by Louis Navellier
April 16, 2024
After the recent increase in Treasury yields and a “hot” Consumer Price Index (CPI) were released last Wednesday, traders are now expecting only two key Fed rate cuts this year. Last Wednesday, the Labor Department said that the CPI rose 0.4% in March to a 3.5% annual pace, up from 3.2% in February. The core CPI, excluding food and energy, also rose 0.4% and is running at a 3.8% annual pace, matching February’s pace. Food prices rose 0.1% in March, while energy prices surged 1.1%, led by a 1.7% jump in gasoline. Owner’s equivalent rent (shelter costs) rose 0.4% in March, the same pace as in February.
On Thursday, the Labor Department announced that the March Producer Price Index (PPI) was only half the CPI gain, rising 0.2%, and 2.1% over the past 12 months. The core PPI, excluding food, energy, and trade services, rose 0.2% in March and 2.8% in the past 12 months. The good news is that the price of wholesale goods declined 0.1% in March, and they have fallen for five of the past six months, as we are still importing deflation from China – a trend which could help Treasury yields moderate a bit.
China’s deflation may persist, since China is likely in a recession, as they announced on Friday that their exports plunged 7.5% in March and imports declined 1.9%, so between falling prices, a surplus of EVs, batteries and solar panels, prices of goods from China should keep declining in the upcoming months.
Contributing to China’s deflation is the fact that European ports are clogged with Chinese EVs, some of which have been sitting there for up to 18 months without a destination. Essentially, these EVs are just sitting in ports until they are sold to distributors. In 2023, Chinese car exports rose 58% and flooded the European auto market. Naturally, these Chinese EVs, which do not have a good service network, will be heavily discounted for sale and are facing a backlash by European EV manufacturers, like VW Group.
If the Fed doesn’t cut rates in June and the ECB does, the dollar will likely rise further, and a strong U.S. dollar raises the price of crude oil. Crude oil surpassed $87 last Friday and there are now fears of $100 crude oil after Mexico slashed its oil exports. Oil shipments from Mexico dropped 35% in March and are now at their lowest level since 2019. Iraq, Qatar and UAE also curtailed their oil exports in March, so that a million barrels per day of crude oil exports disappeared in March, just as seasonal demand began rising.
Egypt used to be an LNG exporter, but after repeated electricity blackouts last year, during a time of peak air conditioning demand, Egypt is now a natural gas importer due to their rising electricity demand.
Natural gas peak-power plants are becoming increasingly common around the world and are expected to help Egypt with its fragile power grid. The only problem is that the Biden Administration is fighting LNG expansion, so the U.S. may lose market share – despite the fact that the U.S. has a surplus of natural gas.
Playing Politics with Energy Prices
The Wall Street Journal reported (in “Now They’re Voting Red: A Pennsylvania Fracking Boom Weighs on Biden’s Re-election Chances”) that President Biden is at risk of losing Pennsylvania, a key “swing state,” due to his administration’s growing opposition to fracking for natural gas. Another Journal article (“The Climate Scientist Fossil-Fuel Companies Can’t Stand”) reported that the Biden Administration is being influenced by Cornell Professor Robert Howarth, who has convinced the Biden Administration that LNG is very dangerous to the environment since it increases methane emissions. The net result is that Western Pennsylvania is turning increasingly red since it is a big producer of natural gas from fracking.
As gasoline prices at the pump rise, this hurts President Biden’s re-election chances, so he has decided to buy some more votes by offering student loan relief for up to 26 million voting-age Americans. Of course, President Biden has pitched student loan relief before, only to have his plans disallowed by federal courts. The fact that President Biden knows that the federal courts will not allow student loan relief means that he is merely trying to “buy” his reelection by making promises which he knows are likely to fail in the end.
Besides, how can we afford massive debt forgiveness? The U.S. debt is now over 130% of GDP. In the first half of Fiscal Year 2024 (ending September 30), the federal debt tallied well over $1 trillion, a $2.13 trillion annual rate. Since both major parties are promising more deficit spending, the deficit will continue to rise. This may not be problematic now, but it will be if a poor Treasury auction sends yields soaring.
If you want to see where we are heading, Italy’s debt is now running at nearly 140% of GDP. Italy is naturally impeded by its aging demographics, which also characterize many other European economies. However, as long as Italy can sell its debt, no one seems to worry. Eventually, high debt can destroy an economy, as Greece found out about a decade ago, so we seem to be going the way of Greece and Italy.
Personal debt is also soaring: The Philadelphia Fed announced that 3.5% of credit card balances were at least 30 days past due at the end of December, which is the highest since 2012, when it started collecting this credit card data. This credit card survey also found that credit scores declined to their lowest levels since the first quarter of 2020. Obviously, many consumers are struggling, which will put increasing pressure on the Fed to cut key interest rates. The Biden Administration is obviously worried about its re-election chances, as many consumers struggle with credit, so it will be interesting if they criticize the Fed.
The Iranian Counterattack Has Fizzled…So Far
The attack that everyone expected – Iran retaliating against Israel – happened late Saturday, but apparently not one of Iran’s 300 or more missiles and drones reached its target in Israel. Israeli Prime Minister Benjamin Netanyahu, speaking from an air base in southern Israel, said, “Whoever harms us, we will harm them. We are prepared to meet all of the security needs of the State of Israel, both defensively and offensively.” The U.S. Navy has also relocated its warships to protect Israel, so tension remains high. Obviously, if the fighting in the Middle East escalates further, crude oil prices will keep rising.
Turning to other ongoing war news, a Russian naval missile carrier was struck by two drones in the Baltic Sea. Ukrainian military intelligence is reported behind the attack. Russia is reportedly losing up to 650 troops per day in a war of attrition that is very tragic for both sides. The conflict between Ukraine and Russia is now occurring farther away from the actual border fighting. A recent Ukrainian drone attack on a refinery deep in Russia is another example of how the current conflict is expanding. Due to this war and the Middle East war’s escalation, crude oil prices are expected to remain high, since Russia’s energy exports have been curtailed after four of its refineries have been attacked by Ukraine in recent months.
As Ukraine’s battlefield situation has deteriorated in recent weeks, Ukraine has increasingly turned to making strikes deep within Russian territory, including infrastructure. Interestingly, Bloomberg reported that Defense Secretary Lloyd Austin warned that Ukraine’s recent attacks on Russian oil refineries risk impacting global energy markets and urged Ukraine to focus on military targets instead, but these strikes are military targets — reducing fuel supplies to the Russian military. This prompted Republican Senator Tom Cotton to accuse the administration of discouraging Ukrainian actions for political reasons, saying, “It sounds to me like the Biden administration doesn’t want gas prices to go up in an election year.”
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Global Implications of Rising Energy Prices
Income Mail by Bryan Perry
Factoring In the New War Realities
Growth Mail by Gary Alexander
How to Create a Roaring (2nd Half of the) Twenties
Global Mail by Ivan Martchev
Possible Rising Recriminations Face the Stock Market
Sector Spotlight by Jason Bodner
Is a Market Cataclysm Coming Soon?
View Full Archive
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Louis Navellier
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