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Bad news continues to emanate from Europe, where inflation is running even hotter than the U.S., since the euro has declined 8% against the U.S. dollar so far this year and commodities are priced in U.S. dollars, making most commodity prices that much higher in Europe. Last Wednesday, European Central Bank (ECB) President Christine Lagarde said, “The era of ultra-low inflation that preceded the pandemic is unlikely to return.” While the Fed is at least raising key interest rates to get more in-line with market rates, the ECB is putting off its first rate increase in a decade (from -0.5% to -0.25%) to July, and then to 0.25% by September. Like the Bank of Japan, the ECB continues to severely lag the Fed in hiking rates, so the euro will remain weak and likely reach parity with the U.S. dollar in the upcoming months.
The G7 meeting in beautiful Bavaria last week was basically a struggle over bad energy choices. With at least three major European countries (Austria, Germany, and the Netherlands) now burning more coal due to high natural gas prices, it’s clear that the green agenda in Europe is largely dead. Also, there is a major natural gas field under the Netherlands where production could be increased, but fears of earthquakes are prohibiting boosting natural gas production there. The only “progress” the G7 seemed to make was in banning Russian gold imports while working on a mechanism to cap the price of Russian crude oil. Essentially, the G7 is trying to create a “buyer’s cartel” to set a cap on the price of Russian crude oil.
If you will pardon me, I don’t believe Vladimir Putin couldn’t care less about what European leaders decree in Bavaria, since Russia has cut off gas imports to Germany and other countries it deems hostile to their interests, since Russia is all too happy to export its crude oil to China and India for resale to others. As such, India has been expanding its refinery capacity, so India will be poised to export refined products – like gasoline, diesel, fuel oil, and jet fuel – and in effect, help Russia circumvent any price restrictions on their crude oil. Furthermore, Vladimir Putin has said that he will be attending the upcoming G-20 summit in Bali, Indonesia on November 15-16. Indonesian President Joko Wodido also invited Ukraine’s President Volodymyr Zelensky to attend that summit, which could make the G-20 summit a bit strained.
In another European summit, U.S. Fed Chairman Jerome Powell was in Portugal last week with the G7 central bankers, including the Bank of England and the ECB. At a press conference on Wednesday, all the central bank talking heads cited the war in Ukraine as the primary inflation catalyst, but they also admitted that some of the pandemic stimulus may have also sparked inflation. Either way, if the war in Ukraine can cease before winter, I would expect a massive relief rally for both stock and bond markets.
After U.S. 10-year Treasury rates hit a high of 3.48% on June 14, there was a significant Treasury bond rally last week as the 10-year Treasury bond yield fell below 2.9% on Friday. If market rates continue to decline, it will take pressure off the Fed to raise rates much more. However, a 0.75% rate hike at the July 27 Federal Open Market Committee (FOMC) meeting is still likely, since the Fed funds rate remains so low.
Inflation may have peaked in the U.S. The Commerce Department on Thursday announced that the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.6% in May and 6.3% in the past 12 months. Excluding food and energy, the core PCE rose only 0.3% in May and 4.7% in the past 12 months. The Commerce Department also reported that consumer spending rose 0.2% in May, down from 0.6% in April. Interestingly, the personal savings rate rose 5.4% in May, up from 5.2% in April, so consumer balance sheets are being shored up, which means that loan default rates may stay low.
Another catalyst that could spark a market rally would be a ceasefire in Ukraine and an eventual peace agreement between Ukraine and Russia, even though Russia may not honor any agreement. Any ceasefire or peace agreement is possible in the upcoming months, since both sides are losing troops and becoming exhausted. Unfortunately, Russia continues to launch missiles into Ukraine, killing innocent civilians, like in the Kremenchuk shopping mall fire and the Odessa residential building that were hit last week.
U.S. Economic News Seems to Say We Can Avoid a Recession
In U.S. economic news, the Commerce Department announced that durable goods orders rose 0.7% in May, which was substantially higher than the economists’ consensus estimate of 0.2%. Business investment rose 0.5% in May and 9.8% in the past 12 months, which is encouraging. Even more encouraging is that new orders rose 0.7% in May, so the manufacturing sector is clearly skirting any recession. Durable goods have risen in seven of the past eight months, which is positive for GDP growth.
The S&P CoreLogic Case-Shiller National Home Price index was released on Tuesday and showed that home prices rose 20.4% in the past 12 months through April, down slightly from a 20.6% annual pace in March. Tampa was the fastest market for home appreciation, with a 35.8% annual appreciation rate, followed by Miami at 33.3%. Pending home sales rose 0.7% (May over April), the first increase in the past six months, so the housing market is apparently in the midst of a relatively “soft landing.”
The Conference Board on Tuesday announced that its consumer confidence survey declined to 98.7 in June, down from 103.2 in May, but the good news is that the “present situation” component (how people feel now) barely budged to 147.1 in June, down from 147.4 in May – both numbers super-high. The bad news was that their “expectations” (for the future) fell sharply to 66.4 in June, down from 73.7 in May. Since the Conference Board’s present situation component remains high, I suspect that retail sales may remain strong, since consumers tend to spend based on the money in their pockets now, not future fears.
Regarding the probability of a soft landing, the Atlanta Fed on Friday slashed its annual second-quarter GDP estimate to -2.1%, down from its Thursday estimate of -1.0%. The estimate of private economists is much more optimistic and ranges from an annual pace of 1.5% to 4.7%, so most private economists think the U.S. economy is in the midst of a “soft landing.” This follows the Commerce Department’s final revision to the first-quarter GDP, citing a -1.6% annual contraction, down from a 1.5% drop previously estimated. The primary catalyst for the first-quarter GDP decline was a big drop in worker productivity.
The June jobs report didn’t come out on the first Friday of the month – it will come out on July 8th – but the Labor Department on Thursday announced that weekly jobless claims declined slightly to 231,000 in the latest week, down from a revised 233,000 in the previous week. Continuing unemployment claims also declined a bit to 1.328 million in the latest week, down from a revised 1.331 million in the previous week. Despite rising corporate layoffs, unemployment claims remain low, due to so many job openings.
Finally, on Friday, the Institute of Supply Management (ISM) announced that its manufacturing index slipped to 53 in June, down from 56.1 in May, reaching its lowest reading in over two years (since May 2020). The new orders component declined to 49.2 from 55.1 in May, which is alarming, since any reading below 50 signals a contraction. Also, the backlog of orders component declined to 53.2 in June, down from 58.7 in May. However, the production component rose to 54.9 in June, up from 54.3 in May. All but three of the 18 manufacturing industries that ISM surveyed reported expanding in June, with paper products, wood products, and furniture & related products contracting. Overall, it is apparent that the manufacturing sector is working off its order backlogs, but it is mostly still growing for now.
Energy and EV Update
Energy prices are down, but the Green Revolution is still sputtering. One culprit behind the extraordinarily high diesel prices is that some existing refineries have been retooled to make cleaner-burning green diesel from animal fats, food waste, and plant oils. Toward that end, California’s Low Carbon Fuel Standard has been rewarding refiners with tradable fuel credits for producing green diesel. There are now 12 renewable green diesel projects under construction, plus another nine projects planned.
According to the Energy Information Administration (EIA), the U.S. is now producing 80,000 barrels a day of green diesel, and there are plans to produce 135,000 barrels per day by 2025. But that may be too slow: Since 2019, about 400,000 barrels of distillates (diesel, heading oil, and jet fuel) have been lost.
The Green Revolution also hit a snag in Germany with the production of the VW (OTCPK:VWAGY) ID.Buzz, since production had to be halted due to battery quality problems from a new battery supplier. The supplier has not been named, but it is not LG Chem (OTCPK:LGCLF), which is currently the big battery supplier for the Audi, Porsche, and VW models within VW Group. VW plans to make 15,000 ID.Buzz vans in 2022 and 130,000 per year as production ramps up. I should also add that Tesla (TSLA) suspended deliveries of its Model Y Performance model made at its new Berlin factory. There was no reason provided for the delivery halt. Currently, the Berlin factory is making about 1,000 Model Y’s per week and production is ramping up.
The Wall Street Journal last week pointed out that electric vehicle (EV) prices have risen 22% in the past 12 months, due to higher material costs as well as a big order backlog. Naturally, the high prices of battery components – namely lithium, nickel, and cobalt – remain a problem as well as choke points, since there are not enough lithium-ion batteries available to boost production, so Tesla’s new Austin and Berlin plants are expected to remain well below their planned output.
Speaking of manufacturing, GM announced on Friday that its second-quarter sales fell 15%, and it built 95,000 vehicles without certain semiconductors due to supply chain woes that continue to haunt the automotive industry. GM also lowered its second-quarter earnings guidance below analyst consensus estimates. Do not be surprised if more companies issue lower earnings guidance, because right now the analyst community has not cut their earnings estimates, so there is no “earnings recession” forecasted.
Speaking of earnings, last Thursday Micron Technology (MU) posted a 6.6% second-quarter earnings surprise but provided lower guidance looking forward, due to weak cell phone and personal computer demand. This demand weakness is partially attributable to China’s recent Covid-19 shutdown, but now that China is reopening, there is a possibility that global economic growth may improve.
One thing that will definitely help boost cellphone sales would be if Apple (AAPL) launches a folding OLED or micro-LED iPhone in late September to boost holiday sales. A folding 5G Apple iPhone would likely sell for approximately $2,000 and be the hot holiday item to help spark a big technology stock rally.
Navellier & Associates owns Apple Computer (AAPL) and VW Group (VWAGY) in managed accounts. A few accounts own Tesla (TSLA) per client request only, in managed accounts. We do not own General Motors (GM), LG Chem (LGCLF), or Micron Technology (MU). Louis Navellier and his family own Apple Computer (AAPL) and VW Group (VWAGY) via a Navellier managed account and Apple Computer (AAPL) in a personal account. He does not own Tesla (TSLA), General Motors (GM), LG Chem (LGCLF), or Micron Technology (MU) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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