July 9, 2019

During this “race to the bottom” in global interest rates, we learned that Christine Lagarde, the former head of the International Monetary Fund (IMF), will replace Mario Draghi as head of the ECB as of November 1. The problem that Mario Draghi and his predecessor, Jean-Claude Trichet, have faced is that they constantly had to fight the conservative central bankers from Germany’s Bundesbank. In fact, many Germans were disappointed that Bundesbank President Jens Weidmann did not get the top ECB job.

In general, German bankers have a hard time understanding why most other eurozone nations (meaning the French, Italians, Greeks, Spanish, and others) do not want to be more Germanic, that is, by complying with strict EU budget guidelines. Since the IMF’s Christine Lagarde helped provide relief to shattered economies with massive deficits – like Argentina – it is widely perceived that she will continue the policies of her predecessor Draghi and fight Germany’s call for more fiscal discipline within the EU.

The net result is that the negative interest rates that now characterize most of the EU will likely persist, so I remain very bearish on the euro and believe the EU is the “new Japan.” Europe may never raise interest rates in my lifetime, due to an aging population, as well as generous social benefits throughout the EU.

On Thursday, Eurostat reported that EU retail sales declined 0.3% in May – a major disappointment because economists expected a 0.3% increase. This was the second month in a row of negative retail sales for the EU. Mighty Germany was even worse than the overall EU, as German retail sales declined 1% in April and 0.6% in May. In the last 12 months, total EU retail sales have risen by just 1.3%.

Turning to Asia, in the wake of the G-20 meeting, it appears that negotiations have resumed with China, and North Korea. Critics of President Trump have complained that he gave too much away to restart the China trade negotiations, but U.S. technology companies pressured the White House to be able to sell components to 5G giant Huawei, so a compromise was made in exchange for China boosting its imports of U.S. agricultural products. The truth of the matter is that economic wars continue and, because the U.S. is the world’s largest market with minimal tariffs (compared to the rest of the world), President Trump continues to conduct the targeted global economic wars that he expects to ultimately win.

Despite tariffs, the Commerce Department announced that U.S. trade volume rose in May. Imports surged 3.3% to $266.2 billion, while exports rose 2% to $210.6 billion. Soybean exports are still running ahead of a year ago, so it appears that the China trade fight has not hindered some agricultural exports, but the U.S. trade deficit soared 8.4% to $55.5 billion in May, up from a revised $51.2 billion in April. Record vehicle imports from Mexico and other countries were largely responsible for the surge in the May trade deficit, which was significantly higher than the economists’ consensus forecast of $54.4 billion.

Global recession remains a threat. The global Purchasing Managers Indices (PMI), recently fell below 50, which J.P. Morgan said raises the probability of a global recession. The chaos in Hong Kong, where riot police last week had to be used to evict protesters from its Legislative Council building, is raising uncertainty about China’s authoritarian rule. Interestingly, surrounding countries, like Thailand, Taiwan, and Vietnam continue to boom, due partly to China’s woes and 25% U.S. tariffs on many Chinese goods.

As the World Inches Toward a Recession, the U.S. Remains the Oasis

The U.S. ISM manufacturing index slipped to 51.7 in June, down from 52.1 in May. That index peaked at 60.8 last August and is now at its lowest level in 32 months. Nonetheless, since the U.S. manufacturing index remains above 50, it is still expanding and doing better than the rest of the world. Consumer orders and components for new orders and imports were essentially flat, as businesses complained about tariffs.

On Wednesday, ISM announced that its non-manufacturing (service) index slipped to 55.1 in June, down from 56.9 in May, the lowest reading for the ISM service index since July 2017, but it remains far above 50, signaling an expansion, so the service sector is still healthy. In fact, 16 of 17 surveyed service sectors reported expanding in June. Overall, the U.S. service sector is still growing, but at a bit slower pace.

Global growth concerns continue to push down crude oil prices and remain very soft despite OPEC and Russia’s pledge to continue to cut production. Longer term, it will be interesting when worldwide gasoline and diesel consumption peak from the electric car boom, which is expected to happen sometime between 2023 and 2025. A drop to $40 per barrel is possible in five years if global demand keeps ebbing.

Interestingly, this year almost half the cars sold in Norway are electric. Last week, I picked up an Audi e-tron and have to say that it drives like a perfectly normal SUV. The big electric push is now coming from the EU, led by Germany, which is banning non-electric vehicles from city centers on high pollution days. Although this big EU push is temporarily helping Tesla Model 3 sales, competition is already hindering Tesla’s S & X models. Longer term, I expect VW Group (Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat, & VW), Mercedes, BMW, Jaguar, and Volvo’s Polestar to continue to outpace Tesla sales.

I should add that new vehicle sales are slumping in the first half, down 2.4% from the first half of 2018. Through June, GM sales declined 4.3%, Toyota slipped 3.6%, and Nissan sales plunged 8.2%. Ford sales are down 3.3%. Fiat Chrysler and Honda sales fared better, with -1.7% declines. Hyundai and Subaru sales fared the best, posting 1.7% and 5.2% gains, respectively. Higher new vehicle prices are offsetting lower finance costs. Consumers remain price-sensitive, which may explain why Hyundai sales are rising.

Navellier & Associates does not own Tesla, VW Group, Honda Motors, General Motors, Subaru, Toyota Ford, or Fiat Chrylser in managed accounts and a sub-advised mutual fund. Louis Navellier and his family do not own Tesla, VW Group, Honda Motors, General Motors, Subaru, Toyota or Hyundai in personal accounts.

Finally, on Friday, the Labor Department announced that 224,000 payroll jobs were created in June, substantially higher than economists’ consensus estimate of 165,000. One reason is that 33,000 new government jobs were created due to the upcoming 2020 census. The unemployment rate rose slightly to 3.7% in June, up from 3.6% in May, but since many new college graduates hit the job market in June this increase is not a surprise. The labor force participation rate rose to 62.9% in June, up from 62.8% in May. Wages rose 0.2% or 6 cents to $27.90 per hour in June and have risen 3.1% in the past 12 months.

I should add that ADP reported on Wednesday that 102,000 private payroll jobs were added in June, which was substantially below economists’ consensus forecast of 140,000. In the past three months, private payrolls have averaged 211,000 per month, so this was a sudden deceleration. Small businesses shed 23,000 private payroll jobs in June according to ADP, accounting for the disappointing June totals.

Overall, due to collapsing interest rates in the EU and a weak euro, the U.S. dollar remains the currency king. The reason that Treasury yields are meandering lower is that foreign capital continues to pour into the U.S. Since economic indicators have softened dramatically and global interest rates continue to decline to record negative yields, there is no doubt that the Fed will cut interest rates 0.25% on July 31.

About The Author

Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.


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