by Louis Navellier

January 20, 2021

The United States Federal Reserve Building Image

Last week, the 10-year Treasury bond yield continued to rise, as last Tuesday’s bond auction had a lackluster bid-to-cover ratio of 2.47. This essentially means that the Fed is going to have to do more quantitative easing or the federal government is going to have to curtail its spending, which is unlikely as the Biden Administration wants to stimulate economic growth amidst the latest Covid-19 lockdowns.

The Fed also released its Beige Book survey in conjunction with its upcoming Federal Open Market Committee (FOMC) meeting on January 26-27. Six Fed districts reported “modest” or “moderate” economic growth, while two Fed districts reported moderate declines, and four Fed districts reported “mixed” or “unchanged” economic activity, so the FOMC may vote to increase its quantitative easing.

The Fed will also have to confront rising inflation. The Labor Department announced on Wednesday that its Consumer Price Index (CPI) rose 0.4% in December. Gasoline prices surged 8.4% in December and that was largely the cause of higher consumer prices. Excluding food and energy, however, the core CPI rose only 0.1%. In the past 12 months, the CPI and core CPI have risen 1.4% and 1.6%, respectively.

There was a similar story for wholesale inflation. On Friday, the Labor Department announced that the Producer Price Index (PPI) rose 0.3% in December, slightly below economists’ consensus estimate of a 0.4% increase. Wholesale energy prices surged 5.5% in December, while food prices declined 0.1% and trade service margins between wholesalers and retailers declined 0.8%. Excluding food, energy and trade margins, the core PPI rose 0.4% in December. In the past 12 months, the PPI and core PPI have risen 0.8% and 1.1%, respectively, so long-term inflation rates are still running below the Fed’s 2% target rate.

Due to the long-term decline of the dollar, the Chinese yuan has been steadily appreciating against the U.S. dollar since late May and is expected to continue to improve due to higher interest rates as well as more robust economic growth. (China was the only economy to grow in 2020.) What is amazing is that several years ago, China devalued the yuan, but China now increasingly dominates international trade, and multi-national companies have become more comfortable holding China’s yuan in their cash reserves.

These are just some of the dilemmas facing the Federal Reserve as their FOMC meets next week.

Other Indicators Point to Rising Jobless Claims and Sinking Retail Sales

The bad news last week was that the Labor Department on Thursday announced that weekly jobless claims surged to 965,000 in the latest week, up from a revised 787,000 in the previous week, reaching the highest level in five months. This was the biggest weekly rise in jobless claims since March 2020 and it came in well above the economists’ consensus estimate of 800,000. Another distressing sign is that continuing unemployment claims rose to 5.271 million, up from 5.072 million in the previous week.

Also, the number of on-line job postings in December declined 10.6% according to Indeed, following an 11.8% decline in November. This is a sign that businesses are becoming extremely cautious as many states continue to issue Covid-19 restrictions. January is normally a good month for new job postings, but since states have not disclosed when they will lift Covid-19 restrictions, many businesses are in no mood to hire new workers. As a result, the Biden Administration will find it difficult stimulating the economy.

On Friday, the Commerce Department announced that retail sales declined 0.7% in December, which was substantially below the economists’ consensus estimate of a 0.1% decline. This was the third straight monthly decline, so I expect that many economists will have to cut their fourth quarter GDP estimates.

Currently, the Atlanta Fed is estimating annual fourth quarter GDP growth of 8.7%, but in the wake of the December retail sales report, I expect that the Atlanta Fed will be cutting its fourth quarter GDP estimate.

Some good news finally emerged on Friday, when the Fed announced that industrial production surged 1.6% in December – well above the analysts’ consensus estimate of a 0.5% increase. As good as this sounds, much of this increase came from a 6.2% increase in utility output in December, so you can thank the cold winter weather and our latest COVID lockdowns for the big surge in industrial production.

The manufacturing sector improved 0.9%, so that is more good news. The mining sector rose 1.6% in December, as crude oil and natural gas prices rose, which may help to narrow the trade deficit a bit. In the past 12 months, overall industrial production has declined 3.6%, so there is still room for improvement.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Louis Navellier
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