by Louis Navellier
June 2, 2021
Due to the surge in inflation and other indicators of a strong recovery, more Fed officials are openly talking about “tapering,” but they are still in a minority, and the next Federal Open Market Committee (FOMC) statement (in mid-June) will be closely scrutinized for any change in the Fed’s language.
I should add that San Francisco Fed President Mary Daly said on Tuesday that she is optimistic about the economy, but she is not ready to change Fed policy. Regarding inflation, Daly described herself as “firmly in the ‘transitory’ camp.” Interestingly, Daly added that, “We haven’t seen substantial further progress just yet.” Translated from Fedspeak, she is waiting for the unemployment rate to decline further.
In the meantime, the 10-year Treasury bond remains remarkably well behaved, falling below 1.6% last week. There were also well-received 5-year and 7-year Treasury auctions on Wednesday and Thursday.
It is also notable that the demand for corporate bonds remains relentless as companies rush to raise capital at ultra-low historic yields to refinance existing debt, boost their cash reserves, and buy their outstanding shares back. The simple fact of the matter is that relative to bond yields, the stock market remains grossly undervalued, which is why most companies prefer to sell new debt rather than issue new stock.
In the meantime, Treasury Secretary Janet Yellen’s proposed minimum global corporate tax of 15% hit another stumbling block last week when Ireland’s Finance Minister Paschal Donohue said he has “significant reservations” over Yellen’s proposed tax plan. Donohue predicted that Ireland would likely maintain its 12.5% corporate tax for many years. In a Sky News interview, Donohue said, “We have really significant reservations regarding a global minimum effective tax rate status at such a level that it means only certain countries, and certain size economies can benefit from that base.” I think it is safe to say that Ireland will remain headquarters for many multinational corporations, including many U.S. companies.
The Economic Statistics Mostly Reflect Revived Growth
The Conference Board last Tuesday announced that its May consumer confidence index slipped slightly to 117.2, down from 117.5 in April, but April marked the highest level in 14 months. Also, the “present situation” component rose to a 14-month high of 144.3 in May, up from 131.9 in April. That is a good omen that we will hopefully see higher consumer spending, but the “expectations” component plunged to 99.1 in May, down from 107.9 in April. That means it is imperative that the Biden Administration works hard to cheer people up, since the decline in this Expectations component was a sign of rising concerns.
The CoreLogic Case-Shiller Home Price Index, announced last Tuesday, reported that home appreciation is now running at the fastest pace in more than 15 years. Specifically, through March, the average home prices in 20 major metropolitan areas rose at a 13.3% annual pace through March, up from a 12% annual pace in February. Phoenix had the fastest rate, at 20%, followed by San Diego at 19.1%.
In other words, inflation is accelerating in the real estate world, a major expense for most families.
The Conference Board on Thursday announced that durable goods orders declined 1.3% in April after rising 1% in March. This was a big surprise, but there is a reasonable explanation, since transportation orders declined 6.7% in April due to the global semiconductor chip shortage, which is hindering auto production (a 6.2% decline). Orders for military aircraft and aviation parts also fell big, an 8.5% decline.
Excluding transportation, durable goods rose by a much more respectable 1% in April. A silver lining in the April durable goods report is that business investment rose 2.3% in April, following a 1.6% increase in March. I should add, in the wake of the April durable goods report, that the Atlanta Fed lowered its second-quarter GDP estimate to an annual pace of 9.1%, down from its previous estimate of 10.1%.
The Labor Department announced that jobless claims in the latest week declined to 406,000, down from 444,000 in the previous week. Continuing unemployment claims declined to 3.642 million, compared with a revised 3.738 million in the previous week. Economists were expecting those numbers to come in at 425,000 and 3.680 million, respectively, so the jobless claims came in better than expected.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, was revised up to a 4.6% annual pace through April. The core PCE index, excluding food and energy, was revised up to a 3.1% annual pace through April. The Fed was expecting inflation to rise to a 2.4% annual pace, so I expect that the Fed will have to clarify its inflation outlook, other than to keep saying it is transitory.
Overall, we remain in a “Goldilocks” environment with an accommodative Fed, despite a strong economy that is creating demand-push inflation. The various port bottlenecks and supply shortages are expected to continue, since China recently had to close one of its major container ship ports in Shenzhen due to a Covid-19 outbreak. Lockdowns are now underway in Malaysia and Melbourne, Australia, reminding us that Covid-19 has not gone away, since the vaccines have not been readily available in all countries.
As a result, supply shortages are expected to persist for several months, fueling inflation. Fortunately, quality growth stocks represent an oasis for investors frustrated by the low bond-yield alternatives.