Economic, Market Impact Of Hurricane Katrina

Good round up from Dow Jones:

Over a week after making
landfall, the broad economic fallout from Hurricane Katrina continues to
unfold. Economists are downgrading their third quarter growth forecasts for
the U.S. economy and not all think that rebuilding in the wake of the storm
will bring things back in the fourth quarter. Markets have stabilized
however, taking their cue from the price of oil and other refined energy
products, which have been hit by a major international effort to release
emergency energy reserves in an attempt to alleviate a supply crunch.
Estimates of the economic loss from the hurricane exceed $100 billion, with
the Senate’s top Democrat putting it closer to $150 billion.

Here
are some of the main market and economic impacts:

  –REFINERS: U.S.
refiners, which had some 12% of their capacity shut by Katrina, have
reported some progress, with one storm-shuttered facility back to normal
operations and another restarting. Flows of crude oil supplies improved
enough to allow 10 refineries in the Gulf Coast and Midwest to ramp back up
toward full capacity. Of the roughly 1.8 million barrels a day of refining
capacity shuttered by Katrina, about 470,000 barrels a day has returned to
service, 500,000 barrels a day is expected to be restored by mid-week, while
most of the remaining 880,000 barrels a day of capacity is likely to remain
off line for months. Of the eight refineries that were shut down by the
hurricane, two are back up, two more expect to be back up this week while
the other four could be down for some time.

 

-ENERGY: Crude oil prices
are under pressure, trading below $66 a barrel while gasoline futures are
down about 7 cents a gallon, as refiners moved to restart plants shuttered
by the hurricane and Gulf of Mexico oil and gas production recovered a bit.
On top of the international efforts to release

supply of oil and other
products, Saudi Arabia has decided to cut the price of its oil to blunt the
hurricane’s pain. Analysts are skeptical that this will be enough to stem
gasoline shortages. Crude futures on the New York Mercantile Exchange are
down $1.77 at $65.80 a barrel.

  -BONDS: While there are more questions
than answers about the long-term economic damage from Katrina, some in the
bond market still believe the Federal Reserve will be forced to take a break
this month from its rate hike campaign. These are very fluid expectations
and will ebb and flow as the
infrastructure damage becomes clearer. Federal
funds futures contracts are pricing in 35% odds of a pause, down from 50%
odds at the height of the speculation last week. Eurodollar futures price in
about a 56% chance of the Fed delivering another rate hike on Sept. 20. The
idea of a pause is finding currency with a some Fed watchers at Wall Street
banks too. Jim O’ Sullivan, senior economist at UBS, is in that camp and
sees the Fed going on hold temporarily to gauge the extraordinary impact of
the hurricane before resuming monetary tightening in November. Treasurys are
weaker as investors book profits on last week’s massive surge in
shorter-dated issues.

  -CURRENCIES: High oil prices and Hurricane
Katrina have made the dollar bulls at Morgan Stanley a bit less bullish.
Though the bank still maintains one of the more positive outlooks for the
dollar on Wall Street, it has pared back its projections for the dollar
versus the euro as well as the Canadian,
Australian and New Zealand dollars.
Last week, UBS downgraded its dollar forecasts too. Much of the outlook for
the dollar will depend on how the bond market fares and whether the Fed does
indeed choose to press the pause button on its rate hike campaign.

  -WATCHING THE PUMP: AAA said Monday the nationwide average price of
regular unleaded gasoline reached $3.06 a gallon, up more than 30% from
$2.31 a month earlier and matching gasoline’s March 1981 record in
inflation-adjusted terms. Analysts warn prices could push still higher
before emergency imports from overseas reach U.S. markets.

 
-BANKS: U.S. Treasury Secretary John Snow will meet with Federal Reserve
Governor Susan Bies and other bank regulators at 4:15 p.m. EDT for an update
on the agencies’ efforts regarding Hurricane Katrina. The meeting will
include officials from the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corp., Office of Thrift Supervision and the
National Credit Union Administration. Officials.

  -EYE ON CHINA:
The hurricane poses challenges for global officials too and the rise in oil
prices promises to complicate domestic policy in China, says Donald
Straszheim, economist at Straszheim Global Advisors. "Oil at $70 per barrel
is making China’s crazy quilt of controls increasingly untenable," he noted.
As the government holds gasoline prices down, "China’s big oil refiners
Sinopec and PetroChina are losing money on refining operations. In response,
they’ve been cutting refinery output and are exporting finished products."

  -MUNICIPAL BONDS: The chief investment officer of a New Jersey-based
boutique investment firm advises avoiding any risk whatsoever in tax-exempt
bonds affected by Hurricane Katrina. The Big Four bond insurers, which back
about $1.6 trillion par value of municipal debt, have about $13 billion of
total Katrina exposure, and likely will have to pay an unknown amount of
claims, said David R. Kotok of Cumberland Advisors. "Just imagine how the
market will be roiled if even one bond insurer is put under negative credit
watch. A trillion in municipal debt would trade under a cloud."

   
-AIRLINES: Surging fuel prices have piled on top of the already hefty
challenges for airlines. Standard & Poor’s slashed the credit rating of
Northwest Airlines to triple-C-minus from triple-C-plus, close to the floor
of the rating scale. That move followed a Securities and Exchange Commission

filing from Northwest late on Thursday, in which it said fuel prices this
year will total about $3.3 billion – a third higher than last year and more
than double the cost in 2003.

  -ZINC: Prices on the London Metals
Exchange fell sharply as the exchange confirmed warehouse stocks in New
Orleans were unaffected by flooding. Zinc prices in the past week soared to
an eight-year high on worries that LME warehouses could be flooded and
possibly lead to corrosion. However, all the metal is dry and accounted for,
exchange officials said. Those warehouses hold
44% of total LME zinc stocks.
On Tuesday, LME zinc fell to $1,400/ton, down $52.50 or 3.7%.

 
-GRAINS: Grain and oilseed futures at the Chicago Board of Trade are firmer,
underpinned by hopes that some exporting can begin now that the U.S. Coast
Guard has opened the Mississippi river to limited vessel transit. Prices
fell last week on worries that newly harvested grain couldn’t be easily
exported and supplies would back up. The Port of New Orleans handles about
70% of all U.S. grain shipments.

  -COMMODITIES: The coffee
industry is trying to dig itself out of the hole imposed by the damage to
New Orleans, which houses 27% of U.S. coffee stocks. Some 1.6 million bags
of beans, owned by large and small companies, are held in the storm-ravaged
city now and inaccessible. Cincinnati-based Procter & Gamble, which
roasts 50% of its coffee in New Orleans, is said to control a sizable
portion of those stocks. World raw sugar futures rallied to new contract
highs amid the broad commodity surge on the heels of the hurricane. The CRB
Futures Index is again hovering near 25-year high, with strength in sugar
and other commodities.

Source:
Economic, Market Impact Of Hurricane Katrina
Grainne McCarthy
(with
Susan Buchanan, Masood Farivar, Simona Covel, Agnes T.
Crane, Stan Rosenberg and Debbie Carlson)
Dow
Jones Newswires, September 6, 2005
http://www.DowJones.com