The U.S. transportation sector, which many see as a proxy indicator of the economy’s health, has retreated 3.1 percent from its Sept. 14 record, hinting to some analysts that the longest bull market on record has entered its late stages.
Railways, freight carriers and package deliverers get less attention than heavy-hitting momentum stocks like Apple Inc and Amazon.com, but the sector could be showing cracks in what analysts and the U.S. Federal Reserve characterize as a robust economy.
Several constituents of the Dow Jones Transportation Average (DJT) have provided disappointing guidance in recent months. As the third-quarter reporting season approaches, investors will watch to gauge whether trade, fuel and dollar risks are affecting the sector’s bottom line.
The 20-company DJT has recently diverged from the broader market after a strong run since late June, suggesting these headwinds could be taking a toll.
As the DJT has retreated, the broader Dow Jones Industrial Average has moved in the opposite direction. The Dow reached its most recent all-time high on Tuesday, 13 trading days after the DJT’s Sept. 14 record.
Diverging highs between the two indexes can signal growing market instability. Similar divergences occurred leading into the recessions of 2001 and 2008-2009, and most recently heading into the market correction that began in late January.
“The transports have been going sideways and haven’t confirmed the new highs in the industrials,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “If the transports were to break down further from these levels, if you saw them declining another 2 or 3 percent in the near future, you would call that a bearish non-confirmation.”
On Friday, both indexes closed lower, with the DJT slipping 0.8 percent and the Dow Jones Industrial Average dropping 0.7 percent.
Delta Air Lines Inc is due to report on Oct. 9, a week after lackluster forecasts from the company and its peer United Continental pulled U.S. airline stocks lower. The bulk of the companies in the DJT are expected to post results in the latter half of October.
FedEx Corp, the first in the group to post quarterly earnings on Sept. 17, missed Wall Street estimates as costs weighed on margins. The global package delivery company has been challenged this year by the ongoing trade disputes between the United States and its major bilateral trading partners, notably China and Europe.
Although a preliminary deal to replace the North American Free Trade Agreement has boosted railway stocks, looming tariffs threaten to increase the cost of transporting goods and services, further testing other DJT constituents.
“There may well be blood in the water before we actually get some kind of agreement on trade between the US and China,” said Bernard Baumohl, managing director and chief global economist at the Economic Outlook Group in Princeton, New Jersey. “It could do some serious damage in the long run as China seeks to establish new supply chain routes from other countries and rely less on the United States.”
Analysts see costs of transportation fuels, which include gasoline, diesel and jet fuel, continuing to climb due to tightening supply and increasing demand.
Rising fuel costs are “depressing stocks that make up the transportation index,” Baumohl added.
Brent Crude prices have risen nearly 26 percent since the beginning up the year and energy analysts see the trend continuing well into 2019.
“In the near-term we’ve seen prices increase as a result of Iranian sanctions reducing the supply of crude oil to the market,” said Andrew Lipow, consultant at Lipow Oil Associates in Houston. “I expect that over the next year, the price in transportation fuel is going to be increasing.”
The climbing dollar could also pressure transportation companies as U.S. goods grow less affordable to foreign consumers, which might result in fewer shipments abroad.
The dollar index, which measures the greenback against a basket of major world currencies, has risen almost 4 percent so far this year.
“The net effect is that (the strong dollar) could impact the transportation index over the course of the next 12 months,” Baumohl said.
Meanwhile, investors will get a clearer picture in coming weeks of the extent to which trade jitters, fuel costs and the rising dollar may have turned transports into a warning sign.
“There are a lot of wild cards out there now,” said Baumohl.
Nigeria’s Borrowing Remains Relatively Low At 19% – Minister
Minister of Finance, Zainab Ahmed, has said Nigeria’s borrowing still stands at 19 per cent of the Gross Domestic Product (GDP). She said this level is low compared to debt levels in Ghana, Brazil, South Africa, Egypt and Angola.
The minister also said there is no plan to remove fuel subsidy. She said the International Monetary Fund merely advised the federal government to remove fuel subsidy but assured Nigerians fuel subsidy removal plans are not even being considered at this time.
On the question of the country’s debt level, the minister said Nigeria’s borrowing is still at 19 per cent of GDP. She said this is still within the country’s fiscal responsibility act which allows a maximum of 25 per cent of GDP.
The minister said Nigeria has the lowest level of borrowing compared to other countries.
Inflation Nightmare Returns To Haunt Zimbabwe
The price of bread almost doubled for Zimbabweans last week, as the inflation nightmare that marked the rule of long-time authoritarian leader, Robert Mugabe, returns to haunt his successor, Emmerson Mnangagwa.
There have been warnings of the mental and physical toll the rampant price increases will have on Zimbabweans after the cost of a loaf of bread basically doubled to three and a half dollars, and a tub of butter shot up to $17 from eight fifty.
Mnangagwa pledged to revive his country’s moribund economy when Mugabe was toppled in 2017 after 37 years in power.
But after the central bank unveiled a new monetary policy in February, introducing a new local currency, prices of goods and services have skyrocketed at rates unseen in a decade.
The disparity between the official and parallel market exchange rates has been rapidly widening, triggering price hikes of up to 300 percent.
The chief of the Zimbabweauthoritarian leader, Robert Mugabe, says he is angry at the government for “putting on a brave face and giving the impression that the economy is on a rebound, but on the ground things are going in the opposite direction.”
The crisis has brought back memories of a decade ago when hyperinflation peaked at a grotesque 500 billion percent, wiping out the Zimbabwean dollar.
Inflation Rate Jumps To Almost 67% In Zimbabwe
Zimbabwe’s statistics agency, said on Monday, year-on-year inflation rate, for March, has spiked, to almost sixty-seven percent under, the new base used to calculate the consumer price index. The agency noted that under the old basing system it used until February this year, the rate had shot up to a hundred sixty-six percent, confirming that Zimbabwe was already in a hyper-inflation environment.
An economist, Steve Hankie, posted on twitter that the actual inflation rate was more than 200%. He said this is the second highest annual inflation rate in the world.
Another economist, Kipson Gundani, says the current inflation figures were emanating from confidence deficit bedeviling the economy.
This new inflation rate may not be a shock to Zimbabwean. In 2008, the country’s inflation reached 500 billion percent, rendering the local currency worthless and eroding savings and pensions.
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