by Louis Navellier

February 6, 2024

As the Federal Open Market Committee (FOMC) met last week for the first time in 2024, they weighed all the economic data and decided to make it clear they would most likely not cut interest rates in March.

Specifically, the FOMC statement on Wednesday said, “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” even though it also said the board “has gained greater confidence that inflation is moving sustainably toward 2 percent.” In fact, the Fed’s favorite inflation indicator, the core Personal Consumption Expenditure (PCE) rate, has been under the Fed’s 2% inflation target rate in each of the last seven months, but Powell made clear that interest rates cuts would start no sooner than May 1. Then, the Fed could make a further string of cuts in June, July and September.

At his press conference last week, Fed Chair Jerome Powell said that key interest rate cuts in March are no longer part of the Fed’s “base case,” which triggered a stock market selloff. Specifically, Powell said, “I don’t think that it’s likely that we will reach a level of confidence by the time of the March meeting.”

Last week’s first positive data point emerged on Tuesday, when the Conference Board announced that its January consumer confidence index surged to 114.8, up from a revised 108 in December, marking the third straight monthly gain and the highest reading in over two years (since December 2021)!  The “present situation” component surged to 161.3, up from 147.2 in December. Also, the “expectations” component rose to 83.8, up from a revised 81.9 in December. With such an upbeat consumer confidence report, and other positive statistics, the Fed is not likely to cut key interest rate cuts until May 1st or later.

In general, the Fed won’t want to cut rates in a booming economy, and the Commerce Department’s preliminary estimate of annual fourth-quarter GDP was +3.3%, while the Atlanta Fed is now estimating 4.2% annual first-quarter GDP growth, up from its previous estimate of 3%, as higher consumer spending, an improving manufacturing sector and inventory rebuilding are expected to boost first-quarter GDP.

Speaking of manufacturing, the Institute of Supply Management (ISM) reported that its manufacturing PMI rose to 49.1 in January, up from 47.1 in December. This ISM manufacturing report was better than economists had expected, but it still represents the 15th consecutive month of declining growth, since any manufacturing PMI under 50 signals a contraction. Still, there were some “green shoots” in the ISM manufacturing report, since the “new orders” component surged to 52.5 in January, up from 47 in December. The prices component soared to 52.9 in January, up from 45.2 in December, but only 4 of 17 industries surveyed by ISM reported an expansion in January as the manufacturing contraction persists.

Turning to jobs, ADP on Wednesday reported that only 107,000 private sector jobs were created in January, which is substantially below economists’ consensus estimate of 150,000. Normally, a weak ADP report would lower expectations for Friday’s payroll report, but January is the biggest month for positive seasonal adjustments, so I was not surprised that Friday’s January payroll report was far higher than ADP.

Sure enough, the Labor Department on Friday reported a January payroll report that was substantially higher than the ADP report. Specifically, the Labor Department reported that 353,000 new payroll jobs were created in January. Also significant is that the December payroll was revised up to 333,000 payroll jobs, up from the 216,000 previously reported. The Labor Department also revised every month in 2023, and the last three months of 2023 were all positive revisions. The unemployment rate remained at 3.7%. The labor force participation rate remained at 62.5%, which is a bit of a surprise, due to December’s 0.3% drop. Average hourly earnings rose 0.6% ($0.19) to $34.55 per hour and +4.5% in the past 12 months.

There seems to be some conflict in these numbers, considering the many January layoff announcements and the general sense of distress in the labor market, since new claims for unemployment rose to 224,000 in the latest week, a two-month high. Continuing unemployment also rose to 1.898 million in the latest week, up 70,000 from the previous week. After all, major U.S. employers announced 82,300 job cuts in January, more than double the December totals, so unemployment claims will likely continue to rise.

Biden’s Defense Department Finally Strikes Back Against Iranian-Sponsored Attacks

The endless fighting in the Middle East with Iranian proxies has effectively closed shipping in the Red Sea. The latest escalation came when three American troops in Jordan were killed in a drone strike at a U.S. logistics support base (Tower 22) near the Syrian border. Also, with 350 troops deployed to Tower 22, dozens of others were injured. Senator Mitch McConnell called for “serious, crippling costs” to Iran, “not only on front-line terrorist proxies, but on their Iranian sponsors who wear American blood as a badge of honor.” Other U.S. senators, such as Lindsey Graham and John Cornyn, called for attacks within Iran on the Quds Force with the Iranian Republican Guard. Iranian Foreign Ministry Spokesman Nasser Kanaani said, “Resistance groups in the region do not take orders from the Islamic Republic of Iran.”

Finally, six days after the deadly attack, President Biden began striking 85 Iranian-backed proxy targets at seven facilities in Syria and Iraq in response to the drone attack on the Tower 22 base, and hundreds of smaller attacks in the previous months. Since this response will escalate the fighting in the Middle East, President Biden is expected to be careful, but America’s reticence to respond will likely encourage the Iranian proxies that have attacked U.S. facilities in the Middle East 166 times since last October.

Do not be surprised if the next major flare-up in the Middle East causes crude oil prices to resume rising higher. Due to the chaos in the Middle East and disrupted shipping lanes, crude oil shipments and even oil production could be disrupted. Additionally, after Ukraine bombed Russia’s natural gas pipeline and the Trans-Siberian Railway, there is still the looming threat that Russia’s crude oil pipeline could be bombed.

Ukraine’s latest major attack was a chemical transport facility with drones. Specifically, the Ust-Luga port was on fire, which is about 100 miles southwest of St. Petersburg. This port is a crucial location for Russia energy infrastructure and operated by Novatek, Russia’s second-largest natural gas producer.

Due to Europe’s green energy policies, combined with an interruption of Russian energy flows, Germany’s GDP contracted -0.3% last quarter. High energy prices continue to threaten Germany’s industrial might as more German companies outsource to Poland, the Czech Republic, Hungary and Slovakia for cheaper electricity. Interestingly, the European Union (EU) threatened economic retaliation against Hungary for opposing aid to Ukraine. Infighting in the EU is not healthy for economic unity. The EU is not in a recession yet, but the EU is not hitting on all cylinders, either.

The European Parliament is in session in Brussels and farmers throughout the EU descended on Brussels on Thursday to throw eggs and stones as they protested the green agenda mandates. Many EU farmers are under duress, and fear going out of business, since they cannot compete against cheaper imports of agricultural products. This growing unrest, which started in the Netherlands and has spread to France, Germany, Greece and Portugal and is fueling challenges from far-right parties, some of which want to follow Britain and exit the EU. Hungary, Italy and Ireland are also objecting to the green agenda that is mandating massive changes for EU farmers. As a result, European unity continues to deteriorate.

China is also flirting with recession. China’s National Bureau of Statistics on Wednesday announced that its official Purchasing Managers Index (PMI) for January came in at 49.2, which means that its manufacturing sector has contracted for four straight months. However, the service sector PMI rose to 50.7 in January, the highest level since last September and evidence of “steady expansion.”  Overall, China’s economic woes persist, but its service sector should help it avoid a recession, for now.

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

Please see important disclosures below.

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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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