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When it comes to deciding when to begin cutting key short-term interest rates, it seems to me that the Federal Reserve seems overly fixated on small monthly variations in various inflation indicators rather than paying attention to the dramatic slowdown in the U.S. economy.
In my view, they should start cutting rates no later than May 1st, rather than June, which most pundits and Fed spokesmen now predict.
For instance, the Commerce Department announced last Thursday that retail sales declined by -0.8% in January, which was well below the economists’ consensus expectation of a smaller -0.2% decline.
That was the biggest drop in the last 12 months. Also, December retail sales were revised down to a 0.4% increase, from the 0.6% increase initially reported.
Only two categories, namely food services and bars (up 0.7%) and furniture (up 1.5%) improved significantly in January, so overall this was a disappointing retail sales report. Obviously, consumers became over-extended after the holidays and are cutting back.
In the wake of the January retail sales report, the Atlanta Fed has reduced its first quarter GDP estimate to a 2.9% annual pace, down from its previous estimate of a 3.4% annual pace.
Even though the federal budget deficit is $77 billion higher in fiscal 2024 (ending September 30, 2024) than in 2023 (+14%), the Congressional Budget Office (CBO) is estimating a smaller budget deficit this year, due to the fact that it expects 1.7 million new workers in 2024 and 5.2 million new workers in 2033 due largely to immigration.
The biggest economic news last week was that the Labor Department reported on Tuesday that the Consumer Price Index (CPI) rose 0.3% in January and 3.1% in the past 12 months.
The core rate, excluding food and energy, rose 0.4% in January and 3.9% in the past 12 months. Both the CPI and core CPI were higher than economists anticipated, so Treasury yields rose in the wake of the CPI report.
The big disappointment was that Owner’s Equivalent Rent (shelter costs) rose 0.6% in January (up from 0.4% increases in the past two months) and a net +6% in the past 12 months.
However, the high-end rental market is showing signs of excess capacity, which may help rental costs moderate in upcoming months.
Overall, the annual pace of the CPI continues to decelerate, but not at the pace economists had anticipated, which is raising odds that the Fed may not cut key interest rates until its June FOMC meeting.
Friday’s Producer Price Index (PPI) was also disappointing, as the Labor Department reported that the PPI rose 0.3% in January and 0.9% in the past 12 months.
The core PPI, excluding food, energy and trade margins, surged 0.6% in January and 2.6% in the past 12 months.
Wholesale food and energy prices declined -0.3% and -1.7%, so the real problem with wholesale inflation continues to be wholesale service costs, which rose 0.6% in January, the largest increase in the past 12 months (since January 2023).
The bright spot remains wholesale goods costs, which declined -0.2%, the fourth straight monthly decline.
From these four straight declines in wholesale goods prices, it is clear that the U.S. continues to import deflation from China via falling import prices. China’s National Bureau of Statistics announced that its consumer prices declined -0.8% in January, the biggest monthly drop since September 2009.
Furthermore, China’s producer price index plunged -2.5% in January. Since the U.S. is importing deflation from China, the Fed must be careful, because global deflation is spreading.
Britain and Japan are already officially in a recession due to two consecutive quarters of declining GDP growth, so global demand remains lackluster.
Our Energy Bet is Paying Off, as Supplies Become Disrupted (Again)
Two major natural gas pipelines in Iran were attacked in multiple locations. This knocked out about 15% of Iran’s natural gas production.
This attack disrupted heating in many Iranian provinces. Obviously, if these attacks persist, oil and natural gas prices will rise. Clearly, the Middle East remains a tinderbox.
Also, Bloomberg reported last Tuesday that many of the tankers transporting Russian crude oil have come to a halt, “Following U.S. Sanctions.”
Approximately half of the 50 tankers that the U.S. began sanctioning on October 10th have failed to unload their cargo.
These sanctions were designed to drive Greek oil tanker owners out of the Russian crude oil transportation business.
The G7 has imposed a $60 price cap on Russian crude oil and a subsequent cap on refined products. No wonder Russia wants to reach a peace agreement with Ukraine, since Western sanctions against their oil exports are still hindering its economy.
In addition, Shell (SHEL) is permanently closing all seven of its hydrogen pumping stations in California, effective immediately. Clearly, this is a blow to the hydrogen economy and the owners of the Toyota Mirai, Hyundai Nexo & Honda Clarity fuel cell vehicles.
Shell Hydrogen Vice President Andrew Beard said they were shutting them down “Due to hydrogen supply complications and other external market factors.”
There has been an acute shortage of hydrogen in California since August 13th. So much for a transition to a hydrogen economy, which was mandated by COP26 in Scotland a couple of years ago.
In Europe, plans to seize productive farmland, kill dairy cows and eliminate nitrogen fertilizers, all in the name of reducing carbon dioxide emissions, have resulted in farmer protests all over the EU. These farmer protests are threatening to undermine the political leadership within the European Union (EU).
Additionally, a growing right-wing party in Germany threatens to leave the EU over it green mandates. Clearly, EU farmers are upset and cannot compete with imported foods that utilize nitrogen fertilizers.
As a result, political change within the EU is anticipated, led by the Netherlands, which is already pushing back against the EU’s green mandates from Brussels.
Germany’s Economy Minister, Robert Habeck, slashed the country’s forecasted economic growth rate to only 0.2%, down from its previous forecast of a 1.2% annual pace. Of all the G7 countries, Germany was the only one to contract in 2023.
The truth of the matter is that Germany’s industrial base is fleeing to Poland, Hungary, Slovakia and the Czech Republic, where electricity costs are lower and more suitable for manufacturing.
Eurostat reported that EU industrial production rose by 2.6% in December, but it declined 1.2% in Germany. Unfortunately, Germany’s decision a few years ago to shut down its nuclear plants and rely on now non-existent Russian natural gas is systematically destroying its industrial base, since LNG is now much more expensive.
Adding to Germany’s woes, VW Group (OTCPK:VWAGY) reported that the U.S. has impounded thousands of Audis, Bentleys, and Porsches at U.S. ports due to “one tiny part” made by a Chinese supplier on a sanctions list for using forced labor in Xinjiang province.
The company said it had notified the U.S. after learning from a supplier that its products included parts made by the banned company. VW Group said, “We really try, but this shows how challenging it is to know everything that is happening in complex supply chains.”
Turning to the U.S. stock market, Bespoke Investment Group reported that AI stocks now account for over 10% of global market capitalization! Nvidia’s (NVDA) earnings announcement this week and its guidance, I expect, will reflect this AI dominance.
Frankly, with 236.8% forecasted sales growth, plus 418.2% forecasted earnings growth, Nvidia is expected to post spectacular quarterly results and issue positive guidance.
Stronger-than-expected earnings during this announcement season are also boosting stock buyback activity. During the first seven days of February alone, $105 billion in stock buybacks were announced, which surpassed all the stock buybacks announced in the month of January.
The forecasted earnings for the next two quarters remain strong, so I would not be surprised if stock buyback activity remains robust.
Navellier & Associates owns Nvidia Corporation (NVDA), Shell (SHEL), and VW Group (VWAGY), in managed accounts. We do not own Toyota Motors (TM), Hyundai (OTCPK:HYMTF) or Honda Motors (HMC). Louis Navellier and his family own Nvidia Corporation (NVDA), Shell (SHEL), and VW Group (VWAGY), personally via Navellier managed accounts and Nvidia Corporation (NVDA), in a personal account but does not own Toyota Motors (TM), Hyundai or Honda Motors (HMC) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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