by Louis Navellier

December 13, 2022

On Friday, we learned that the Producer Price Index (PPI) was cooling off, due largely to the fact that the big PPI surges from a year ago are being “cut off” in the annual calculation. The core PPI, excluding food, energy and trade margins, rose just 0.3% in November and 4.9% in the past 12 months. In October, the core PPI was running at a 5.4% annual pace, so core inflation is half a point lower in just one month.

Wholesale energy prices declined 3.3% in November, while food prices rose an offsetting 3.3%. Service input costs remain stubbornly high, surging 0.8% in November after rising only 0.2% in October. Overall, the PPI is falling, but high food and service costs prohibited an even larger decline in the November data.

We’ll see the Consumer Price Index (CPI) at 8:30 am (EST) today, about the time this report goes out.

As of last Friday’s close, the 10-year Treasury bond yield is now 3.584%, so when the FOMC raises its key interest rate by 0.5% on December 14th, the Fed will be near “parity” or “neutral.”  If the FOMC statement mentions dovish words like parity or neutral, the stock market should stage a massive rally.

The financial media keeps talking about how the Fed will be raising its federal funds rate to 5% or 6% next year, but the FOMC never fights market rates, so if market rates remain near 4%, I remain in the camp that December will be the Fed’s last interest rate hike. Why would they want to get ahead of market rates?

The other economic news released last week was “mixed” but positive enough to perhaps avoid recession:

The Institute of Supply Management (ISM) recently announced that its manufacturing index declined to 49 in November, down from 50.2 in October. Since any ISM reading over 50 signals an expansion, and under 50 is a contraction, the U.S. manufacturing sector is contracting after 30-straight monthly gains.

The ISM non-manufacturing (service) sector is fortunately doing much better than the manufacturing sector and rose to 56.5 in November, up from 54.4 in October. This was a big surprise, since economists were expecting the ISM service index to decline to 53.5. The primary reason that the ISM service index rose was that the “business activity” component surged to 64.7 in November, up from 55.7 in October. Other ISM service index components declined, but fully 13 of the 16 industries that ISM surveyed reported an expansion in November, so the service sector remains healthy and has improved significantly.

The Commerce Department on Tuesday reported that the U.S. trade deficit rose 5.4% in October to $78.2 billion, as exports declined 0.7% to $256.6 billion, and imports rose 0.6% to $334.8 billion. This means that the shrinking trade deficit in the past few months, mostly from energy exports, has abruptly ceased, so economists may now reduce their fourth-quarter GDP estimates. Sure enough, the Atlanta Fed revised its fourth-quarter GDP estimate down to a 3.2% rate on Friday, versus its previous 3.2% estimate on Tuesday.

The Labor Department’s regular Thursday report on new claims for unemployment said claims rose to 230,000 in the latest week, up from a revised 226,000 in the previous week. Continuing unemployment claims surged to 1,671 million, up from a revised 1.609 million in the previous week. This is the highest level of continuing claims in the past 10 months. Jobless claims will eventually get the Fed’s attention, but for now, the Fed is concentrating on raising key rates 0.5% at its FOMC meeting on December 14th.

Artificial Supply and Demand Factors Won’t Keep Oil Prices Down for Very Long

OPEC+ decided to maintain its current production levels, despite evidence that China was easing its Covid restrictions. Interestingly, the G7 $60 cap on Russian crude oil began last week, but crude oil prices rose, since it is widely believed that the price cap will fail. Poland, Lithuania and Estonia argued for a less restrictive price cap, since they rely on Russian crude oil, but they were overridden by the G7. (The G7 price cap also includes a ban on shipping, insuring or financing Russian crude oil.)

Officially, Russia is refusing to sell crude oil to companies that are complying with the G7 price cap. In the meantime, there was a traffic jam of crude oil tankers off Turkey’s coast last week. Some of these oil tankers are waiting for confirmation that their insurance remains in place, since Russian crude oil cannot be insured above the $60 price cap. Turkey has checked 22 crude oil tankers to verify their insurance before they can proceed. So far, all but one of these tankers were transporting crude oil from Kazakhstan.

The Wall Street Journal reported that shipping companies have snapped up dozens of second-hand oil tankers this year – those that can navigate frozen seas around Russia’s ports in the Baltic. This “shadow fleet,” according to the WSJ, will change flags, turn off transmitters, use decoy signals and swap crude oil at sea. In the end, Russia will likely sell more crude oil to China, India, Saudi Arabia and the UAE, where it can be refined, so those countries, especially India, can sell refined products like diesel and fuel oil.

A big wildcard in the energy patch is the question of when the Biden Administration will stop draining the Strategic Petroleum Reserve (SPR) by up to one million barrels per day supply of predominately light sweet crude oil – the kind Europe likes to refine. The SPR is now at 1980 levels, so the crude oil releases will have to be stopped soon, and that is expected to send crude oil prices soaring in the upcoming weeks.

The Wall Street Journal reported on Tuesday that crude oil prices have softened, but many energy stocks remain resilient. One of the problems is that the spread between WTI and Brent sweet crude has widened. Typically, when WTI and Brent crude oil spreads are wide, refiners can make more money, but the inventory of gasoline and distillates (e.g., diesel, heating oil, jet fuel, etc.) has risen in recent weeks, so refiners may have to discount their refined products. Ironically, the inventory of crude oil has fallen dramatically in recent weeks according to the Energy Information Administration, so crude oil markets remain divided by type. It appears that demand has dropped, but long-term supply problems will persist.

One factor that should help firm-up crude oil prices is that China’s State Council has officially relaxed the parts of its contentious Covid Zero policies that sparked protests around the county. The State Council said that people will no longer have to show proof of a negative Covid test before entering most public places. China also announced on Wednesday that in November its exports declined 8.7% and its imports plunged 10.6%. In other words, China’s draconian Covid policies are hurting its economy, so the relaxation of Covid Zero policies should help to stimulate economic growth and fossil fuel demand.

News from Tesla, Apple and Other Key Stocks

Bloomberg reported last week that Tesla plans to lower production at its Shanghai manufacturing plant by up to 20%. Not long ago, Tesla made significant price cuts in China in an attempt to capture more electric vehicle (EV) market share. China’s BYD Auto is now beating Tesla  and just reported a 153% annual increase in sales of its EVs and plug-in hybrids to 230,427, while Tesla sold a record 100,291 EVs in China from its Shanghai plant. Since Tesla’s Shanghai plant has been a core profit center, any production cut there could hurt the stock. In the meantime, Tesla continues to lose global EV market share.

I should add that Tesla posted record sales in China in November, despite the fact that overall Chinese vehicle sales declined to 1.65 million units, or -10% compared to October. Now that China is relaxing its Covid Zero restrictions, its vehicle sales are anticipated to recover in upcoming months. Nonetheless, Tesla will suspend production of its Model Y in Shanghai during the last week of December due to a lack of demand. Overall, it will be interesting to monitor whether or not EV sales are peaking near-term.

The Financial Times reported that the price of lithium-ion batteries rose this year for the first time in a decade. The culprit was surging prices for lithium, nickel and cobalt. As the EV boom continues, the price of lithium-ion batteries is expected to continue to rise as demand outstrips supply.

The real problem for Lucid and Rivian is this: Can they secure enough batteries to achieve profitability, especially as Ford, GM, VW Group and other major automakers boost their EV production? A shakeout in the EV industry is coming, especially now that Tesla is starting to discount some of its EVs.

In ESG news, Vanguard, the second largest asset manager in the world, resigned from the Net Zero Asset Managers (NZAM) initiative that had the goal of zero carbon emissions by 2050. In the wake of Blackrock’s ESG blowback and termination by the State of Florida, Vanguard apparently did not want to be lumped in the same camp. Furthermore, Vanguard said that its NZAM alliance had resulted “in confusion about the views of individual investment firms.” Fidelity and PIMCO also are not part of the NZAM alliance. Obviously, what is “ESG-suitable’ continues to be debated, especially after Tesla was booted from S&P Global’s ESG indices back in May. (S&P Global remains in the NZAM alliance.)

And finally, President Biden and Apple CEO Tim Cook visited Taiwan Semiconductor’s new plant in Arizona, which is still under construction and running over budget. Taiwan Semiconductor is planning on spending $40 billion to build two semiconductor plants in Arizona. The first plant is supposed to commence semiconductor chip production in December 2023. In a letter to the Commerce Department, Taiwan Semiconductor said, “A range of construction costs and project uncertainty in Phoenix makes building the same advanced logic wafer fab in Taiwan considerably less capital intensive.”

Additionally, a shortage of skilled workers has been a “real barrier.” In other words, the onshoring of semiconductor manufacturing has not been going as planned. Apple is one of Taiwan Semiconductor’s largest clients, so when Apple’s chips can be made in America, it will be a big deal.

Navellier & Associates owns Apple Computer Inc. (AAPL), Ford Motor Co. (F), Taiwan Semiconductor Manufacturing Co. Ltd (TSM), and Volkswagen Ag.(VWAGY), in managed accounts and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Rivian Automotive (RIVN), General Motors (GM), or Lucid Group (LCID). Louis Navellier and his family own Apple Computer Inc. (AAPL), Ford Motor Co. (F), and Volkswagen Ag.(VWAGY), via a Navellier managed account and Apple Computer Inc. (AAPL) in a personal account. He does not own Tesla (TSLA), Rivian Automotive (RIVN), General Motors (GM), Taiwan Semiconductor Manufacturing Co. Ltd (TSM), or Lucid Group (LCID) personally.

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

Please see important disclosures below.

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