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April Consumer Prices, Housing Starts and Industrial Production

KEY DATA: CPI: +0.4%; Less Food and Energy: +0.2%/ Starts: +6.6%; Permits: +3.6%/ IP: +0.7%; Manufacturing: +0.3%

IN A NUTSHELL: “With inflation accelerating slowly, housing rebounding slowly and manufacturing activity improving slowly, it is clear the economy is picking up steam slowly.”

WHAT IT MEANS: The Fed’s dual mandate means it has to target maximum employment at stable prices i.e., an unemployment rate in the 4.75% to 5% range and inflation at about 2%. We have pretty much been at the full employment target for several months and now inflation is making its way to the 2% rate. Consumer prices rose sharply in April led by a jump in energy costs. With oil prices steadily increasing, we should be in for some additional solid gains for a while. The rise in inflation was not just gasoline. Prices for food, medical care, shelter and transportation services rose as well. There were also a number of categories, though, where costs did decline, such as clothing, vehicles and, most importantly, cupcakes. In other words, there is an upward trend in inflation, but it is not across all categories.

On the housing front, conditions did improve nicely in April. Housing starts surged and permit requests rose solidly. But the level of construction is still well below the recent peak recorded in June 2015. Strangely, the problem has been in multi-family activity. With the rental market so strong, it was expected this segment would lead the way – and it did in April. But for the first four months of the year, multi-family starts were below the same period last year. And that was true for permit requests, so this segment seems to have stalled a bit. Looking forward, starts exceeded permits for the past three months, so don’t expect any major acceleration in building.

Manufacturing production rebounded in April as well, but the story is the same here. We get one negative month, one flat month and one positive month, and the cycle repeats. This sector is not showing a major upturn, though it does look like the declines could be over. The summer driving season is projected to be really strong and that could lead to additional output of gasoline. As for energy production, prices probably need to rise a little more before wells start coming back on line, but maybe the shut downs will cease.

 MARKETS AND FED POLICY IMPLICATIONS: Inflation is accelerating, but not at a rapid rate. Over the year, headline consumer costs were up 1.1%, which is still below target. However, one year ago, prices were falling. Excluding energy, though, prices were up 2%. At current levels, energy turns positive in September and the yearly rise accelerates for six months. In other words, by the fall, even the headline number should be above the Fed’s target. Excluding food and energy, the more common comparison, prices were up 2.1% over the year, marking the six consecutive months that core consumer inflation was at or above the Fed’s 2% goal. In other words, the Fed’s dual mandate is within its grasp. But Fed Chair Yellen is likely to hang on to the mediocre growth in housing and manufacturing to argue that a rate hike is not yet needed. And given that real earnings actually declined in April, as prices rose faster than wages, she can also say that wage pressures are not yet critical. So, these reports may hint that the Fed will have to do something in a few months, but the data don’t require that a rate hike occur in June.

April Retail Sales and Producer Prices

KEY DATA: Sales: +1.3%; Excluding Vehicles: +0.8%; Core: +0.9%/ PPI: +0.2%; Less Food and Energy: +0.3%

IN A NUTSHELL: “Reports of the consumers’ demise appear to be premature.”

WHAT IT MEANS: It’s been an ugly year for a lot of retailers and that showed up in the first quarter earnings numbers. But some hope may have appeared in today’s retail sales report. Households went out and hit the stores pretty heavily in April, even when you take out the rebound in motor vehicle sales. Almost every major category was up sharply. The only group that experienced a sales decline was building materials. However, those stores had been booming during the first quarter of the year and the year over year rise is still the highest of any of the categories except Internet sales. General merchandise demand was flat and restaurants saw a more modest increase, though that was good news given the declines they had suffered. So-called “core” retail sales, which exclude vehicles, gasoline, building supplies and food services were up sharply. The core closely follows the consumption number in the GDP, so they are looked at as an indicator of consumer demand.  

On the inflation front, wholesale prices rose moderately as goods costs led the way. It’s funny how rising energy prices changes the picture of inflation, isn’t it? Not really. By the fall, we could be seeing year-over-year energy price gains rather than declines and while we are talking producer prices here, those quickly make their way into consumer prices. That is also true on the food side and the drop in wholesale food costs is good news for consumers. An interesting change is the deceleration in services inflation. Prices did rise, but modestly. Service inflation, which is nearly two-thirds of producer costs, has been decelerating this year. When you look at the details, and this report has about fifty different special indices, there are no categories where inflation is high.

MARKETS AND FED POLICY IMPLICATIONS: Has the consumer decided that it is time to spend again, or are was the April uptick just a bump in the mediocre growth trend? I think it is real. Incomes are growing solidly and household balance sheets are in good shape. The job market is tight and people are quitting their jobs again, a sign of confidence. Consumer confidence seems to be soft, though, and it is unclear exactly why that is the case. My guess is that this is just one of those times where the data are strange and as we go through the rest of the spring and summer, we will see households actually spending their funds. That is, April is likely the start of something good. For the Fed, though, it’s not the start but the follow through that matters. One month is not enough for anyone to say happy days are here again for retailers. However, producer inflation is no longer declining and while it is hardly a worry, the trend is up. All-in-all, today’s reports tell the Fed that conditions are not nearly as soft as the GDP data seemed to indicate and while they have time when it comes to inflation, they may not have as much time as they thought as well.  

April Jobs Report

KEY DATA: Payrolls: +160,000; Private: 171,000; Unemployment Rate: 5% (unchanged); Wages: +0.3%

IN A NUTSHELL: “Job growth is not too hot, not too cold but not just right.”

WHAT IT MEANS: The economy has grown by just over a 1% annualized growth rate during the past six months, but job gains during that time frame were strong – probably stronger than would be expected given the economy. What has worried economists is that firms would not be able to sustain all that hiring, so the April increase in payrolls was a disappointment. But is it a warning sign? Maybe not. The last time job gains were this modest was last July, but that report was followed by six months of solid increases. One number doesn’t mean much. Second, it’s always about the details and those were mixed, not soft. On the positive side, manufacturing stopped its steep slide and actually added a few jobs. Health care was solid as was leisure and hospitality, while there were plenty of professional services positions were added. On the negative side was the government. Not surprisingly, the postal service continues to shrink and strangely, there were layoffs in local education. Why April? Got me. The energy sector is still in free-fall while retailers cut, rather than added employees. The retail decline happens periodically, but it is something to watch.

But the really good news for workers, and the issue for the Fed, was that wages rose sharply and the gains are accelerating. In addition, hours worked were up and that implies that income growth in April was strong. One of the reasons wage gains are picking up is that the unemployment rate is near full employment. Yes, it remained at 5%, and yes, the labor force shrunk, but it is up 1.2% over the year. That is well above a demographically supportable, sustainable rise. What appears to be happening is that people are indeed coming back into the workforce, as would be expected when the labor market tightens. A one-month decline in the labor force or the participation rate means nothing as both are rising over the year.

MARKETS AND FED POLICY IMPLICATIONS: This was one of those reports where the headline number and the details were largely in synch. There were good parts and weak parts but it was mezza mezza overall. The level of job gains, while mediocre, is still large enough to stabilize if not keep the unemployment rate slowly falling. There are clear signs the tight labor market is causing firms to finally pay up for workers, and that really is the story here. Workers are starting to quit again and businesses continue to complain about their inability to find suitable workers. That raises the question whether the soft job gains in April was the result of a lack of demand or a lack of supply. If you cannot the workers you need, you cannot hire more workers. That translates into higher wages in order to retain workers. Chair Yellen has made the argument that soft wage gains is an indicator of a labor market that has yet to reach full employment. This report doesn’t force her to say that full employment is here, but it brings us much closer to that point. Even if the May report duplicates the April wage increase, I don’t think a rate hike at the June 14-15 meeting is likely at all. But unlike others, I believe the July 26-27 one is a possibility. If both the May and June reports contain strong wage gains, Chair Yellen will have problems supporting her stand. Also, as I have argued before, she wants to show that all meetings, not just ones with press conferences, are options for rate hikes. The July meeting would be a suitable one to prove her point. As for the markets, a report that is less than expected on job growth but more than expected on wage growth is a real conundrum. Maybe the less than stellar earnings numbers will remind traders that if demand is not good, earnings will not grow strongly. Instead, they should hope for a good economy, even if it means rising rates, rather than a weaker one that implies no rate hikes.

Layoffs, Jobless Claims, April Jobs, Productivity and Help Wanted Online

KEY DATA: Layoffs: 65,141/ Claims: up 17,000/ ADP Jobs: 156,000; Productivity: -1%; Labor Costs +4.1%/ Help Wanted: +39,000

IN A NUTSHELL: “The labor market is tight, but the tightening process may be slowing.”

WHAT IT MEANS: If Janet Yellen is laser-focused on the labor market, the data released over the past two days don’t indicate that conditions are firming sharply. Of course, tomorrow we get the jobs report, so everything could change. But until then, let’s review the recent data, starting with today’s the jobless claims report. While there was a pop in the number of people filing for unemployment insurance last week, that is not unusual. These data bounce around a lot. The four-week average is still at a level that says firms are doing everything they can to keep workers. That said, Challenger, Gray and Christmas reported an April surge in layoffs, led by the ever-shrinking energy sector. The total for the first four months was the highest since the 2009. Before you panic, the 2009 total was nearly three times this year’s number. Also, we have no idea where or when or even if they will occur. Still, firms seem to be announcing cut backs at a surprisingly high pace given the unemployment claims numbers and yesterday’s report by the Conference Board that online want ads rebounded.

Yesterday, there were a number of labor market reports. ADP’s monthly reading of April job gains came in below expectations as mid-sized businesses added workers at a lower than typical pace. However, the level was the same as the July 2015 number and job growth was very solid during the second half of last year. We may get a lower than expected number tomorrow.

But for me, the biggest eye-opener was the productivity and costs report. I have argued that the monthly hourly wage number is worthless, even if the markets want to make believe it contains useful information. I prefer to look at the more complete compensation data that is contained in the productivity and Employment Cost Index reports. Productivity continues to falter as firms are hiring but output is largely going nowhere. With compensation gains holding fairly steady, labor costs surged.  

MARKETS AND FED POLICY IMPLICATIONS: The labor market is tight but it doesn’t seem to be in the grips of a major shortage situation just yet. Firms are doing everything they can to keep their workers. Challenger, Gray and Christmas indicated companies are resorting to stay, not exit interviews. Instead, they might try raising pay, but of course that still is a non-starter for most firms. And that is the point. No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases. For me, that is the biggest reason productivity is so weak. Let me say this again, wage increases drive productivity not just productivity drives wage increases. This is a simultaneous process that firms seem to think is a one-way relationship – productivity first, wage gains, maybe, second. Until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder. That is human nature and failing to understand that will keep productivity and earnings down. But the Fed will worry about compensation growing slowly and say the labor market is not tight. And the Fed will see productivity is weak and say the economy is at risk. What the members will miss is the interaction of the two and by doing so, miss what are some of the real problems in the economy.

April 26, 27 2016 FOMC Meeting

In a Nutshell: “Moderating economic growth and consumer spending keep the Fed on hold.”

Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%

The FOMC members came, they talked, and they didn’t do much other than signal that they will continue to do not much for a while.

Going into the latest Fed gathering, there was some uncertainty over what the Committee would signal. Was Chair Yellen’s dovish tone going to hold sway or would the members try to signal that a rate hike could be on the table in June? Well, those who were worried that interest rates could go up, shouldn’t have been concerned.

Right off the bat the statement noted that “growth in economic activity appears to have slowed” and “growth in household spending has moderated”. Yes, there were some comments about income gains holding up and consumer sentiment being high, but weakening growth and softening household demand are not generally considered circumstances where you would expect to see rate hikes.

There was also no statement that the risks to the forecast were equally balanced. I guess they just didn’t want to say that what the risks were, and that failure to discuss where the economy might likely go is another indication that the members are uncertain where the economy might go. And uncertainty about how strong the economy might be going forward doesn’t breed rate hikes.

Today’s statement was probably a little more dovish than most people expected. Chair Yellen has been yelling that she was willing to wait longer than others before raising rates and if anyone doubted it, it is now clear that she has the biggest voice in the room. There was only one dissent and that too was a bit of a surprise. She is doing a good job in herding the cats on the Committee.

Okay, what does this all mean? We still have two more jobs reports and a slew of other labor market, inflation and economic data coming out before the next meeting on June 16-17. But those reports, as well as data from Europe and Asia, will have to be really strong for the Fed to consider raising rates at that meeting. The opportunity after June would be July 26, 27. I actually believe that is a possibility despite the fact there is no press conference afterward. Chair Yellen has made it clear that all meetings are live meetings, whether or not there is a press conference scheduled. I suspect she will take the first chance to prove that point. July could be it, but we need a whole stream of solid economic and inflation numbers to make that happen.

(The next FOMC meeting is June 14-15, 2016.)

March Durable Goods Orders, April Consumer Confidence and Nonmanufacturing Activity and February Housing Prices

KEY DATA: Orders: +0.8%; Capital Spending: 0%/ Consumer Confidence: -1.9 points/ NonManufacturing Activity: -0.4 points/ Housing Prices: +0.4%

IN A NUTSHELL: “March went out like a lamb and April was baaad as well.”

WHAT IT MEANS: If the Fed was hoping for a spring rebound, it will have to wait a little longer. The recent data have hardly been great and today’s numbers continued that trend. Durable goods order rose solidly in March, but were up less than expected. Part of that may have been due to the oddity that Boeing reported a sharp increase in orders but the government had civilian aircraft demand falling. Don’t ask me why, I just don’t know. The rest of the report was mixed. Orders for machinery and communications equipment were up while demand for computers, electrical equipment and motor vehicles declined. Private sector non-aircraft capital goods orders were flat, which was disappointing given they had cratered in February and a bounce back had been expected. Order books are not filling, so don’t expect any great surge in production anytime soon.

The Philadelphia Fed reported that activity in the non-manufacturing portion of its regional economy expanded slightly slower in late March and early April.   Yet this was not a bad report. Hiring, the workweek and wages and benefits all were up solidly, indicating that activity is solid. It is also pointing to a growing labor shortage in the Mid-Atlantic area. In addition, expectations, especially about business activity, were up solidly, pointing to growing confidence that the region’s economy should do well in the months to come.

The Conference Board reported that consumers were a touch less optimistic in April. It was interesting to see that the current conditions index rose nicely, but expectations dropped even more. Maybe everyone is just depressed about the primaries. I don’t know.

Finally, home prices continued to rise, as the S&P/Case Shiller national home price index moved up solidly in February. Gains were across the nation, with Portland and Seattle posting double-digit increases over the year. Still, the rise is slowing, which is good news for potential buyers.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC begins its two-day meeting today and none of the numbers released today should change anyone’s thinking about the condition of the economy or whether rates should be increased. The really interesting reports come out later this week. It is very likely that Thursday’s GDP report will show that there was tepid economic growth in the first quarter. However, on Friday, the Employment Cost Index release could indicate there was a sharp acceleration in wages and salaries. We saw a hint of that in the Philadelphia Fed’s survey. Chair Yellen is watching labor costs as a key indicator of labor market tightness and the Employment Cost Index is one of the better measures of those pressures. Labor costs had cooled, surprisingly, during the second half of 2015, but I think that was not the case early this year. If that forecast is accurate, eyes will turn to next week’s jobs report and wages. While I think the hourly wage number is largely meaningless, it is viewed by the markets as containing some information. That too could be show accelerating wage pressures. But until we see that labor costs are indeed on the rise, Chair Yellen will be able to say that there is still a lot of room for the Fed to stand pat – which is what I expect tomorrow’s statement to indicate.

March Leading Indicators, April Philadelphia Fed Manufacturing Index and Weekly Jobless Claims

KEY DATA: Leading Indicators: +0.2%/ Phila. Fed: -14 points: Expectations: +13.4 points/ Claims: down 6,000

IN A NUTSHELL: “The economy is continuing to expand slowly and the labor market is tightening, but the manufacturing sector remains weak.”

WHAT IT MEANS: Next week the Fed meets and will evaluate what is going on. So, what is going on? Not much. The Conference Board’s Index of Leading Indicators rose in March after having declined the previous two months. On net, this report points to a continued expansion in the months to come, but hardly a break out into strong growth.

On the manufacturing front, the Philadelphia Federal Reserve’s survey of manufacturers took a steep dive in April. Just about every component was down sharply from its March level. Normally, that would be a warning sign that something not so great was going on in the manufacturing sector. However, that might not be the case. While current conditions cratered, optimism improved sharply. Respondents were more optimistic about future demand and as a consequence, expect to hire more people and work them longer. This improving outlook for the future seems to indicate that the current slowdown may not last long.

On the labor front, we have a totally different picture. Unemployment claims dropped to their lowest level in nearly 43 years. Adjusting for the size of the labor force, it was the lowest level ever. Firms are holding on to their workers as tightly as they ever have, a clear sign of growing labor shortages.

 MARKETS AND FED POLICY IMPLICATIONS: Yes, the economy is expanding. Yes, manufacturing seems to be lagging. But can we really say that economic activity is faltering if the labor market is still tightening? Probably not. I say probably because unemployment tends to be a lagging indicator, though more recently the length of the lag has likely shortened. The economy starts to turn before firms figure it out, both on the upside and the downside. Regardless, next week’s FOMC meeting will not be interesting as far as its outcome: There will not be any change in rates. But the statement will matter. Since there is no press conference or dot chart or forecast estimates, the parsing of the words in the statement will be all we have to go on. I don’t expect any major change from the previous statement, since the economy has not rebounded sharply enough to cause anyone to say growth is accelerating. Thus, the members could save some money by phoning it in. Okay, I am kidding. There will be some dissent as some members are still leaning toward moving sooner rather than later, but we will not know about their views until the minutes come out a three weeks later. As for the markets, today’s reports, other than the surprisingly low claims number, should not have a major impact on investor thinking. We are still in earnings season and oil and Europe and just about everything other than fundamental economic data should drive decisions.

March Existing Home Sales

KEY DATA: Sales: +5.1%; 1-Familly: +5.5%; Condo: +1.8%; Prices (Year-over-Year): +5.7%

IN A NUTSHELL: “Home sales rebounded in March, but the lack of inventory is likely to keep gains down for some time to come.”

WHAT IT MEANS: Housing is dominating the data this week and the mixed results don’t point to a vibrant market. Yesterday, we saw that housing starts were soft, which came on top of a stagnant homebuilders’ confidence. Today’s existing home sales numbers were better than expected, but really not that great. Sales rose in March quite solidly, rebounding from a down February. Single-family activity was somewhat stronger than the condo market. The increases were across the nation, with every region reported a rise in closings. Still, we are below the sales pace posted in December and January and the rise from March 2015 was a modest 1.5%. Condo sales were actually down from last March, though it is not clear why. The big problem remains the supply of homes on the market. There are only about a 4.5 months supply at the current sales pace. That is way too low. With supply low, it is not surprising that price gains remain quite strong.

MARKETS AND FED POLICY IMPLICATIONS: The housing market is doing okay, and I mean just okay. There is some hope that sales may accelerate. Demand for high-priced units was soft in March. That may reflect the uncertainty created by the stock market volatility we saw in January and early February. Since these data reflect closings, it may be a few more months before upscale demand rebounds. With the equity markets coming back nicely, an upturn in the upper end of the market is likely. Until then, we can only forecast a better market and that is something many Fed members are unwilling to bet on. As for the markets, stronger than expected economic data are usually not viewed positively by traders, and this report was a little higher than projected. But it was mixed, so I don’t expect any major reaction to these numbers, especially give it is earnings season.

March Retail Sales and Producer Prices

KEY DATA: Sales: -0.3%; Excluding Vehicles: +0.2%/ Producer Price: -0.1%; Goods: +0.2%; Services: -0.2%

IN A NUTSHELL: “The consumer seems to have decided that visits to the mall are passé.”

WHAT IT MEANS: Consumers have been the broad shoulders of the economy, but carrying the load seems to tiring them out. Retail sales faded in March, which was not a major surprise given that vehicle demand was off fairly sharply. Indeed, excluding vehicles, which were due for a slump after having been strong for so long, demand for retail products rose. Unfortunately, the gain was not very strong. The details of the report were mixed. Clothing was down but building supplies were up. Restaurant demand fell, a real eye opener since this was a leading sector, but furniture and appliances inched upward. We didn’t do a lot of online shopping but we did visit general merchandise stores. Gasoline sales jumped, but there was also a rise in gasoline prices. Basically, we bought some goods here and there but not a lot of things in general.

On the inflation front, business costs remain under control as the Producer Price Index fell in March. This was a strange report as goods prices actually rose while services costs declined. That was a reversal of past reports. The decline in services costs was pretty widespread. It is unclear why there was a sudden downdraft in services prices, so we should not take this report as an indicator that we could see weak pricing in the largest component of the economy. On the goods side, food costs decline but energy prices were up. Excluding food and energy, wholesale prices rose modestly, a sign that any further acceleration in inflation should be limited.

 MARKETS AND FED POLICY IMPLICATIONS: The first quarter of this year looks like it was a total downer. We knew business investment was going to be soft because of the continuing problems in the oil complex and that exports were likely to be modest due to the strong dollar. But there was some hope that the consumer would make up for those other sectors. Those prayers seem to have been dashed. GDP growth could come in around 1% or even less, depending on inventories. That would make it two consecutive quarters below 2%, which in itself is nothing great. So, why has the consumer left the field of battle? It isn’t because households don’t have the money to spend, they do. It’s not as if confidence is faltering, it is not. So, is this the pause that refreshes or the pause that depresses? My view is that the long, slow recovery has caused people to fundamentally change their buying habits. Is the trip to the mall really something that is high on the priority list? I am not so sure. Parents don’t have to drop their kids off at the mall to get rid of them for a few hours anymore. They just have to pay for data. And the recession taught us that the things we once thought we needed, we really didn’t need.   Consumers will continue to consume, but the rate of consumption may have shifted downward, at least for a while.

March Non-Manufacturing Activity and February Trade Deficit and Job Openings

KEY DATA: ISM (NonMan.): +1.1 points; Orders: +1.2 points /Trade Deficit: $1.2 billion wider/ Openings: -159,000; Hirings: +297,000

IN A NUTSHELL: “Politicians and market experts keep saying the economy is trouble, but the data keep telling us that is just not the case.”

WHAT IT MEANS: All portions of the economy look like they are coming back. Last Friday, the Institute for Supply Management reported that manufacturing grew solidly in March as orders surged. Today they reported that the non-manufacturing portion of the economy improved as well, also because of rising demand. Exports were solid, a story repeated in the trade data. In addition, hiring picked up, which we saw in the March employment report. Backlogs are building, though not rapidly. With orders and business activity up and order books filling, it is likely we should see solid job gains in the months to come.

As for the nation’s trade situation, there was good news and bad news in the February report. First, the deficit widened, which means more money is flowing out of the country to buy foreign products. But while imports were up, so were exports. Foreign purchases of our products are coming back. The manufacturing sector had been battered by low energy prices and the rising dollar, but at least those companies that sell their products overseas may be coming out of the dark tunnel. We sold more computer products, telecommunications equipment, engines, motor vehicles and consumer products. However, we bought lots of consumer products and capital goods. That points to improving household and business activity.

As for the labor market, there was mixed news in the February Job Openings and Labor Turnover Survey (JOLTS). This is a favorite of Chair Yellen and who knows how she will react to it as openings fell but hirings jumped. The new hires were the highest since November 2006, which is impressive. It just might be the firms have finally figured out how to fill all those open recs, which may explain the decline in openings. There was also a rebound in quits. There had been a sharp drop in January, which was strange. As it turns out, it looks like the decline was just a blip in the trend toward more people leaving their jobs to find other positions. That only happens in a solid labor market.

 MARKETS AND FED POLICY IMPLICATIONS: For the most part, today’s reports point to a domestic economy that is in good shape. First quarter growth looks like it may be a little less solid than hoped for, but the underlying data indicate all is still well. That means the battle for the hearts and minds of Fed members will continue. The Chair will continue doing all she can to rein in those who want to make moves sooner and more often than she does, while the opposition uses the latest data as ammunition to return fire. I don’t expect either side of the hike/don’t hike debate to back down until the inflation data demand that one side capitulate. With states passing increased minimum wage laws and companies raising their wages to match competitors’ moves, I just don’t understand how the compensation data have stayed so tame for so long. But I have argued that wages are set to jump for over a year now, so maybe I never will get it. Anyway, investors should see these reports as supporting the hawks at the Fed. But the markets haven’t delinked from oil, so who knows where they will go given the wishy-washy nature of the petroleum markets.