July 23, 2019
President Trump said on Thursday that a U.S. warship destroyed an Iranian drone in the Strait of Hormuz. Earlier, an oil tanker from the United Arab Emirates (UAE), the Riah, disappeared after traveling through the Straits, entering Iranian waters. The Riah’s GPS tracking device was apparently turned off. Iran’s Foreign Ministry initially said that Iran provided aid to a foreign oil tanker with a malfunction. However, subsequently Iran admitted that its Revolutionary Guard seized the Riah for allegedly smuggling fuel.
Tensions remain high between Iran and Britain after the Royal Marines impounded an Iranian crude oil tanker suspected of trying to illegally deliver crude oil to Syria. Britain also discovered an unmanned Iranian “bomb boat” that was packed with explosives in the path of the HMS Duncan. The HMS Duncan will be joining the HMS Montrose to escort ships in the Strait of Hormuz. Then, on Friday, Iran seized a British crude oil tanker, the Stena Impero, in the Strait of Hormuz, so clearly Iran has escalated tensions with its confrontation with Britain. Furthermore, a second British crude oil tanker, the Mesdar, was boarded by armed Iranian forces on Friday, temporarily detained in the Strait of Hormuz and later allowed to continue its voyage. Britain’s Foreign Secretary Jeremy Hunt warned Iran of “serious consequences” if it does not release the Stena Impero and its crew of 23, but Britain ruled out any “military options.”
The economic sanctions on Iran are tough enough to get them to return to the negotiating table. Last Tuesday, President Trump said that a lot of progress had been made with Iran and reiterated that he was not looking for any “regime change” there. In an attempt to be conciliatory, President Trump said, “We want to help them, we’ll be good to them, we’ll work with them, we’ll help them in any way we can, but they can’t have a nuclear weapon.” Naturally, Iran wants all economic sanctions removed before it agrees to return to the negotiating table, but as long as both the U.S. and Iran are talking, that is a positive sign.
The Latest Economic News Points to a Rate Cut Next Wednesday
The economic news last week was mixed. The Federal Reserve announced on Tuesday that Industrial Production was flat in June, as manufacturing and mining gains were offset by a 3.6% decline in utility output. Manufacturing accounts for about 75% of Industrial Production and rose 0.4% in June, while mining rose 0.2%. A 2.9% rise in the automotive sector was credited for much of June’s manufacturing strength. Naturally, utility output is also impacted by the weather, so now that the weather has heated up in much of the U.S. this July, I expect that Industrial Production will perk up when the July data comes in.
The Commerce Department announced on Tuesday that Retail Sales rose 0.4% in June, substantially better than economists’ consensus expectation of a 0.1% increase. On-line sales rose by an impressive 1.69% in June as 11 of 13 categories rose in June. Sales at gas stations declined by 2.76% due to falling prices at the pump. Excluding automotive and gasoline sales, retail sales rose by an impressive 0.7% in June. Retail sales have now risen for four consecutive months and 3.4% in the past 12 months. Overall, it appears that consumer spending remains strong, which is very positive for second-quarter GDP growth.
The Labor Department on Tuesday announced that Import Prices declined by 0.9% in June, the largest decline in six months and indicative that deflationary forces persist. Petroleum prices declined 0.9% in June, while non-petroleum prices declined 0.4%. In the past 12 months, import prices have fallen 2% (the largest decline since August 2016), due largely to a strong U.S. dollar as well as a weak global economy. Imports from China have fallen 1.5% in the past 12 months, so all the fears of higher import prices from tariffs have not materialized due largely to a weak Chinese yuan. I should add that Export Prices declined 0.7% in June and 1.6% in the past 12-months, so deflationary pressure persists, which just guarantees that the Fed will cut key interest rates on July 31 at its Federal Open Market Committee (FOMC) meeting.
Another reason that the Fed will cut key interest rates is that the Commerce Department announced that Housing Starts declined 0.9% in June and Building Permits declined 6.1% in June. New home building in the South and West declined, while the slower-growing East and Midwest improved. Since home building boosts durable goods sales, it is imperative the Fed cut rates to stimulate lackluster home sales.
The Conference Board on Thursday announced that its Leading Economic Index (LEI) declined 0.3% in June, the biggest monthly decline in three years following no change in May and a 0.1% increase in April. Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board, said the decline was “driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” adding, “for the first time since late 2007, the yield spread made a small negative contribution. As the U.S. economy enters its eleventh year of expansion, the longest in U.S. history, the LEI suggests growth is likely to remain slow in the second half of the year.” Overall, the LEI is further confirmation that the Fed will cut its key interest rate at its upcoming FOMC meeting next week.