April 30, 2019
Crude oil prices initially rose last week after the Trump Administration ended the waivers for countries to import Iranian crude oil. The U.S. had previously granted eight countries a 180-day waiver to continue to buy Iranian crude oil despite U.S. sanctions. Now, with countries like China, India, and Turkey no longer buying Iranian crude oil, the Trump Administration’s intention is “to bring Iran’s oil exports to zero.”
Specifically, the White House said, “The Trump Administration and our allies are determined to sustain and expand the maximum economic pressure campaign against Iran to end the regime’s destabilizing activity threatening the United States, our partners and allies, and security in the Middle East.” The White House added that the U.S., Saudi Arabia, and the United Arab Emirates “are committed to ensuring that global oil markets remain adequately supplied.” On Friday, President Trump told reporters, “Gasoline prices are coming down. I called up OPEC. I said you’ve got to bring them down. You’ve got to bring them down.” As a result, crude oil prices fell sharply on Friday and erased all of last week’s gains!
In the meantime, Iran has threatened to close the Straits of Hormuz in response to the U.S.’ waiver of sanctions expiration, but this is not likely to occur. Specifically, Republican Guard General, Alireza Tangsiri, signaled that if Iran was prohibited from using the Strait of Hormuz, that Iran would “defend Iranian waters.” Former Secretary of State John Kerry has admitted meeting with Iranian leaders “three or four times,” and President Trump has pointed out that his actions are a violation of the Logan Act.
Secretary of State Mike Pompeo said, “What Secretary Kerry has done is unseemly and unprecedented” and added that “This is a former secretary of state engaged with the largest state sponsor of terror.” The Logan Act criminalizes unauthorized negotiations between U.S. citizens and foreign governments who have disputes with the U.S. Clearly, the Iran sanctions are designed to crush the Iranian economy, which is suffering from a collapsing currency and rampant inflation (running at 47.5%, with food up 73.2%).
Our Economic Dashboard is Still “Under the Speed Limit”
The economic news was mixed last week, ensuring the Fed will stay “on the sidelines.”
First, the National Association of Realtors (NAR) reported that home sales declined 4.9% in March to an annual pace of 5.21 million, following an 11.2% decline in February, the largest monthly decline in more than three years. A sharp slowdown in expensive properties led the decline. Lawrence Yun, NAR’s chief economist, said that the tax changes have limited the ability of wealthier homeowners to deduct mortgage interest payments and property taxes, which effectively discourages sales of more expensive homes. Yu said that “the lower-end market is hot, while the upper-end market is not.” Overall mortgage applications have been rising in recent months, so it appears that the less expensive homes will continue to sell.
In contrast, the Commerce Department reported on Tuesday that new home sales rose 4.5% in March to an annual rate of 692,000. This was a pleasant surprise, since economists were expecting new home sales to decline 2.5% in March. In the past 12 months, new home sales have risen 3%. Three of the four major U.S. regions reported growth. The South was especially impressive with its strongest sales growth in a decade. The only region to dip in March was the Northeast. The supply of new homes declined to a 5.3-month supply and median new home prices declined to $302,700, the lowest in more than two years. Now that homebuilders are building more affordable homes, new home sales should remain strong.
The Commerce Department on Thursday announced that durable goods orders surged 2.7% in March, due largely to strong demand for commercial aircraft (up 31%), vehicles (up 2.1%), and networking equipment, which is a big surprise, since economists were expecting only a 0.5% increase. February durable goods orders were revised to a 1.1% decline, up from a 1.6% decline previously estimated.
Core durable goods orders, which reflect business investment, rose an impressive 1.3% in March.
The best news was that the Commerce Department reported on Friday that the preliminary estimate for first-quarter GDP growth was an amazing 3.2% annual rate, substantially higher than economists’ consensus estimate of 2.5%. I have to say that I am astonished that GDP growth accelerated from a 2.2% annual pace in the fourth quarter to a preliminary 3.2% pace in the first quarter, since typically extreme winter weather hinders GDP growth in the first quarter. I cannot remember when first-quarter GDP growth was this strong, but strong durable goods and retail sales reports helped to boost first-quarter GDP.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose at only a 0.6% annual pace in the first quarter, which is incredibly bullish for continued low interest rates. Overall, that implies a “Goldilocks” environment of stable interest rates, low inflation, and 3%+ GDP growth.
Across the pond, business sentiment is not so encouraging. Specifically, German Ifo business sentiment fell to 99.2 in April, down from 99.7 in March. This was a big surprise, since economists were expecting sentiment to improve to 99.9 in April. German GDP is now forecasted to rise only 0.5% in 2019. Klaus Borger, an economist at KfW Research, said that the Ifo business survey confirms “the export-driven industry is in recession, whereas the domestic economy remains rather healthy.” In other words, slowing demand from China and other major markets is hindering mighty Germany’s exports. I should add that the German 10-year bund yields turned negative after the Ifo business survey was released.