Pump Prices, Weaponizing Natural Gas and Fed Nominations

U.S. consumers are likely to face a second round of increases at the pump heading into the summer driving season. According to API, stockpiles slumped by 3.91 million barrels last week, the largest drop in six months, bringing down total holdings to the lowest level in five months.

Pump prices have already risen more than 25% since the start of the year to an average cost of $4.13 a gallon, and up more than 40% since this time last year. For the average American household then – assuming a two-car family, 20 gallon tank, filing up two to three times a month – this means spending anywhere from $100 to $150?more?each month just to fill up the family car with gasoline.

In international energy news, natural gas has become, as?Bloomberg News?describes it,?“the latest weapon”?in the war in Ukraine. According to reports, Russian state energy giant Gazprom halted flows of natural gas to Poland and Bulgaria and said supplies will remain turned off until they agree to pay in rubles.

Supplies to both countries are now slated to end on April 27 (today), meaning the EU has little over two weeks to make a decision whether or not to accept the terms, with the next payment due by May 15.

According to Poland's Climate Minister Anna Moskwa, there is little reason to be concerned.?“Poland has the necessary gas reserves and sources of supply that protect our security – we have been effectively independent from Russia for years,"?Moskwa tweeted.?"Our warehouses are 76% full.”??Poland specifically imports roughly 50% of its natural gas from Russia, while the EU as a whole imports roughly 40%.?Bulgaria, meanwhile, relies on Russia for 90% of its gas resources.

Covid cases interrupted Senate confirmation hearings yesterday. An initial vote to confirm Fed nominee Lisa Cook from Michigan State University fell short 47 to 51 after Democratic Senators Ron Wyden and Chris Murphy tested positive for Covid-19. Vice President Kamala Harris also tested positive yesterday, but is said to be asymptomatic.

Meanwhile, Lael Brainard was confirmed by the Senate 52 to 43 to be the Federal Reserve’s vice chair. Brainard has been a governor at the Fed since 2014 nominated by President Obama, making her the only sitting governor not nominated by President Trump. In addition to Brainard, the Senate is expected to confirm Fed Chairman Jerome Powell to a second four-year term. Powell’s nomination vote is scheduled for a vote?“soon.”?President Biden’s other remaining nominees for the Fed include Lisa Cook and Davidson College dean of faculty Philip Jefferson.

Yesterday, durable goods orders rose 0.8% in March, less than the 1.0% rise expected, according to?Bloomberg,?albeit the strongest gain in two months. Year-over-year, headline orders rose 9.9% in March, the weakest annual increase since February 2021.

Transportation orders rose 0.2%, following a 4.4% decline the month prior, due to a 5.0% gain in vehicles and parts orders. Civilian aircraft orders, however, fell 9.9%, the second consecutive month of decline. Excluding transportation, durable goods orders rose 1.1% in March and increased 9.1% over the past 12 months.

Capital goods orders dropped 1.1% in March. Nondefense capital goods orders, meanwhile, decreased 0.5%, following a 6.1% drop in February. Capital goods orders excluding aircraft?and?defense – a proxy for business investment – rose 1.0% in March, double the rise expected and the largest monthly gain in two months. Year-over-year, business investment increased 9.7%, down from the 11.0% gain reported last month and the weakest annual pace since February 2021.

In other details, electrical equipment orders rose 3.9%, following a 1.2% increase the month prior, primary metals orders gained 1.5%, fabricated metals orders increased 0.8%, and machinery orders rose 0.7% in March. Additionally, computers and electronics orders jumped 2.6% in March, the strongest monthly gain in four months.

Bottom Line:?Durable goods orders posted a welcome rise in March, rebounding from a revised 1.7% decline in February, weakness led by a 4.4% dip in transportation orders. Year-over-year, however, while still robust, headline momentum is slowing somewhat with the annual pace of orders declining from 11.9% to 9.9% and even further from a recent peak of 60.4% in April 2021.

That being said, the gap between shipments and core orders appears to be shrinking, suggesting companies may be better equipped to clear bottlenecks, or at least they were prior to Russia’s invasion of Ukraine and another round of lockdowns overseas.

While the latest figures suggest some sustainability in terms of capital expenditures at the end of the first quarter, going forward, downside risks remain as conflict overseas moves into its third month, Covid policy measures intensify, and the Federal Reserve tightens monetary policy, potentially undermining domestic growth and consumption.

Also yesterday, the S&P Case-Shiller 20 City Home Price Index jumped 2.39% in February, surpassing the 1.50% gain expected and the largest monthly increase on record. Year-over-year, the 20-city index rose 20.2%, also a new record high. On a national basis, home prices rose 19.8%, the most in six months and the third biggest increase in the data going back 35 years.

Additionally, the FHFA House Price Index rose 2.1% in February, surpassing the 1.5% gain expected and the largest monthly gain on record.

Also, consumer confidence, according to the Conference Board, declined from 107.6 to a reading of 107.3 in April, a two-month low. According to?Bloomberg, confidence was expected to rise to 108.2 at the start of the second quarter. In the details of the report, a gauge of current conditions declined from 153.8 to 152.6, while expectations rose from 76.7 to 77.2 in April, a two-month high.

Also yesterday, new home sales dropped 8.6% from 835k to 763k in March, a four-month low. According to?Bloomberg, new home sales were expected to decline 0.6% at the end of the first quarter. Year-over-year, sales dropped 12.6%, following a 1.5% annual gain in February. Due to a fall in sales, the months’ supply of new homes rose from 5.6 to 6.4 months, a five-month high. From a price standpoint, the median cost of a newly constructed home rose 3.6% from the month prior to $437k. Year-over-year, new home prices increased 21.4%.

Finally yesterday, the Richmond Fed Index unexpectedly rose one point to a reading of 14 in April, a four-month high. According to?Bloomberg, the index was expected to decline to a reading of 9 at the start of the second quarter. In the details of the report, the new orders index fell from 10 to 6, and the number of employees declined one point to a reading of 22. On the other hand, the shipments index rose from 9 to 17, and wages jumped from 37 to 41 in April, a seven-month high.

This morning, wholesale inventories rose 2.3% in March, more than the 1.5% gain expected and following a 2.6% rise in February.

Also this morning, pending home sales declined 1.2% in March, slightly more than the 1.0% decline expected and following a 4.0% drop in February. Year-over-year, pending home sales fell 8.9%, the fourth consecutive month of decline.

Tomorrow, GDP is expected to rise 1.1% in the first quarter, down from the 6.9% rise in the fourth quarter, and the weakest pace of activity since Q2 2020. Also, initial jobless claims are expected to decline from 184k to 180k in the week ending April 23. Additionally, the Kansas City Fed Manufacturing Index is expected to fall two points to a reading of 35 in April.

Later this week, on Friday, personal income is expected to rise 0.4% and personal spending is expected to increase 0.7% in March. Additionally, the PCE is expected to rise 0.9% in March and 6.7% over the past 12 months, and the core PCE is expected to increase 0.3% in March and 5.3% year-over-year.

-Lindsey Piegza, Ph.D., Chief Economist