March 19, 2019
Brexit is turning out to be a disaster. Last Tuesday, members of Britain’s Parliament overwhelmingly defeated Prime Minister Theresa May’s “Plan B” for Brexit by a 391 to 242 vote. Even though this vote was less decisive than the Brexit plan the Prime Minister May proposed in January (i.e., “Plan A”), this was still a very decisive vote. Then, on Wednesday, British lawmakers rejected by a super-slim margin of only four votes (312 to 308) a “no deal” plan for Brexit on March 29th, setting up a Brexit delay vote.
On Thursday, members of Parliament voted 412 to 202 to delay Brexit – pursuant to Article 50 – seeking an unspecified extension that the European Commission is expected to grant. Even though the British pound and euro rallied in anticipation of a Brexit delay, U.S. Treasury bond yields continue to meander slightly lower in a clear sign of a flight to quality and continued international capital flight.
As an example of the global economic slowdown hitting European markets, dealers at the Geneva Motor Show seemed downbeat due to slowing vehicle sales in China and Europe. Additionally, these auto makers introduced predominantly new electric vehicles (EV) which cost them tremendously high research and development sunken costs, so their profitability is under tremendous pressure.
Fed Chairman Powell Has Learned to “Watch His Language”
On 60 Minutes nine days ago, Fed Chairman Jerome Powell did a good job as a cheerleader for the U.S. economy. Specifically, he said, “We’ve seen a bit of slowing, but still to healthy levels, in the U.S. economy this year,” adding, “I would say there’s no reason why this economy cannot continue to expand.”
The truth of the matter is that the U.S. economy often suffers from slow economic growth during the first quarter, due to severe winter weather. Now that spring is coming, consumers’ moods should improve and I expect retail spending will improve. Furthermore, economic data in recent weeks has been encouraging, signaling that there is pent-up demand that should help GDP steadily grow in the upcoming months.
For example, the Commerce Department announced that retail sales rose 0.2% in January, but when autos and gasoline sales were excluded, core retail sales rose a robust 1.2%. Discounts for vehicles and lower gasoline prices hindered overall retail sales for January, since auto sales declined 2.4% and sales at gas stations declined 2%. December retail sales were revised down to a 1.6% decline, down from 1.2% originally reported, which marks the largest monthly drop since 2009. However, an early Thanksgiving remains the primary culprit for weak December retail sales. Overall, January retail sales were encouraging and should help to boost the perception that consumer spending will steadily improve in 2019.
On Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.2% in February, in-line with economists’ expectations. This was the first monthly increase after three straight months of 0% change. Food and energy prices each rose 0.4% in February. Excluding food and energy, the core CPI rose 0.1% in February, the smallest monthly increase in six months. In the past 12 months, the CPI and the core CPI have risen 1.5% and 2.1%, respectively. I should add that gasoline prices rose 1.5% in February, but have declined 9.1% in the 12 months, so there appears to be minimal inflation risk.
Then, on Wednesday, the Labor Department announced that the Producer Price Index (PPI) rose 0.1% in February, below economists’ consensus estimate of a 0.2%. The core PPI, excluding food and energy, also rose 0.1% in February, so there was little evidence of any inflation on the wholesale level. In the past 12 months, the PPI and core PPI rose 1.9% and 2.3%, respectively. Last summer, the PPI and core PPI were running at an annual pace of 3.4% and 3%, respectively, so wholesale inflation has cooled off dramatically in the past several months – one reason why the Fed has hit the “pause” button.
The construction sector is heating up. On Wednesday, the Commerce Department reported that construction spending rose 1.3% in January, substantially higher than economists’ estimate of 0.4% and the largest monthly increase since last April. It was driven by a dramatic 4.9% increase in public construction projects, which is the largest monthly increase in over eight years (since September 2010). December’s construction spending was also revised up dramatically to a 0.8% increase, up from a previous reported 0.6% decline. Overall, this was a very bullish report for continued strong GDP growth.
The Commerce Department also announced on Wednesday that durable goods orders rose 0.4% in January, substantially higher than economists’ consensus estimate of a 0.1% decline. Excluding transportation orders, durable goods orders declined 0.1%. Although commercial aircraft orders remain strong, the transportation sector is still hindered by a 1% decline in auto parts, due predominantly to weakening auto sales. The good news is the orders for core durable goods rose 0.8% in January, the largest increase in six months. December durable goods orders were revised up to a 1.3% increase.
Although this was a positive durable goods report, durable goods orders could plunge if Boeing has any order cancellations due to the 737 Max grounding. The 737 Max issue seems to be related to autopilot software stall characteristics that some pilots may not have been properly trained for, so hopefully between a software update and better pilot training, Boeing will not have massive order cancellations. I actually bought more Boeing stock last week in a sub-advised mutual fund, managed accounts, and a family account, since I am confident that Boeing will act swiftly to address the necessary software and pilot training issues. I should add that the 737 Max is substantially more efficient than older 737 models, so I would be shocked if airlines cancelled their orders, since there is no viable competitor from Airbus.
(Navellier & Associates does own BA in managed accounts and our sub-advised mutual fund. Louis Navellier and his family do own BA in personal accounts.)