by Louis Navellier

February 25, 2020

Outside of the United States, the next three largest economies are China, Japan, and Germany, and all three are contracting. China’s growth rate is slowing dramatically while Japan and Germany are either flat-lining or falling into recession, causing the global growth machine to contract dramatically in 2020.

The World's Largest Economies Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Japan’s GDP plunged 1.6% in the fourth quarter (a 6.3% annual rate), the largest contraction in almost six years (since the second quarter of 2014). A sales tax hike to 10% (up from 8%) hindered Japan’s consumer spending, and now with some Chinese supply chains disrupted by the coronavirus impacting Nissan and other major manufacturers, fears are spreading that Japan’s first-quarter GDP will also be negative. Japan may slip into a recession (two negative GDP quarters), as Germany’s GDP dips to near zero growth in the fourth quarter (+0.1% annualized), so global growth may be nearing a tipping point.

First-quarter growth indications don’t look good. The China Association of Automobile Manufacturers announced that sales in January declined 18% compared to a year ago. After two consecutive years of declining vehicle sales, 2020 has gotten off to a horrible start. The Chinese Lunar New Year and the coronavirus have unquestionably hindered vehicle sales, and I expect vehicle sales in China to remain weak due to its economic woes. The fact of the matter is that China’s GDP growth will likely contract in the first quarter, no matter what the official number will be when it is announced in April.

Speaking of auto sales, European Union (EU) passenger car registrations declined 7.5% in January to 956,779 units. According to the EU report, “Major taxation changes announced by some EU member states for 2020 pulled registrations forward into December 2019, explaining this January drop.”

Regardless of these tax changes, sales were already impacted by continued weakness in the global economy, along with some uncertainty related to Brexit. All four major EU economies saw a contraction in auto sales in January, led by a 13.4% plunge in France, followed by a 7.6% decline in Spain, a 7.3% drop in Germany, and a 5.9% dip in Italy. As I have said before, the EU has been driving Tesla’s sales boom, so if auto sales remain weak in Europe, it could stall Tesla’s future sales growth.

That is the bad news. The good news is that the worldwide demand for U.S. Treasury securities remains relentless. The 30-year Treasury bond yield declined further last week and dipped below 2%. Bloomberg had a good article last week titled, “There’s a Wall of Cash Eager to Buy Treasuries on Any Price Drop,” in which one institutional manager boldly predicted that the 10-year Treasury bond would hit 0% within two years! I will not make such a bold prediction, but I can confirm that, based on the bid-to-cover ratios, there is plenty of demand for U.S. Treasury securities, especially from international investors that benefit from a strong U.S. dollar in a negative interest rate world. If this global interest rate collapse continues, the Fed may be forced to cut key interest rates, since the Fed historically never fights market rates.

Navellier & Associates does not own Tesla in managed accounts or our sub-advised mutual fund.  Louis Navellier and his family do not own Tesla personally.

U.S. Growth Remains the Global Oasis

As global GDP growth rates continue to flounder, the U.S. remains an oasis. The euro is now trading at its lowest level relative the U.S. dollar in three years and will likely fall to parity to the U.S. dollar later this year. I expect copper, crude oil, and other key commodities to continue to flounder, as they are universally quoted in dollars. Crude oil could fall below $50 per barrel and trade in a range of $45 to $48 in the upcoming months due to a supply glut caused by a drop in global demand as well as rising inventories.

Preventing any economic weakness in the U.S. will be a goal for President Trump, since he wants to have at least 3% annual GDP growth heading into the November Presidential election, so I am wondering what President Trump will do to stimulate U.S. economic growth in the upcoming months. Politico recently reported that the Trump Administration is weighing a 10% middle class tax cut to contrast himself with his Democratic opponents. Due to falling energy prices, the middle class is already benefiting from the equivalent of a tax cut that should boost consumer spending, the primary driver of U.S. economic growth.

The big surprise last week was rising inflation. The Labor Department announced on Wednesday that the Producer Price Index (PPI) surged 0.5% in January, substantially higher than the economists’ consensus estimate of 0.2%. This is the largest monthly gain in the PPI in 15 months and was almost entirely due to a technical 0.7% surge in “trade margins,” which were unchanged in the previous five months.

Excluding food, energy, and trade margins, the core PPI rose 0.4% in December and 1.5% in the past 12 months. Michael Pearce of Capital Economics said, “The 0.5% jump in final producer prices in January was driven by one-off factors, including a jump in retail margins and an administered increase in Medicare hospital payments.”  I think it is safe to ignore the January PPI as any imminent inflation threat.

The Commerce Department announced on Wednesday that housing starts slipped 3.6% in January to a 1.57 million annual pace, but new building permits surged 9.2% to a 1.55 million annual pace, which is nearly a 13-year high. Economists were only expecting January housing starts to run at a 1.43 million annual pace, so housing starts still came in much better than expected and were likely aided by mild January weather. Overall, the housing sector is clearly doing well and is aided by low mortgage rates.

Finally, on Friday, the National Association of Realtors announced that existing home sales slipped 1.3% in January to a 5.46 million annual pace. A 9% sales drop in the West due to a shortage of existing homes for sale was largely responsible for this decline. There is now a tight 3.1-month supply of existing homes for sale based on January’s sales pace. In the past 12 months, median existing home prices have risen 6.8% to $266,300. Fortunately, rising home prices help to boost consumer confidence, and with long-term interest rates so low, I wouldn’t worry too much about any temporary slowdown in the housing market.

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

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