by Louis Navellier

May 19, 2020

Deflation is Spreading

There is a mounting concern that deflation is spreading. Specifically, the Labor Department announced on Tuesday that the Consumer Price Index (CPI) declined by a whopping 0.8% (a -9.2% annual rate) in April, a bit worse than the economists’ consensus expectation of a 0.7% decline. Energy prices fell 10.1% in April as gasoline prices plunged -20.6%. Food prices rose 1.5% in April as “food at home” costs soared 2.6%, led by a 4.3% increase in meats, poultry, fish, and eggs. Excluding food and energy, the core CPI dropped by 0.4% in April, well below economists’ consensus estimate of a 0.1% decline. The core CPI posted its largest monthly drop since 1957, while the headline CPI posted its largest decline since 2008.

On Wednesday, the Labor Department announced that the Producer Price Index (PPI) plunged a shocking 1.3% in April (a -14.5% annual rate), which was substantially lower than economists’ consensus estimate of a 0.5% decline. The PPI has declined every month this year and has fallen 1.2% in the past 12 months.

The core PPI (excluding food, energy, and trade services) declined 0.3% in April. Wholesale energy prices plunged a whopping 19% in April. Despite rising food costs in grocery stores, wholesale food prices fell 0.5% in April. The price for “final demand goods” plunged 3.3% in April, which is the biggest monthly decline ever recorded. Overall, there is no doubt that deflation is alive and well on the wholesale level!

Despite the wave of new government debt and borrowing, interest rates are not rising. There were multiple Treasury auctions last week and the “bid to cover” ratios were actually higher than normal, so all the fears about the U.S. federal government borrowing too much did not cause key interest rates to spike.

However, the market sank on Wednesday after Fed Chair Jerome Powell said that “the economic path ahead is highly uncertain and subject to downside risks.” This suddenly “fuzzy” outlook by the previously positive Fed Chair caused Treasury yields to meander lower, but the ultralow interest rate environment continues to support higher stock prices, since at the time of Fed Chairman Powell’s speech, the stocks in the Dow Industrials and S&P 500 that pay dividends have an annual yield of 3.4% and 2.8%, respectively.

Powell also implied that a quick V-shaped economic recovery was unlikely and said a steep economic downturn could “leave behind lasting damage” to the U.S. economy. In his speech before the Peterson Institute for International Economics, the Fed Chairman said, “The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.” Translated, this essentially means that the Fed will continue to keep key interest rates ultralow for the foreseeable future.

The Grim Statistics Mount Up

The Labor Department announced on Thursday that new claims for unemployment rose 2.98 million in the latest week. Although the weekly totals continue to decline, they are still running over 10 times the normal weekly rate and the total has reached 36.5 million workers filing for unemployment benefits in the past eight weeks – meaning that the unemployment rate is now close to 20%. California, Florida, Georgia, New York, and Texas reported the most new jobless claims. Since three of these five states are in the process of reopening, hopefully the jobless claims will continue to steadily decline in upcoming weeks.

Also on Thursday, the Fed announced that nearly 40% of households with less than $40,000 in income reported a job loss in March. Clearly, this is very bad for apartment rental income, sub-prime vehicle loans, and credit card debt. In other words, nearly 40% of families that could least afford to lose income lost a job in March. This may explain why unemployment funds in some states, like California, have been depleted, so states are now borrowing from the federal government to shore up unemployment benefits.

Finally, the Commerce Department announced on Friday that retail sales plunged 16.4% in April, which is much worse than the economists’ consensus estimate of a 12.5% decline. Excluding autos and gas stations, which are the two large categories (experiencing 12.37% and 28.79% sales declines, respectively), April retail sales still plunged 16.2%, since the sales declines were widespread. I should add that March’s retail sales were also revised up a bit to an 8.3% decline (vs. an 8.7% decline initially reported). The only sector that showed a sales increase in April was on-line sales, which soared +8.4%.

Interestingly, the strongest sector in March, namely grocery stores, experienced a 13.1% sales decline in April. Bars & restaurants experienced a 29.52% sales decline in April, which frankly sounds a bit higher than possible for mostly-closed bars and restaurants, and may be revised lower. The sectors that reported massive sales declines in April were awesomely large: furniture (down 58.71%), electronics (down 60.56%), and clothing (down 78.85%). Looking forward, retail sales should be improving gradually in the upcoming months, but do not be surprised if retail sales remain negative for the next couple of months.

Which Automobile Plants Are Essential, and Which Aren’t

Another interesting development last week was Elon Musk declaring that Tesla would be opening its manufacturing plant in Fremont, California, despite the fact that the local county health official declared the plant a “non-essential” business that should remain closed. Musk’s threat to move Tesla’s home office to Nevada or Texas must have had an impact, since Alameda County approved Tesla’s plan to fully reopen its Fremont plant on Monday, May 18th. President Trump also tweeted his support for reopening Tesla’s Fremont plant, which makes it clear that some automakers are more ‘equal’ than others.

Interestingly, General Motors’ Bowling Green, Kentucky plant for the Corvette was not fully shut down like other GM plants, since the Corvette chassis was deemed “essential,” so Corvette production was not fully shut down. What makes America great is that our states are generally free to compete with each other for business, which is why Tesla is now seeking the most friendly state to build its Cybertruck.

Also putting pressure on states is the fact that their tax revenues have plunged during the coronavirus shutdown, so the pressure to reopen businesses is growing. I mentioned on my Thursday podcast that New Jersey lost 60% of its tax revenues in April, so it has to open up part of its economy to shore up its fiscal predicament. Another example is that California now has a projected $54.3 billion budget deficit, so, according to SEIU union leaders, Governor Gavin Newsom is proposing a 10% pay cut to all state workers. As a result, California, like New Jersey, will likely come under intense pressure to reopen.

Navellier & Associates does not own Tesla or General Motors in managed accounts and our sub-advised mutual fund.  Louis Navellier and his family do not own Tesla or General Motors.

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Deflation is Spreading

Income Mail by Bryan Perry
Here’s Hoping the Reopening Goes According to Plan

Growth Mail by Gary Alexander
This Market Recovery is Justified by History

Global Mail by Ivan Martchev
The Banks Are Likely to Take Out their March Lows

Sector Spotlight by Jason Bodner
Just What Does “Overbought” Mean?

View Full Archive
Read Past Issues Here

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Louis Navellier
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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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