US trade deficit breaks $60B barrier

The global equity markets held up great last week. They fell slightly on some pretty bad news, which may well be an indication of the underlying positive sentiment. Investors noted the higher-than-expected US trade deficit for November of $US60.3 billion , a rise in the price of oil, and several disappointing company earnings announcements, but didn’t let the equity markets tank from the news. On the good news side, Apple Computer’s first Qtr profits for the three months ending December 31, 2004 rose to US $295 million, up from US $63 million for the same period a year earlier. The 4X increase in profits was attributed to Christmas sales of the iPod digital music players.

So far, our thinking on international oil prices has held. Oil prices remained in the high US $40’s early this week, holding the gains made last week, mostly because the key heating oil consuming region in the Northeastern United States is experiencing cold weather that could test the low winter fuel supplies. Other regions are also experiencing very cold temperatures, but they are not as populated. We continue to forecast oil pricing to remain near US $50 for US light sweet crude, well above the OPEC floor of US $40 due to the winter season, low stocks and uncertainty in many of the major oil production regions. Please note that OPEC’s reference crude basket was last valued at $41.80, not far from the unofficial floor price they have set. OPEC has an official target range of $22-$28, a price structure introduced in March 2000 but the basket has been well above the band for more than a year. OPEC agreed last month to withdraw 1 million barrels per day (bpd) of supply from January 1 to support pricing. “Oil producers will act to defend prices if they see a sharp drop in demand,” Algeria’s Energy Minister Chakib Khelil said Monday.

UK:
The Bank of England left interest rates on hold for the fifth month in a row, the rate remains at 4.75%. Recent data indicated a slowdown in manufacturing and consumer spending, as well as in mortgage approvals. Interest rates have been raised five times since November 2003, in a move to slow the housing market and consumer debt, but the 4.75% rate has remained unchanged since August. The yield on the UK ten-year gilt fell last Thursday as a result.

UK exports, including both goods and services, rose by 3.2% to ?24.8 billion, although total imports rose to a new high of ?27.9 billion. The cumulative deficit for the first 11 months of 2004 now stands at ?36.3 billion, ?4.5 billion higher than the same period in 2003.

Europe:
The European Central Bank kept the benchmark interest rate at a six-decade low of 2% as the decline in oil prices reduced inflation risks, leaving the bank free to support economic growth with the low rate.

Japan:
Wholesales price inflation eased to 1.9% in December from 2% the previous month, again because of the lower price of crude over December.
Steel was the main commodity to suffer from price inflation as disruptions in production caused a shortage of supply.

US deficit balLons
United States:
The US trade gap ballooned to $60.3 billion in November, an all time high, as Americans continued to purchase foreign goods, despite the weakness of the dollar. The data released by the Commerce Department showed the deficit had widened as greater imports from China were consumed, and which represented more than 25% of the total deficit.
US consumers remained resilient as sales at US retailers rose 1.2% in December 2004 compared to the previous month.

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