by Louis Navellier

April 11, 2023

When President Biden was a candidate, he said that he planned to make the Saudis “pay the price.” He said he would “make them, in fact, the pariahs that they are.” Additionally, regarding the Saudi Royal Family, he said that there is “very little socially redeeming value in the present government in Saudi Arabia.”  Due to the war in Yemen, President Biden ordered an end to all arms sales and other support for Saudi Arabia. Clearly, the U.S. policy on Saudi Arabia is now enduring significant Saudi payback.

Under the Trump Administration, by contrast, Saudi Arabia welcomed President Trump in an elaborate ceremony. Trump was Israel’s ally and also the Saudis’ ally, no easy feat. Now, Saudi Arabia is moving away from ties with the U.S. Saudi Arabia has (1) reestablished diplomatic relations with Iran, (2) helped China expand its refining capacity to process Russia’s crude oil, and (3) bought cheaper heavy, Russian crude oil for electricity generation, so Saudi Arabia could sell more of its lighter grade crude oil.

In other words, whatever influence the U.S. once had with Saudi Arabia has been squandered. China, Russia, and Saudi Arabia are now formidable opponents. Since India also refines a lot of Russian oil, so that it can export refined products, I could add India into this new China/Russia/Saudi Arabia alliance.

The Biden Administration can always release more crude oil from the Strategic Petroleum Reserve (SPR) to try to curb soaring oil prices, but the SPR has already been drained to below a 40-year low and the U.S. is now in the midst of soaring seasonal demand that will be much stronger during the summer.

Obviously, any time energy prices soar, it hurts the Biden Administration, so it will be interesting to see how they respond to OPEC+, since demonizing Saudi Arabia and its Royal Family is not working well.

While the U.S. is worried about renewed energy inflation, Europeans are worried about accelerating food inflation. The “green” policies that seized 30% of the farmland in the Netherlands are apparently now having consequences. Furthermore, the mandate that many European countries have faced – to shift away from more efficient chemical fertilizers to organic fertilizers, to reduce carbon dioxide emissions – is just making food prices soar. No wonder there are protests in Britain, France, and Germany.

The European Union is trying to fight food inflation with price caps, but that is just causing more food shortages. As a result, lines for certain food staples may become more common in Europe.

French President Emmanuel Macron last week decided to flee the protests in France and visit China for three days. It is widely perceived that Chinese President Xi Jinping will try to drive a wedge between France and the European Commission regarding Russia. Macron has warned Europe not to pick sides between the U.S. and China. Specifically, President Macron said, “We need a single global order.”

Interestingly, President Macron is being accompanied by a delegation of executives from leading French companies, including Airbus, so France is looking to expand its business with China, which is its third largest trading partner after Germany and the Netherlands. In addition, the U.S. European Commission President Ursula von der Leyen also visited China last week, and she called on European Union (EU) members to scale back the risks in dealing with a more assertive China, so this upped the tension level.

Will We See a Real Recession This Year – or Just a “Rolling” Recession?

The Institute of Supply Management (ISM) announced that its manufacturing index declined to 46.3 in March, down from 47.7 in February. This represents the fifth straight month that this index has been below 50, which signals a contraction. The new orders component slipped to 44.3 in March, down from 47 in February. All the other sub-components fell, too. Overall, the manufacturing contraction is getting worse. The good news is that this weak reading should help Treasury yields continue to moderate a bit.

On Wednesday, ISM announced that its non-manufacturing (service) index slipped to 51.2 in March, down sharply from 55.1 in February. The new orders component declined for the third straight month and plunged to 52.2 in March, down from 62.6 in February. Only 13 of the 18 industries that ISM surveyed reported growth in March. Even though any reading over 50 signals an expansion, the sharp deceleration in the ISM services index in March was a massive disappointment.

Due to this new data, the Atlanta Fed lowered its first-quarter GDP estimate to an annual pace of just 1.5% for the first quarter, and due to higher crude oil prices, some economists are lowering their second-quarter GDP estimates. Since the manufacturing sector is definitely in a recession, the best way to describe the current environment is a “rolling recession,” as my favorite economist, Ed Yardeni, calls it.

There is definitely a feeling that the U.S. is no longer the world leader, since our former allies, like Brazil, France, and Saudi Arabia all embrace China, and do not want to get involved in the spat between the U.S. and China. Furthermore, China likes to fight economic wars and dominate key industries, so it can better influence selected industries. Due to slower EV sales in China, the price of lithium, cobalt, and nickel are moderating, but this may be temporary, as more auto manufacturers switch to EVs. Both Europe and the U.S. are striving to onshore their battery supplies, but recent Chinese price cuts are making onshoring options more complicated. The bottom line is China likes to control key industries.

I should add that House Speaker Kevin McCarthy on Wednesday met with Taiwan President Tsai Ing-wen at the Ronald Reagan Presidential Library during her U.S. tour. China has vowed retaliation for Speaker McCarthy meeting Tsai. A spokesperson for the Chinese Consulate in Los Angeles said that this meeting was “an assault on the political foundation of Sino-U.S. relations,” adding that, “This is the first red line that must not be crossed.” Taiwan’s Foreign Ministry said that the Chinese criticisms “have become increasingly absurd,” and Taiwan would not back down in the face of authoritarian pressure.

In other economic news, ADP reported on Wednesday that private payrolls rose by just 145,000 in March, down from a revised 261,000 in February. Nela Richardson, ADP’s chief economist, said, “Our March payroll data is one of several signals that the economy is slowing.”  As further evidence that employers are pulling back, the Labor Department reported on Tuesday that its JOLTS report showed that there were 9.93 million available jobs in February, which is 632,000 fewer job openings than January’s revised total. This is the first time that job openings fell below 10 million in nearly two years.

On Friday, the Labor Department reported that 236,000 payroll jobs were created in March. This was essentially in-line with economists’ consensus estimate of 239,000. The January total was revised down to 472,000 (from 504,000 previously reported), while the February payroll was revised up to 326,000 (from 311,000). The unemployment rate declined to 3.5% in March, down from 3.6% in February.

The labor force participation rate rose to 62.6%, the highest level in three years, as those over 55 came back to work. The average workweek declined to 34.4 hours, the lowest level since the pandemic began. Average hourly earnings rose 0.3% (+9 cents)_to $33.18 per hour. In the past 12 months, average hourly earnings rose 4.2%, well below inflation’s rise. Overall, the payroll report was indicative that payroll growth is slowing, but more older workers are seeking jobs, since inflation is eroding purchasing power.

In addition, the Labor Department announced on Thursday that weekly unemployment claims declined to 228,000 in the latest week, up from a sharply revised 246,000 in the previous week. Continuing unemployment claims rose to 1.718 million in the latest week, up from a revised 1.649 million in the previous week. The four-week average of weekly and continuing unemployment are both rising.

And finally, on Tuesday, when former President Trump was charged in New York, Treasury yields declined significantly in a flight to quality, while gold and many cryptocurrencies rallied. Hopefully, our political soap opera will end soon, as the U.S. has lost its credibility around the world, and the U.S. dollar is losing its mojo as the U.S. embarrasses itself around the world with our political infighting.

The World Bank and IMF Warn of a Slow-Growth Decade Ahead

The World Bank is warning of a “lost decade” in the 2020s for world growth, citing the war in Ukraine, the Covid-19 pandemic, and high inflation. The Washington DC bank said in a report that “it will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one,” adding that “a structural growth slowdown is under way: At current trends, the global potential growth rate … is expected to fall to a three-decade low over the remainder of the 2020s.”  Ouch!

Speaking of depressing predictions, the International Monetary Fund managing director, Kristalina Georgieva, on Thursday warned that the global economy is facing years of slow growth, with medium-term prospects the weakest in more than 30 years. Georgieva said that the world economy would expand at a 3% annual pace for the next five years, saying. “The path back to robust growth is rough and foggy, and the ropes that hold us together may be weaker now than they were just a few years ago.”

She concluded by saying that the weaker economic outlook would make “it even harder to reduce poverty, heal the economic scars of the Covid crisis, and provide new and better opportunities for all.”

Yikes! I think the economists at the World Bank and IMF need to be treated for clinical depression!

While global growth may be slowing, China’s economic growth is re-surging fast. China’s official purchasing managers index for the service sector surged to 58.1 in March, up from 56.3 in February. We should never underestimate a world where nearly eight billion people are each striving for a better life.

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

Please see important disclosures below.

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A Look Ahead by Louis Navellier
President Biden’s Saudi Insults Have Come Home to Roost

Income Mail by Bryan Perry
Earnings Season is the Next Big Hurdle for Equities

Growth Mail by Gary Alexander
A Tax Time Bomb is Ticking

Global Mail by Ivan Martchev
The Odds of a May Rate Hike Just Rose

Sector Spotlight by Jason Bodner
Investing Isn’t as Easy as Child’s Play…But It’s Close

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Louis Navellier

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