Thanks to better-than-expected news on the trade deficit, the Dow Jones industrial average jumped around 50 points in early trading Wednesday. That made up for most of yesterday's losses. But the rally may not last once investors realize why the trade deficit narrowed.
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According to the Commerce Department, the United States imported $65.7 billion more in goods and services than it exported in February. This means the trade deficit fell nearly $3 billion in February versus the prior month. This was the first hopeful sign for U.S. trade in several months.
Ashraf Laidi, chief currency analyst for MG Financial Group, had predicted that a deficit reading of less than $66 billion "could trigger a positive knee-jerk reaction in the dollar." And that is exactly what took place, as the dollar gained strength against both the euro and the Japanese yen early Wednesday.
The strengthening dollar sparked a rally in the domestic equity markets, as foreign investors must park their new greenbacks somewhere. And conventional wisdom says U.S. stocks are currently a better bet than treasury bonds. As a result, all three major U.S. stock indexes—the Dow, the Nasdaq composite index, and the Standard & Poor's 500—were up this morning.
But it's important to understand just why the trade gap narrowed. According to the Commerce Department, U.S. exports aren't on the rise. It's just the opposite: Exports in February declined by 1.2 percent. The only reason the overall trade deficit shrank was that U.S. imports fell at a much faster rate—by 2.3 percent.
And a big reason that U.S. imports fell so dramatically in February was that oil prices slumped 11 percent that month. This, in turn, meant that the dollar value of all the oil the U.S. imported in February decreased.
Of course, in recent weeks, oil prices have turned right around, and crude oil futures contracts are near the $70-a-barrel level again. And conceivably, oil prices could shoot as high as $80 a barrel in the second quarter if the global oil markets continue to be spooked by the geopolitical uncertainties of Iran's nuclear plans, Laidi says.
If that's the case, the dollar value of U.S. oil imports will probably rise—and so, too, will the trade deficit.
