by Louis Navellier

May 16, 2023

Treasury Secretary Janet Yellen turned up the heat by setting a June 1 deadline for the federal government’s debt ceiling debate. Last Tuesday’s meeting between House Speaker Kevin McCarthy and President Joe Biden did not make any progress, but at least they said they will meet again this week.

Since the House of Representatives already passed a debt ceiling bill, all President Biden has to do is sign that bill to lift the debt ceiling; but he does not like the slower spending growth in that bill, so for now McCarthy has the leverage, and it will be interesting to see who blinks first. The debt ceiling is a political football and since 2024 is an election year, both sides are seeking to score political points.

If a deal is not reached by June 1st, pension payments for federal retirees might be postponed, giving lawmakers a little more time to hammer out details. A partial government shutdown is also possible, which has happened in the past, but that is expected to be a last resort. Treasury Secretary Janet Yellen in a Bloomberg interview on Friday said, “If Congress fails to do that, it really impairs our credit rating. We have to default on some obligations, whether it’s Treasuries or payments to Social Security recipients.”

In his New Hampshire Town Hall interview, televised on CNN last Wednesday, Former President Donald Trump urged the House Republican leadership to allow the federal government to default if the Biden Administration and Democratic leadership do not agree to slower spending growth. Specifically, Trump said, “I say to the Republicans out there — Congressmen, Senators — if they don’t give you massive cuts, you’re going to have to do a default.”  Then Trump added, “I don’t believe they’re going to do a default because I think the Democrats will absolutely cave, because you don’t want to have that happen. But it’s better than what we’re doing right now because we’re spending money like drunken sailors.”

At one point in the CNN interview, Trump took a question from the audience about energy inflation.

“If elected President again, what is the first thing you would do to bring down costs?”

Trump: “Drill, baby, drill.”

He said this in response to the anti-drilling energy policy of the Biden Administration, as well as the radical policies of the Environment Protection Agency (EPA), which recently introduced new emission rules for utilities. The EPA also exempted natural gas peaker power plants that turn on and off during peak load demand, like during high air conditioning demand. Excuse me, but if natural gas peaker power plants are exempt from the proposed EPA rules, won’t the utility industry just install more peaker power plants to circumvent the EPA’s proposed rules?  Frankly, this is great news for the domestic natural gas industry!

The Wall Street Journal also published a great article last week about “carbon-capture.”  There is only one commercial power plant in North America that does this, namely the Boundary Dam Power Station Unit 3 in Saskatchewan, Alberta, which is a coal-fired power plant that is fitted with a $1.1 billion carbon-capture system. SaskPower said the benefits of operating a coal-fired power plant utilizing carbon-capture are becoming less apparent, which is raising doubts about the Biden Administration’s goal of achieving carbon dioxide free electricity by 2035. The oil industry has been experimenting with carbon capture technology to recover more oil from existing wells, which is where much of SaskPower’s carbon dioxide is piped 36 miles to extract more crude oil from geological formations.

The only commercial-scale carbon capture plant in the U.S. was the Petra Nova coal-fired plant in Texas that closed in 2020 after operating three years. Even if carbon capture can be perfected, the next hurdle is how to be profitable when there are no producing oil fields.  As a result, the Biden Administration’s goal of shifting to hydrogen or carbon capture for electricity generation is beginning to look futile.

Inflation is Retreating, and Growth is Returning

There continues to be no recession in sight, as the Atlanta Fed estimates second-quarter GDP growth at a 2.7% annual pace. Furthermore, first-quarter GDP growth is expected to be revised higher due to the fact that the March trade deficit declined sharply: Imports declined 0.3% to $320.4 billion, and exports surged 2.1% to $256.2 billion, led by vehicles, crude oil, refined products, and natural gas. The U.S. trade deficit with China is now at its lowest level in three years. China’s total April exports declined by 6.4% to $295 billion, which raises concerns that its economic growth is slowing. The Chinese purchasing managers index declined to 49.2 in April, down from 51.9 in March. Any reading below 50 signals a contraction.

Last Wednesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.4% in April and 4.9% in the past 12 months. What got Wall Street most excited was that Owners’ Equivalent Rent only rose 0.4% in April, down from 0.6% in March and 0.8% in February, so finally the cooling housing market is showing up in the CPI report. Also encouraging was the fact that service prices, excluding energy and housing costs, rose by only 0.1%, which was very encouraging! Food prices were unchanged in April, while energy prices rose 0.6%. The core CPI, excluding food and energy, rose 0.4% in April and 5.5% in the past 12 months. Overall, Wall Street is excited that service costs are moderating.

As I told CNBC Singapore last Wednesday, the CPI will likely be falling dramatically in the next couple of months, since the biggest monthly inflation surges were in May 2022 (0.9%) and June 2022 (1.2%). They will soon be “cut off” in the 12-month calculations, so the annual rate of CPI inflation will likely decelerate to about a 3% annual pace in July. A 3% inflation rate should be low enough to dampen any inflation expectations and get the Fed to think about cutting rates in the December 2023 FOMC meeting.

On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose 0.2% in April and just 2.3% in the past 12 months. The biggest surprise was that the March PPI was revised to a decline of -0.4%, which helped push the annual PPI down to a 2.7% annual pace through March. Food prices declined -0.5% in April, while energy prices rose 0.8%. The core PPI, excluding food, energy, and trade services, rose 0.2% in April and 3.4% in the past 12 months. The bad news was that the wholesale service costs rose to the highest level in six months, so the Fed will likely keep rates high for a few more months.

The Labor Department also reported on Thursday that weekly unemployment claims rose to 264,000 in the latest week, up from 242,000 in the previous week. This is the highest level of unemployment claims since October 30, 2021. Continuing unemployment claims also rose to 1.813 million, up from a revised 1.801 million in the previous week. The four-week moving average of weekly unemployment claims rose to 245,250, its highest level since November 20, 2021, so with unemployment claims now running at the fastest pace in over 17 months, the Fed should pause their interest rate hikes for the time being.

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

Please see important disclosures below.

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To Find Big Treasures, You May Need Ballast

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About The Author

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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