combined deficit versus Q1 trade deficit, it is obvious that net trade will make a substantial positive contribution to Q2 GDP. The lower dollar and the still quite robust growth in the trade with other countries keep exports well underpinned (17.8% Y/Y), while weak domestic growth is having a negative effect on import that grew by 12.5% Y/Y.
The June import price report brought no relief. Import prices rose by a steeperthan- expected 2.6% M/M and 20.5% Y/Y, the highest on record and up from an upwardly revised 2.6% M/M and 18.8% Y/Y in May. Petroleum, up 7.4% M/M and 78.6% Y/Y were the main culprit, but also prices excluding petroleum rose by 0.9% M/M and 7.3% Y/Y and show a clear upward trend. Prices for iron and steel products were mentioned as showing important increases. The report suggests that while domestic wages behave well, material costs and imported goods prices are rising.
The Michigan consumer sentiment index for July was marginally up from 56.4 in June to 56.6 in early July and defying expectations for a decline to 55. The index has relentlessly fallen in the first six months to levels only seen in the 80-82 recessions. So while the small improvement might be a surprise, it is premature to draw the conclusion that consumer sentiment has bottomed or still less that an improvement is around the corner. The tax rebate checks might have played a role, even if they have been distributed since May or some other factor may have been in play. The improvement is in line however with the last few weekly ABC consumer comfort readings that suggested some improvement. The current situation index improvement marginally while the expectation sub-index fell slightly further. The inflation indicators brought disconcerting news. The 1-year inflation expectation increased to 5.3% from 5.1% previously, the highest level since December 1981 and the 5-to-10- year inflation expectations stabilized at 3.4%, the highest level since 1995. The Fed will certainly look at these figures with great concern.
