by Louis Navellier
June 25, 2024
The big news last week was that the Commerce Department reported that retail sales rose by only 0.1% in May, below the analysts’ consensus estimate of 0.3%. April retail sales were also revised down to a -0.2% decline, from unchanged. Excluding gasoline, retail sales rose 0.3% in May. Five of the 13 categories tracked by the Commerce Department contracted in May. Despite this weak retail sales report, the Atlanta Fed kept their second-quarter GDP estimate at 3% (annualized), nearly equal to its previous 3.1% rate.
Treasury bond yields declined in the wake of this weak retail sales report, since bad news is often good news in the bond market. The bond vigilantes are still in charge of Treasury yields. As I have repeatedly said, the Fed does not fight market rates, so if the bond vigilantes drive Treasury yields lower, the Fed may be forced to cut key interest rates sooner than they expected. Right now, the consensus is that the Fed will cut key rates on September 18th, but I believe that the Fed should cut key interest rates on July 31st.
The Minneapolis district Fed President Neel Kashkari appeared on CBS’s “Face the Nation” last week and said that it’s a “reasonable prediction” that the Fed will wait until December to start cutting key interest rates. Kashkari also said, “We need to see more evidence to convince us that inflation is well on its way back down to 2%,” adding that, “We’re in a very good position right now to take our time, get more inflation data, get more data on the economy and on the labor market, before we make any decisions.”
I should add that Kashkari is a hawkish member of the Fed and does not speak for all FOMC members. Since Kashkari and Chicago Fed President Austan Goolsbee have been very outspoken, it seems that they are undermining Fed Chairman Jerome Powell’s authority, which is just promoting more uncertainty.
The primary catalyst keeping inflation artificially high is shelter costs (“Owners’ Equivalent Rent”) in the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) index. The Wall Street Journal reported last Tuesday that rental costs are still rising in several northeastern and mid-western cities and may continue to complicate the inflation picture. In the past 12 months, Owners’ Equivalent Rent has risen 5.4%. The proportion of Owners’ Equivalent Rent in the PCE is lower than the CPI, so optimism is rising that the next PCE, to be announced later this month, may indicate that inflation is cooling.
Since our Fed is now lagging Canada and the European Central Bank in cutting key interest rates, “carry trades” are expected to increase. That’s where foreigners put money in the U.S. seeking higher yields in a strong currency. If these carry trades approach a trillion dollars or more, they could continue to drive Treasury yields lower and encourage the Fed to cut key interest rates in July rather than September.
The Bank of England did not cut key interest rates last Thursday, but they hinted that a rate cut would be forthcoming. Britain is in the midst of an election, where the Labour Party is expected to prevail. Economic growth in Britain has stalled and most economists expect that the Bank of England will cut rates in the upcoming months, especially if the Fed cuts, but they did not want to seem to impact the coming election.
Last Wednesday, the European Commission reprimanded France and Italy for running high deficits. Additionally, another seven (of 21) EU nations had a budget deficit over 3%, including Belgium, the Czech Republic, Estonia, Hungary, Poland, Slovakia and Spain. Amazingly, Denmark, Ireland and Portugal reported budget surpluses! According to S&P Global, the Euro-zone Purchasing Managers Index slipped down to 50.8 in June, down 1.4 points from 52.2 in May. There was a decline in new orders in France as the upcoming election has created uncertainty there, since President Macron’s party is expected to face an embarrassing defeat after Macron’s approval rating hit an historic low of 26%.
In the wake of the recent G7 meeting, Italian Prime Minister Giorgia Meloni emerged as the leader of the right-wing shift in Europe, but many of the other leaders at the G7 meeting are not expected to prevail in upcoming elections — including British Prime Minister Rishi Sunak and French President Emmanuel Macron. German Chancellor Olaf Scholz is also very unpopular and is not expected to prevail in the next elections there. Canadian Prime Minister Justin Trudeau is also very unpopular, and Canada is expected to host the next G7 meeting – with a slew of new world leaders – next year. Also, President Biden appeared lost at a skydiving presentation, until Meloni turned him around and pointed him in the right direction.
The Ukrainian Peace Talks Broke Up with No Cease Fire
Like the G7 conference in Italy, the recent Ukrainian peace conference in Switzerland was a bust.
Although Russia did not attend the conference, Vladmir Putin said Russia would “immediately” order a ceasefire and start negotiations with Ukraine if they start withdrawing troops from the regions that Russia annexed in 2022 and renounce any plan to join NATO. Italian Prime Minister Meloni said, “If President Putin’s proposal is: We are willing to have a peace negotiation if Ukraine recognizes the invasion of Ukraine and gives up the occupied parts … that doesn’t seem particularly effective to me as a proposal.” But since both Ukraine and Russia have suffered horrible casualties, ceasefire negotiations may persist.
Although Ukraine secured another $50 billion in aid, the cost of rebuilding the country is staggering. Russia has disabled 80% of Ukraine’s coal-fired power plants and a third of its hydroelectric plants. As a result, rolling blackouts are common and very disruptive. There has been some progress on stopping Russia’s attempt to capture Ukraine’s second largest city, Kharkiv, but Russian missiles keep destroying buildings and infrastructure. Ukraine has been capturing some Russians, but the war of attrition persists.
The Financial Times has reported that Europe bought more Russian natural gas in May than U.S. natural gas. Despite Russia’s pipelines being blown up, its LNG exports to Europe have surged. That’s because the Biden Administration has stopped U.S. LNG expansion, subject to environmental reviews. This has effectively forced Europe to look to Russia, so in May, Russia supplied 15% of European natural gas, while the U.S. supplied 14%. Although the European Union (EU) is striving to seek other sources, such as natural gas pipelines from Azerbaijan, Europe remains LNG dependent and must accept Russian LNG.
This energy dependence on Russia puts the EU in a delicate position and may help to facilitate peace negotiations. In the meantime, in the wake of new tariffs on Chinese EVs, the EU’s green agenda is now being scrutinized. By putting bigger tariffs on China, both the EU and the U.S. are sending mixed signals on the green agenda, and the recent shift to the right in the recent EU election is also expected to curtail the compliance with the Paris Climate Accord, especially the farm-based parties, which exploded out of nowhere after Brussels told farmers they were major carbon polluters and had to change how they farm.
The Energy Information Administration (EIA) reported on Thursday that crude oil inventories declined by 2.5 million barrels in the latest week and are now 4% below the 5-year average. The uncertainty in the Middle East has escalated, as Israel has had to divert some of its military resources to defend against an anticipated attack from Hezbollah on its northern border, as fears of a full-scale war builds after rising attacks there. The Houthis also sank a freighter, the MV Tutor, as container traffic in the Red Sea has effectively ground to a halt. The Suez Canal historically accounted for up to 15% of world trade, but shipping disruptions in the past several months have cost Egypt several billion dollars in lost revenue.
Finally, former President Trump has pledged a 10% minimum tariff on imported goods to pay for his proposed tax cuts. Economists have criticized these higher tariffs as being inflationary. However, since almost half of taxpayers do not pay income taxes, other than Social Security and Medicare via payroll deductions, a 10% minimum tariff would effectively collect taxes from a broader base of people. I should add that the Biden Administration has actually increased Trump’s original tariffs, especially on Chinese goods, so it may be hard for President Biden to criticize Trump at their upcoming debate on June 27th.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
Bond Traders (Not the Fed) Control Interest Rates
Income Mail by Bryan Perry
The Torrid AI Rally Takes a “Pause That Refreshes”
Growth Mail by Gary Alexander
Keep Investing – Even During World War III
Global Mail by Ivan Martchev
More European Political Fireworks Are Coming
Sector Spotlight by Jason Bodner
Try Not to Track Stock Prices Daily
View Full Archive
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Louis Navellier
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