by Louis Navellier

April 9, 2024

Tomorrow morning, the Consumer Price Index (CPI) will be released for March, and the Producer Price Index will follow on Thursday morning. Miracles can happen, but if they follow the trend in January and February, prices will continue higher, especially considering recent price increases in food and energy.

The core PCE, which is the Fed’s favorite inflation indicator, came out at +0.3% in February and is now running at a 2.8% annual pace. The surprise in that release was that the January core PCE was revised up to a 0.5% increase, up from 0.4%, previously reported. The overall PCE, including food and energy, rose 0.3% in February and 2.5% in the past 12 months. In his reaction to the core PCE, Fed Chairman Jerome Powell in San Francisco quipped, “It is good to see something coming in line with our expectations.”

I should add that Fed Chairman Jerome Powell spoke last Wednesday at the Stanford Business School, where my son is a student. He said that the Fed still has time to assess the recent inflation data before deciding when to start cutting key interest rates. Specifically, Powell said that recent higher-than-expected inflation data did not “materially change” the overall picture and reiterated that the Fed will decide when it will likely be appropriate to start lowering key interest rates “at some point this year.”  Hmm. Thanks!

The stock market rallied on Thursday morning in the wake of Fed Chairman Powell’s cryptic comments. However, on Thursday afternoon, the stock market did an abrupt “about face” after Minneapolis Fed Bank President Neel Kashkari said that he penciled in just two rate cuts this year, but that if inflation continues to stall, none may be required this year. Yikes!  I once liked Neel, but now I am not so sure.

Here are some of the strong economic news items that are causing the Fed to retreat from talk of rate cuts.

The ISM Manufacturing report surprised most economists by announcing that its manufacturing index improved to 50.3 in March, up from 47.8 in February. This ended 16 straight months in which the manufacturing sector has been in a contraction. One “green shoot” that pushed the index higher was that the new orders component rose to 51.4, up from 49.2 in February. In addition, production at factories surged to 54.6 in March, up 48.4 in February, and nine of the 15 manufacturing industries that ISM surveyed expanded in March, so there is some hope for a manufacturing resurgence this year.

Next, ISM announced that its non-manufacturing (service) index decelerated to 51.4 in March, down from 52.6 in February, but any reading above 50 signals an expansion, so the service sector is still growing, just a bit slower. For example, the new orders component came in at a very healthy 54.4 in March, down from 56.1 in February, and 12 of the 16 service industries that ISM surveyed reported growth in March.

Positive U.S. statistics continued last Wednesday, when ADP reported that 184,000 private sector jobs were created in March and the Labor Department announced on Friday that 303,000 new payroll jobs were created in March, substantially more than the economists’ consensus forecast of 214,000.

The unemployment rate dropped to 3.8%, down from 3.9% in February. Average hourly earnings rose by 12 cents (+0.3%) to $34.59 per hour, while the average workweek rose to 34.4 hours, up from 34.3 hours in February, and the labor force participation rate rose to 62.7%, up from 62.5% in February.

This strong payroll report caused Treasury yields to rise, squelching hopes for an early Fed rate cut.

Overseas, China’s National Bureau of Statistics announced that its official purchasing managers index (PMI) rose to 50.8 in March, up from 49.1 in February. This is the highest Chinese PMI in the past year and since it is above 50, it signals an expansion. Rising export orders were the primary reason that China’s PMI rose in March. Interestingly, the National Bureau of Statistics announced that further state support for industry was needed, since companies were suffering from “insufficient market demand.”

That last item tells me that China is still in the midst of a domestic contraction and a sputtering economy.

Eurostat on Wednesday announced that consumer inflation in the eurozone declined to a 2.4% annual pace in March, which is lower than the economists’ consensus forecast of 2.5%. This decline in consumer inflation from a 2.6% annual pace in February is setting the stage for a key interest rate cut by the European Central Bank (ECB) in June. I am also expecting that the Bank of England and possibly the Fed will also cut key interest rates in June in essentially a coordinated rate cut by major central banks.

The other interesting development is that we’re seeing gold at record highs over $2,300 per ounce, a sure sign of inflation and currency instability. Gold’s gain is spurred in part by record buying of gold by many central banks, especially the central bank of China and private banks in China and India.

Statistics Canada also announced that record gold shipments helped boost its export growth to the strongest position in the past six months. Excluding exports to the U.S., Canada’s exports to other countries surged 14.2% in February, due largely to gold exports to Britain and Switzerland.

Now that crude oil is over $86 per barrel, it appears that inflation’s decline may be stalling, and we may remain far from reaching the Fed’s 2% target goal. Rising Treasury yields in the wake of improving economic data also may have spooked the stock market a bit. Bloomberg pointed out that financial markets are now signaling 65 basis points in interest rate reductions, not the 75 basis points that the Fed has telegraphed via its dot plot.  I remain in the camp that the Fed, ECB and Bank of England will start cutting key interest rates in June and that the Fed will cut key interest rates three times this year. 

In the meantime, Tesla shocked Wall Street on Tuesday when it announced that it only delivered 386,810 vehicles in the first quarter, substantially below analyst consensus estimate of 449,080. The Model 3 and Model Y accounted for 96% of Tesla’s first quarter deliveries. A shutdown at its Berlin plant and retooling at its Fremont plant for an upgraded version of the Model 3 hindered Tesla’s output. Concerns about BYD and Li Auto taking market share away from Tesla in China persists. Tesla stock is down 33% year-to-date.

Further compounding the stock market fear on Thursday was the fact that President Biden demanded an immediate cease fire from Israeli Prime Minister, Bibi Netanyahu. Complicating matters for Israel is that the CIA warned that Iran will attack after the missile attack on Iran’s consulate in Damascus, Syria. So essentially, the fears of a possible World War III are growing as the unrest in the Middle East spreads.

Adding to Asian economic woes, a massive earthquake in Taiwan last Tuesday disrupted semiconductor manufacturing, even if only briefly. Although Taiwan Semiconductor evacuated its factories after the earthquake, workers are now returning. The manufacturing facilities were fortunately on the west side of Taiwan, while the 7.4 magnitude epicenter was on the east side of the island, near the city of Hualian. Nvidia is dependent on TSMC for chip production, so any price dip in Nvidia a good buying opportunity.

As I wrote last week, mass starvation is becoming increasingly likely due to an acute fertilizer shortage that may compound the aid relief to Cuba, Haiti and Gaza. The farmer protests in Europe are partially due to the restrictions on chemical fertilizers engineered by the elite to comply with the Paris Climate Accord. However, these policies are now resulting in a massive right-wing shift against oppressive government policies. The New York Times this week had an article entitled “Angry Farmer Are Reshaping Europe” that detailed how widespread the rejection of green policies are within European farm communities.

American Energy Independence Has Prevented Recession

In the U.S., we are food and energy independent, so we have a natural competitive advantage. The Biden Administration’s recent ploy to ban LNG expansion until environmental reviews can be done after the Presidential election is a sign that the ruling elite are still in charge, despite widespread resistance.

The reason that the U.S. economy has not slipped into a recession is that the energy sector has boomed, so that the U.S. is now producing a record 13.3 million barrels per day of crude oil and exporting a record of almost five million barrels per day. The U.S. is even more dominant in natural gas, which is considered a waste product from crude oil production that is often flared if it cannot be sold. The energy sector alone in the U.S. is responsible for approximately delivering 2% GDP growth so energy has prevented a recession.

Energy demand is rising, now that spring has arrived. However, supply remains tight. Bloomberg reported that Russia has reduced its diesel exports to 569,000 barrels per day, which is down 21% from its average daily exports of 724,000 barrels per day in March. The Ukrainian drone attacks and seasonal maintenance are apparently responsible for the drop in Russian exports. Another Ukrainian drone attack on a Russian refinery on Tuesday may further curtail Russian diesel production. Furthermore, the missile attack on the Iranian consulate in Damascus, Syria, which killed senior Revolutionary Guard leaders has raised the tension in the Middle East because it is anticipated that Iran may stage a retaliatory strike soon.

Regardless of who becomes the next President, the U.S. will remain strong due to the fact that our states naturally compete with each other for business leaders, so I remain optimistic regardless of political gyrations that are expected to unfold in the upcoming months. I should add that if it appears that Donald Trump might be re-elected after the summer conventions conclude, I may sell many of our remaining energy stocks due to his “drill baby drill” promise, since a U.S. glut could emerge in a Trump presidency.

Before concluding, I’ve got to comment that AI is running into two energy problems. First, the power grid is not currently strong enough to support the future cloud computing demand that AI requires. The second problem (which The Wall Street Journal discussed last week) is that the Internet is not fast enough for growing AI demands. AI needs to be able to save selected correlations or data pockets, and to optimize those correlations. That is essentially what we do with the fundamental analysis we do. The danger with big data is getting lost in the data. Power grid and Internet speed limitations may cause AI to get smarter.

In conclusion, in election years and a rising market, optimism can be addictive. If you turn on Bloomberg Television the most common topic is FOMO or “fear of missing out.”  You already have seen what market leaders like Nvidia, Super Micro Computer, Eli Lilly and Novo-Nordisk have done this year, and I expect that many more of our fundamentally superior stocks will follow. Presidential election years can breed optimism, since American can sense that change is coming. A growing sense of (1) consumer and investor optimism, (2) two more quarters of easy year-over-year comparisons and (3) I believe coordinated central bank rate cuts are expected to make 2024 the best year for our fundamentally growth stocks since 1999!

Navellier & Associates owns Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Novo-Nordisk A/S Sponsored ADR Class B (NVO), Eli Lilly and Company (LLY), and Li Auto, Inc. Sponsored ADR Class A (LI), in managed accounts. Some accounts own Tesla (TSLA), per client request in managed accounts.  Louis Navellier and his family own Nvidia Corp (NVDA), Super Micro Computer, Inc. (SMCI), Novo-Nordisk A/S Sponsored ADR Class B (NVO), Li Auto, Inc. Sponsored ADR Class A (LI), and Eli Lilly and Company (LLY), via a Navellier managed account, and Nvidia Corp (NVDA) in a personal account. He does not own Tesla (TSLA) personally.

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

Please see important disclosures below.

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Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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