by Louis Navellier
February 8, 2022
Across the pond, British Prime Minister Boris Johnson is under investigation by Scotland Yard for holding a party at his apartment during the height of Britain’s Covid lockdown restrictions. It appears that he hosted a “BYOB” (bring your own bottle) party at his office during the latest Covid lockdown.
In Canada, truckers via their “Freedom Convoy” descended on Ottawa, the nation’s capital, to protest the Covid restrictions, but Prime Minister Trudeau was whisked off to a secret location to hide from the crowd, which he referred to as “fringe.” Trudeau excused himself by saying that he tested positive for Covid, so he conveniently had to quarantine for at least five days rather than address the protestors.
Finally, California Governor Gavin Newsom and Los Angeles Mayor Eric Garcetti are under criticism for hanging out with basketball legend Magic Johnson and violating the mask mandate at the 49ers vs. Rams NFL playoff game, at a time when toddlers and kindergartners at California schools must wear masks.
Boris Johnson has apologized, and Gavin Newsome has tried to explain his gaffe, but it will be interesting if Justin Trudeau is actually capable of apologizing after making any Canadian returning to Canada on an airplane be incarcerated in hotels for three days during the height of the Covid restrictions! Canada’s outrage against the Covid restrictions is a sign that economic freedom is valued by workers around the world. I find the call for economic freedom a positive sign, plus a call for shared sacrifice by our leaders.
In addition, strict mandates have put the robust economic growth rates of late 2021 in danger of a rapid reversal into recession. Last Wednesday the Atlanta Fed estimated first-quarter GDP growth at just a 0.1% annual pace. Coming off the 6.9% annual growth rate in the fourth quarter, this is a shocking slowing of growth to a near-standstill. I realize that we’ve seen severe snowstorms, which curtails GDP activity briefly until the snow melts, but if the Atlanta Fed’s forecast is accurate, the Fed will be reluctant to raise key interest rates too soon, since the U.S. may be teetering on slipping into a recession at election time.
I also warned in my recent podcasts that investors should brace themselves for the January inflation statistics due to surging natural gas and crude oil prices. The Consumer Price Index (CPI) and Producer Price Index (PPI) announcements this Thursday and next Tuesday are expected to be truly shocking. It will be interesting if these inflation statistics reignite fears that the Fed will hike short-term interest rates by 0.5% instead of 0.25%, which is anticipated in March. As I have repeatedly said, the Fed never fights market rates, so watching long-term rates is more important than endless speculation about rate hikes.
Speaking of inflation, on Wednesday, Eurostat announced that consumer inflation rose to a record 5.1% annual pace in Europe in January, due to surging energy prices. Specifically, energy prices have risen 28.6% in the past year, while food prices rose 5.2%. Excluding food and energy, the core rate of inflation is at 2.3% (per year), which is down from a 2.6% annual pace in December. Since Ukraine is called “the breadbasket of Europe,” the build-up of Russian troops on the border is starting to influence food prices.
The European Central Bank (ECB) on Thursday said that they were “unanimously concerned” about inflation, but ECB President Christine Lagarde said that the Governing Council expects inflation to fall back to its 2% target. The ECB is continuing its asset purchases (quantitative easing) but signaled that they will decrease QE gradually. Not surprisingly, the ECB did not raise rates, which remain at 0%.
By contrast, the Bank of England raised its key short-term interest rate by 0.25% Thursday to 0.5%, which represents its second straight interest rate increase. The primary reason the Bank of England increased key short-term interest rates is that it raised its inflation forecast to 7.25%, up from 6% in December. Due to higher energy prices, Britain is very vulnerable and can do little to fight inflation, other than to increase the value of the British pound, so the price of imported goods might decrease slightly.
The Latest Economic Statistics are Generally Trending Down
In addition to the Atlanta Fed’s shocking estimate of only 0.1% GDP growth this quarter, many U.S. statistics are turning down, in part due to rising inflation and some recent lockdowns due to COVID.
The Institute of Supply Management (ISM) announced on Tuesday that its manufacturing index slipped to 57.6 in January, down from 58.8 in December. Since any reading above 50 signals an expansion, the report still reflects a healthy expansion. In addition, 14 of the 15 industries surveyed in January reported that they were expanding. (The only industry to report a contraction in January was Paper Products, so perhaps the silver lining is that people know better than to hoard too much Toilet Paper this time around!)
On Thursday, ISM announced that its non-manufacturing (service) index slipped to 59.9 in January, down from 62.3 in December. This is still a very impressive number, since 50+ means expansion, and all 15 service industries surveyed by ISM reported an expansion, so the service sector remains very healthy.
The Commerce Department reported on Thursday that durable goods orders declined 0.9% in December, but November’s durable goods were revised up to a 3.2% increase. The primary reason for the big swing down in durable goods in December is that the transportation sector contracted 3.9% in December after surging 8.2% in November. The culprit for the volatile transportation order swings is in the commercial aircraft sector, where December orders plunged 14.4% after soaring 41.9% in November. Excluding the volatile transportation component, durable goods orders rose 0.4% in December and 1.1% in November. Overall, it is reassuring that, excluding transportation, durable goods orders continue to steadily improve.
Why the Wild Conflict in Job Numbers?
(And Why Believe Any of those Numbers?)
Workers are still quitting in droves, mostly in search of better-paying jobs in a world of rising prices. The Labor Department reported that 4.3 million workers, representing 2.9% of the workforce, quit their jobs in December. In the previous two months, October and November, 4.2 million and 4.5 million workers, respectively, also quit their jobs, bringing the total to 13 million quits in the quarter. Naturally, this high quit rate is complicating payroll statistics, since the workforce briefly shrinks until these workers find new jobs. There are now a whopping 10.9 million job openings in the U.S., so an acute labor shortage persists.
Here’s what happens when job security and longevity are no longer predictable: The statistics of new hires wildly conflict. The biggest conflict I’ve ever seen happened last week when ADP reported that private payrolls declined by 301,000 in January, which was galaxies below economists’ consensus estimate of a 200,000 gain. This is the first time that ADP reported negative private payroll change since December 2020. According to ADP, the leisure and hospitality sector was hit hardest and lost 154,000 jobs, due to layoffs attributed to fears of the Omicron variant. The trade, transportation and utilities sector also lost 62,000 jobs in January. Naturally, if the workforce continues to shrink, the Fed will be in a bit of a pickle.
Then, shockingly, the Labor Department on Friday reported that 467,000 payroll jobs were created in January, substantially above economists’ consensus estimate of 150,000. Furthermore, the November and December payrolls were also revised up massively, to 647,000 (from 249,000 previously reported) and to 510,000 (from 199,000 previously reported)! It makes you wonder why they bother with the initial report!
The unemployment rate rose to 4% in January, up from 3.9% in December, as the labor force expanded. The labor force participation rate in January rose to 62.2%, up from 61.9% in December, and is now at the highest level since the start of the pandemic. Interestingly, the average work week declined to 34.5 hours in January, down from 34.7 in December. Average hourly earnings rose 0.7% (23 cents) to $31.63 per hour in January, up 5.9% in the past 12 months. Overall, the Labor Department’s job revisions were shockingly high, and some seasonal adjustments may have artificially inflated the January payroll report.
Between these two jobs reports, the Labor Department also announced on Thursday that new weekly unemployment claims came in at 238,000, down from a revised 261,000 in the previous week. Continuing unemployment claims came in at 1.628 million, below the revised 1.672 million in the previous week. Overall, weekly and continuing claims were better than economists’ consensus expectations.
Finally, crude oil prices surged above $90 per barrel last week for the first time since 2014. It is important to note that crude oil prices typically rise every spring, since demand naturally rises, because there are more people who drive and work in the Northern Hemisphere than the Southern Hemisphere. Obviously, geo-political tensions are also putting some upward pressure on crude oil prices. Russia has tried to “sanction proof” its economy since it seized the Crimean Peninsula in 2014 and is actually being economically rewarded now for assembling troops on the Ukrainian border. I hate to say it, but $100 per barrel crude oil could be coming soon, due to soaring seasonal demand and especially if we see war erupt in Ukraine.
Despite all this energy inflation and global unrest, the good news is that earnings are mostly working, and many stocks have resurged on short covering. Last week, better-than-expected fourth-quarter earnings from UPS, plus a 48% dividend increase, were especially well received by Wall Street. I was also happy about Google’s blowout fourth-quarter sales and earnings. Google’s sales were nearly 6% above analysts’ consensus estimate, while its earnings were 12.85% better than analysts’ consensus estimate. Google also announced a 20-for-1 stock split. Google’s leadership should help the other technology stocks rebound.
Navellier & Associates owns Alphabet (GOOG) and United Parcel Service Inc. (UPS), in managed accounts Louis Navellier and his family own Alphabet (GOOG), via a Navellier managed account, but do not own United Parcel Service Inc. (UPS), personally.