by Louis Navellier
March 21, 2023
Short-term, the Treasury Department, Federal Reserve and the FDIC had to restore order by issuing a joint statement that they are taking actions that “fully protects all dispositors” in Silicon Valley Bank as well as Signature Bank (a state-chartered New York bank), but that is no long-term solution. (What does an “insurance limit” really mean if all accounts are always protected to any and all unlimited amounts?)
Another wise short-term move would be to “pause” any interest rate increase this week, while the Fed watches how the banking sector shakes out. Plunging Treasury yields are calming financial markets, but they also indicate that the Fed doesn’t need to raise rates higher to match market rates. In fact, Goldman Sachs now expects that the Fed may not raise key interest rates at its Federal Open Market Committee (FOMC) meeting this week. Clearly, the Fed suddenly has a lot of new challenges on its plate, especially if First Republic Bank and other big financial institutions come to the Fed asking for emergency liquidity.
The bigger long-term problem, of course, is that the yield curve is still inverted, so the Fed must start to un-invert the yield curve if it wants to remove the contagion risk from the U.S. banking system. By the way, I emphatically said on CNBC Singapore last Tuesday that the Fed must un-invert the yield curve. They should shrink the yield curve by getting short-term rates down in their open market operations.
In Palm Beach, Florida, I’ve seen a run on First Republic’s deposits, and some folks are even willing to incur early withdrawal penalties on their CDs, just to put hands on their cash. Naturally, some of these folks in Palm Beach are still scarred from the Madoff disaster, as well as by losing money in leveraged municipal bond products sold by some big financial institutions in 2008. As long as the yield curve stays inverted, there is a risk of a contagion that other banks may fail the Fed’s capital requirements, so job #1 at the Fed should be to reverse the severe inversion of the yield curve, which plagues all banks. The good news is that the Fed has opened its discount window for a year (up from 90 days) to any troubled banks.
The banking contagion risk has spread to Europe, where all eyes are now on Credit Suisse after its auditor identified “material weakness” in its financial reporting for 2021 and 2022. In an interview, the Chairman of Saudi National Bank, which holds 10% of Credit Suisse, said they would provide no financial assistance to Credit Suisse, since having over a 10% stake would incur more regulatory burdens.
Last Wednesday, the Swiss National Bank announced that they were willing to provide a 50 billion Swiss franc ($54 billion) “liquidity backstop” for Credit Suisse, and on Thursday, Credit Suisse accepted, saying that it decided “to pre-emptively strengthen its liquidity” by borrowing from the Swiss National Bank.
Other euro banks (BNP Paribas, Societe Generale, ING, Monte deo Paschi, UniCredit, Commerzbank, and Deutsche Bank) are also weak, so it was shocking that the European Central Bank (ECB) raised its key interest rate by 50 basis points on Thursday, from 2.5% to 3%. However, the previous statement to keep “raising interest rates significantly at a steady pace” was missing, so this could be the final increase.
Along with the Fed, the Bank of England also meets this week, so it will be interesting if they telegraph when they will stop raising key interest rates. Many strategists are forecasting rate cuts later this year, but that seems premature at this point. Still, I would appreciate a joint statement from the U.S. Treasury, ECB, and Swiss National Bank to calm the panic that has enveloped the banking industry, but they are quiet.
Major Inflation Indicators Were Within Expected Ranges
The banking crisis overshadowed inflation last week, but the Labor Department announced on Tuesday that the Consumer Price Index (CPI) rose 0.4% in February and is now running at a 6% annual pace, down from a 6.4% annual pace in January. The core CPI, excluding food and energy, rose 0.5% and is now running at a 5.5% annual pace, down from a 5.6% annual pace in January. Owners’ Equivalent Rent remains stubbornly high, rising 0.8% in February, so the Fed could still be inclined to raise rates 0.25%.
On Wednesday, the Labor Department announced that the Producer Price Index (PPI) declined -0.1% in February and is running at a 4.6% annual pace, down substantially from a 5.7% annual pace in January. The core CPI rose 0.2% in February and is now running at a 4.4% annual pace, the same as in January. Overall, this was a great PPI report, and it could tip the scales in favor of a “pause” in rate increases.
Also on Wednesday, the Commerce Department announced that retail sales declined -0.4%, which was in-line with economists’ consensus estimate. Vehicle sales declined 1.8% in February, so excluding auto sales, retail sales declined -0.1%. Sales at on-line retailers rose 1.6%, but otherwise, February retail sales were lackluster. Spending at bars and restaurants declined 2.2% in February, perhaps due to a colder month than January. January’s retail sales were also revised to 3.2%, up from 3% previously reported.
In the wake of the February retail sales report and January revision, the Atlanta Fed increased its first-quarter GDP estimate to a 3.2% annual pace, up from its previous estimate of a 2.6% annual pace.
Why Crude Oil Prices are Temporarily Down
The Energy Information Administration is having a harder time measuring crude oil inventories due to crude oil blending to a sweeter crude oil grade for export. The U.S. is now exporting about 5.63 million barrels of crude oil a day, which represents 45% of U.S. daily crude oil production. Increasingly, the price of crude oil is tied to the decline of Russia’s crude oil production and to the rising demand in the spring.
Although crude oil and other commodities were impacted by fears of a U.S. banking contagion, I expect crude oil prices to naturally firm up as the weather improves. Currently, U.S. demand remains seasonally low, due partially to the fact the California flooding is impeding traffic. This California flood risk is expected to persist, due to the risk of a fast snow melt in the Sierra, which has a record snowpack.
The Biden Administration provided final approval to ConocoPhillips’ $8 billion Willow project on the North Slope of Alaska. The Willow project is expected to produce 180,000 barrels per day and account for 1.5% of U.S. crude oil production. Alaska is now producing less than 25% of the 2 million per barrels per day in production back in the 1980s. Other than revitalizing Alaska’s oil industry, ConocoPhillips’ Willow project is also important to preserve the lifespan of the Alaska pipeline, since if crude oil stops flowing, the pipeline will be ruined in cold temperatures. This is also the problem facing Russia, since if they stop production in their Arctic oil fields, their pipelines will likely be damaged and become unusable.
The Wall Street Journal on Friday reported that the demand for oil supertankers is rising, due to a spurt of crude oil demand in China for its oil refining industry. The cost of chartering a supertanker is now nearly $100,000 per day, according to ship brokers, which is double the charter rate just a month ago.
According to commodity tracking firm Kpler, China’s crude oil imports are on track to match or surpass the record level set in June 2020. Obviously, China’s growing demand for crude oil bodes well for higher oil prices this spring. In the meantime, companies that own crude oil tankers, like Frontline (FRO) and Teekay Tankers (TNK), are poised to prosper. The International Energy Agency said China’s crude oil demand is expected to rise to two million barrels a day and push global demand to 102 million bbl/day.
In EV news, VW announced that it will spend 180 billion euros ($193.2 billion) on its development of new electric vehicles (EVs) and battery plants. It’s also interesting that the new Porsche EVs (718, Cayenne, and Macan models) will be about 15% costlier than their internal combustion equivalents (ICE).
Porsche is continuing to use efficient lithium-ion batteries, while VWs will be expanding to less efficient iron phosphate batteries to keep EV prices lower, especially on its models designed for cities. The fact that EVs are more expensive that ICE vehicles will continue to be a big problem for a big company like VW, so I expect that iron phosphate batteries will become more dominant in the upcoming years.
Navellier & Associates Inc. owns Frontline (FRO), Teekay Tankers (TNK), Volkswagen Ag. (VWAGY), and ConocoPhillips (COP), we do not own Silicon Valley Bank (SVB), Signature Bank (SBNY), BNP Paribas, Societe Generale, ING, Monte deo Paschi, UniCredit, Commerzbank, Deutsche Bank, JpMorgan Chase & Co. (JPM), Goldman Sachs (GS), Credit Suisse Group (CS), or First Republic Bank (FRC) in managed accounts. Louie Navellier personally owns Frontline (FRO) and Teekay Tankers (TNK), Volkswagen Ag. (VWAGY), and ConocoPhillips (COP), via a Navellier managed account. Louie Navellier does not personally own Silicon Valley Bank (SVB), Signature Bank (SBNY), BNP Paribas, Societe Generale, ING, Monte deo Paschi, UniCredit, Commerzbank, Deutsche Bank, JpMorgan Chase & Co. (JPM), Goldman Sachs (GS), Credit Suisse Group (CS), or First Republic Bank (FRC).