Manufacturing Healthy, Foreign Demand for US Assets Slows from Record Levels, Capacity Utilization Back Near Average Levels, Oil Inventories Soar

- Empire Manufacturing for February rose to 20.3 versus estimates of 18.0 and a reading of 20.1 in January.
- Net Foreign Security Purchases for December fell to $56.6 billion versus estimates of $76.2 billion and $91.6 billion in November.
- Industrial Production for January fell .2% versus estimates of a .2% increase and an upwardly revised .9% gain in December.
- Capacity Utilization for January rose to 80.9% versus estimates of 80.8% and an upwardly revised 81.2% in December.
- The EIA reported crude inventories rose 4,853,000 barrels vs. estimates of a 1,000,000 barrel rise. Gasoline supplies rose 2,115,000 barrels vs. estimates of a 1,600,000 barrel build. Distillate supplies rose 907,000 barrels vs. estimates of a 1,000,000 barrel decline. Refinery utilization rose .28% vs. estimates of unchanged.

BOTTOM LINE: Manufacturing in NY state unexpectedly accelerated in February as sales and orders grew, Bloomberg said. Factories got a boost from a spike in consumer spending as retail sales gained 2.3% in January, the largest gain since May 2004. The prices paid component of the index rose to 52.8 versus 46.6 in December. Manufacturing should continue to add to US economic growth over the intermediate-term.

International investors boosted their holdings of US assets by $56.6 billion in December, Bloomberg reported. Net holdings of Treasury notes, stocks and corporate bonds by international investors slowed from $91.6 billion in November and an all-time record of $105.6 billion in October. The UK, Japan and China all increased their holdings of US Treasuries. However, Caribbean banking centers, which are mainly hedge funds, decreased their Treasury holdings. Foreigners’ holdings of US stocks rose $8.7 billion. I expect international demand for US assets to increase further over the intermediate-term as energy prices fall, inflation measures decelerate, the dollar remains firm and US growth remains relatively healthy.

US Industrial Production unexpectedly fell in January after a record decline in utility output, while manufacturing strengthened for a fourth month, Bloomberg said. Business spending to upgrade equipment is helping to keep manufacturers’ order book full. Utility production plunged 10.1% in January, the largest decline in US history. Manufacturing, which comprises more than 80% of the index, rose .7% versus a .5% gain in December. Capacity utilization is only now back near average levels of 80.7%. I expect industrial production to remain healthy over the intermediate-term as companies continue to gain confidence in the sustainability of the current expansion and inventories are rebuilt.

The EIA energy inventory data was overall very bearish once again for the entire energy complex. Oil is getting oversold short-term, however I still expect long-term support at $56/bbl. to give way over the coming weeks.