June 5, 2018
Just to recap the status of the overall Emerging Markets crisis, there has been a growing currency crisis in Argentina, Burma, Cambodia, Indonesia, Iran, Paraguay, Turkey, Uzbekistan, Venezuela, Vietnam, and some other emerging market countries, which is also accelerating the exodus from emerging market investments. When there is an international currency crisis, the oasis currencies are the U.S. dollar, British pound, the Chinese yuan, the euro, and Japanese yen, since these currencies have tremendous liquidity. However, the Chinese yuan and euro are not as strong as they once were, plus the British pound and Japanese yen have slipped a bit, leaving the U.S. dollar to carry the burden of global capital flight.
The good news is that this capital flight is causing the 10-year Treasury bond yield to decline, which means that the Fed will likely be hesitant to raise key interest rates further after its widely anticipated June 13 rate hike next week. The Treasury yield curve is now the flattest in over a decade, which is bad for the financial stocks that typically profit from the spread between short- and long-term interest rates. I am a former banking analyst and am proud that financial stocks are largely absent from my growth portfolios, so I’d say one of the keys to beating market averages is to avoid financial stocks, especially major banks.
In the meantime, a trucker’s strike over high diesel prices has crippled Brazil’s economy. A decline in fuel taxes is putting pressure on the Brazilian government to end its payroll tax breaks, which may in turn instigate more strikes. Despite a concession to cut diesel prices for 60 days, many truckers remain on strike, so there are acute fuel and food shortages nationwide. Many Brazilian businesses remain closed due to a lack of raw materials and the inability to deliver essential products. Approximately one billion chickens and 20 million pigs are at risk of not being fed adequately. So overall, Brazil’s GDP is expected to take a major hit, and chaos has become the “new normal” in Brazil.
Lowest Jobless Rate Since 1969 Highlights Upbeat Economic News Week
Naturally, the big economic news last week was Friday’s payroll report, where the Labor Department reported that 223,000 payroll jobs were created in May, much better than economists’ consensus estimate of 190,000. The March and April payrolls were revised up by a cumulative 15,000 jobs to 155,000 and 159,000, respectively. The unemployment rate in May declined to 3.8%, its lowest level since 1969 and tying a reading from April 2000. Average hourly wages rose by 8 cents or 0.3% in May to $26.92 per hour. In the past 12 months, wages have risen at a 2.7% annual pace. I should add that on Wednesday, ADP reported that 178,230 private payroll jobs were created in May. ADP significantly revised its March and April private payrolls lower to 198,470 and 162,990, respectively. Overall, the job market remains very healthy, with hiring in construction, healthcare, and manufacturing industries especially strong.
The other economic news was equally positive last week. On Tuesday, the Conference Board’s consumer confidence index for May rose to 128, up from a revised 125.6 in April. The present situation component rose to a 17-year high of 161.7 in May, up from 157.5 in April. Overall, consumer confidence is near a 17-year high, which bodes well for retail sales as well as second-quarter GDP growth.
The Fed’s Beige Book survey, released Wednesday, stated that all 12 Fed districts grew “moderately.” The Beige Book survey was especially positive on U.S. manufacturing, citing a strong construction sector. All this economic activity boosted loan demand, which is also a good sign. Despite higher prices for crude oil, steel, and other commodities, the Beige Book survey said that inflationary pressures appear subdued. Overall, the Beige Book survey painted a “Goldilocks” view of the U.S. economy, where growth and inflation are neither too hot nor too cold. Essentially, the Fed is on track to raise rates in June and then will monitor inflation and market rates before deciding if it wants to raise rates later this year.
Finally, I should add that the Energy Information Administration (EIA) reported on Thursday that crude oil output rose by 215,000 barrels per day to 10.47 million barrels per day in March, a record for U.S. oil production. Production in Texas rose by 4% to almost 4.2 million barrels per day. The spread between WTI crude oil and Brent light sweet crude is now over $11 per barrel, which means the refiners I prefer should be able to make a lot of money on the spread!
Brexit is expected to be a major event, since many companies, like Honda, are fleeing Britain due to uncertainty over tariffs and the underlying business environment. Despite this uncertainty, both Britain and the European Union (EU) are now seeking to delay the March 29th Brexit deadline. Specifically, Prime Minister Theresa May has said Parliament can vote to extend the Brexit deadline on March 12th.
However, Prime Minister May does not want to delay Brexit beyond March 29th. This vote seems to be more about appeasing rebellious lawmakers and ministers who believe a “no deal” exit would be a disaster. The EU is hoping for a Brexit extension, but remains divided on the timing. Overall, it is apparent that politicians are doing what they do best – they “kick the can down the road,” which could be a disaster for both Britain and the EU. The business community cannot plan amidst all this uncertainty, so both the British pound and euro remain weak, with recessions for Britain and the EU looking inevitable.
In the meantime, Venezuela remains a humanitarian disaster. The fact that the Venezuelan military has violently blocked trucks with food and medical aid on both the Brazilian and Colombian borders is expected to cause more army desertions. Colombia reported on Tuesday that 320 soldiers deserted in a span of four days. Since there are an estimated 200,000 troops in the Venezuelan military, this is a mere trickle. However, many soldiers are hungry due to acute food shortages, so it may be just a matter of time before the military sides with the Venezuelan people, defying the generals – who got rich under Maduro.
Last week, Vice President Mike Pence and Venezuelan opposition leader Juan Guaido agreed on a strategy to tighten the noose around President Maduro and his generals. Specifically, Pence announced more sanctions against Venezuela and $56 million in aid for neighboring countries with Venezuelan refugees. The detention of Univision’s Jorge Ramos and the seizure of his camera crews after Ramos asked Maduro about “young people eating out of a garbage truck,” has helped increase international pressure to oust Maduro. Ramos and his Univision crew were subsequently deported from Venezuela. Overall, Pence said that “we hope for a peaceful transition to democracy, but President Trump has made it clear: All options are on the table,” adding that Trump is “100%” in support of Juan Guaido.
Brexit and Venezuela are just two examples of why the U.S. remains an oasis in a troubled world.
The most exciting economic news last week came out on Tuesday, when the Conference Board announced that its consumer confidence index surged to 131.4 in February, up from a revised 121.7 in January. This was a huge surprise, since economists were expecting the index to come in at 124.7. The “expectations” component soared to 103.4 in February, up sharply from 89.4 in January.
There is no doubt that the end of the federal government shutdown boosted consumer confidence. After this week’s late winter storms, improving weather in the spring should also boost consumer confidence, so I expect that the consumer confidence index will hit an 18-year high in the upcoming months.
On Thursday, the Commerce Department announced that GDP rose at a 2.6% annual pace in the fourth quarter, substantially above analyst consensus estimates of a 2.2% annual pace. For all of 2018, U.S. GDP rose an impressive 3.1%. Overall, we remain in a “Goldilocks” environment characterized by a lack of inflation, moderate interest rates, a dovish Fed, and a strong U.S. dollar. There is no doubt that the U.S. remains an oasis amidst the impending Brexit chaos and concerns about global GDP growth.
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