Economic, Market Impact Of Hurricane Katrina

Tuesday, September 06, 2005 | 02:58 PM

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.

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

Tuesday, September 06, 2005 | 02:58 PM | Permalink | Comments (3) | TrackBack (2) add to | digg digg this! | technorati add to technorati | email email this post



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"Economic loss" may have a precise definition, but I don't know what it is. Is it really just a way of covering up the conflation of losses in property and output? At times like this, it is pretty important to distinguish between the two. I have heard estimates that property losses alone will reach $100 bln.

We also need to know whether we are looking at net or gross figures. Are "economic losses" in Q3 or in 2005 lost forever?

Not that our gentle host is to blame for the language that others use to talk about Katrina.

Posted by: kharris | Sep 6, 2005 3:39:53 PM

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