by Louis Navellier
July 4, 2023
Most observers agree that the war in Ukraine has backfired badly on Russia. One indication is that when the Wagner troops abandoned their positions and were advancing on Moscow on their “march for justice,” they were welcomed favorably by most of the Russian people in Rostov, a Ukrainian border town and Russian military hub. Further north, in Pavlovsk, the Wagner Group apparently shot down some Russian Defense Ministry helicopters and other aircraft after they were attacked. Further north, in Voronezh, on the road to Moscow, the Defense Ministry bombed an oil tanker facility in an attempt to slow the Wagner Group’s advance, which stopped in Elets, saying they are “returning to field camps according to plan.”
Just how long any truce or peace remains between the Wagner Group and the Russian Defense Ministry is uncertain. In a televised ceremony at the Kremlin last Tuesday, Vladimir Putin told 2,500 troops there that, “You in fact prevented a civil war” and added, “In a difficult situation you acted clearly and coherently.”
On the same day, the Russian Ministry of Defense said that the Wagner Group was preparing to hand over its heavy weapons, which is a sign that the Ministry of Defense is planning to assimilate the Wagner Group. Putin has said that Wagner Group members were welcome to sign contracts with the Russian military, go home or follow the Wagner Group’s leader, Yevgeny Prigozhin, to exile in Belarus. The Russian Federal Security Service said it has closed its criminal case against the Wagner Group’s mutineers.
Near-term, Ukraine is viewed as a winner due to this internal chaos in Russia. However, NATO allies are not seeking a peace deal and instead are seeking to help shore up Ukriane’s defenses, since their offensive effort was met with heavy Russia resistance. Like all wars, both sides are losing, so how both Russia and Ukraine regroup in the upcoming months will be the most interesting outcome of this tragic conflict.
In the meantime, the internal conflicts within the eurozone are increasingly focused on the European Central Bank (ECB). Specifically, two Italian deputy prime ministers, Matteo Salvini and Antonio Tajani, who have each criticized ECB President Christine Lagarde after she signaled another key interest rate hike at its upcoming meeting in July. Salvini and Tajani called her ECB policy “nonsense and dangerous.” Tajani said, “With rates that are too high, you risk a recession.” Also, Italy’s Prime Minister, Giorgia Meloni, has been very vocal against French President Macon – in parallel with this assault on the ECB.
Bloomberg reported that the volume of oil being stored at sea is now the highest in two and a half years, because Saudi Arabia is now storing crude oil in tankers. As of June 23td, approximately 129 million barrels of crude oil were stored in oil tankers, the most since October 2020. At the same time, crude oil transported by sea is falling, perhaps because Russian oil shipments to India and China could be waning.
Amid a Growing Global Recession, U.S. Remains the Oasis
Most global economies are slowing down. Purchasing Managers Indices (PMIs) are now declining around the world. On Friday, China’s National Bureau of Statistics announced that its official PMI for June was essentially flat at 49 in June, vs. 48.8 in May. Since any reading under 50 signals a contraction, China is in a manufacturing sector recession. One big alarm is that the new export orders component declined to a 5-month low of 46.4. The service sector PMI for June declined to 52.8, down from 53.8 in May. Finally, home sales for the top 100 Chinese property developers declined 28.1% in June. If you add up all of these numbers, I think it is safe to say that China may finally see negative GDP numbers in the second quarter.
Japan and the U.S. have the strongest PMIs, but even those have also lost momentum in recent months. Trade data show that China and Europe are now contracting as trade collapses. The Labor Department reported that U.S. import prices in May for goods from Hong Kong, Singapore, Taiwan and South Korea have fallen 6.3% in the past year, and this price deflation should show up soon in inflation data. Economic weakness should also push bond yields further down, especially as evidence of lower inflation emerges.
In the U.S., we witnessed a series of surprisingly strong statistics released last week. First, the Commerce Department announced that durable goods orders surged 1.7% in May to reach $288.2 billion. This follows a 1.2% increase in April. This show of strength was a big surprise, since economists were expecting a -0.9% decline. The details were also very encouraging. Excluding transportation, new orders increased 0.6%. Excluding defense, new orders rose by an impressive 3%. Automotive orders surged 2.2% in May. Defense orders plunged 35%, but a 33% surge in passenger planes offset that big defense decline. Core business orders rose 0.7%, and +2% in the past 12 months. Durable goods have now risen for three consecutive months, indicating rising business confidence and a surging manufacturing sector!
The Conference Board announced that its Consumer Confidence index for June surged to 109.7, up from 102.5 in May. The present situation component rose to 155.3 in June, up from 148.9 in May, while the expectations component rose to 79.3 in June, up from 71.5 in May. This consumer confidence report is simply stunning, indicative that a robust consumer recovery is underway. In the wake of both surging durable goods orders and consumer confidence, I now expect a very healthy June retail sales report.
The Commerce Department also reported that new home sales in May surged 12.2% to an annual pace of 763,000. Even more impressive is that new home sales are now 20% higher than a year ago. Economists were expecting new home sales to rise only 0.5%, so this was a massive surprise. The median home price in May was $416,300, down 7.6% from $450,700 in May 2022, so between lower home prices and slightly lower mortgage rates, the housing market appears to be in the midst of a robust recovery!
The Atlanta Fed now projects second-quarter GDP growth at a 2.2% annual pace, up from its previous estimate of 1.8%. However, in the wake of last week’s stronger-than-expected economic news, I expect upward GDP revisions. Another factor causing economists to revise their second-quarter GDP growth up is the fact that the Commerce Department announced on Wednesday that the trade deficit in May declined 6.1% to $91.1 billion as imports dropped 2.7% to $254 billion and exports declined 0.6% to $163 billion.
Speaking of GDP, the Commerce Department on Thursday revised its first-quarter GDP calculation to a 2% annual pace, up sharply from a 1.3% annual pace previously announced. The primary reasons were due to consumer spending being revised to a 4.2% annual pace from a 3.8% annual pace. Furthermore, exports surged to a 7.8% annual pace, up from a 5.2% rate. Overall, I am now expecting second-quarter GDP growth to exceed first-quarter GDP due to rising consumer confidence and favorable trade data.
There was also some good news on the labor front last week, since the Labor Department announced on Thursday that weekly unemployment claims declined to 239,000 in the latest week, down from a revised 265,000 in the previous week. Continuing unemployment claims fell to 1.742 million, down from a revised 1.761 million in the previous week. As a result of these declines, the four-week moving averages of continuing and existing unemployment claims are also heading lower.
The Fed announced on Friday that consumer spending decelerated in May to a 0,1% increase, down from a robust 0.6% increase in April. The Personal Consumption Expenditure (PCE) index rose only 0.1% in May and has risen 3.8% in the past 12 months. The core PCE, excluding food and energy, rose 0.3% in May and 4.6% in the past 12 months. Despite an improving PCE, a bigger drop is anticipated in June and hopefully that big drop will convince the Federal Open Market Committee (FOMC) to continue to pause any further key interest rate hikes when they next meet in late July.
Closing with a bit of ridiculous news from last week, New York City’s Department of Environmental Protection (DEP) has drafted new rules that would order restaurants to reduce their carbon emissions by 75%. This would require restaurant owners to buy expensive emission control devices on their pizza ovens, which also require expensive maintenance. DEP Spokesman, Ted Timbers, said “All New Yorkers deserve to breathe healthy air and wood and coal-fired stoves are among the largest contributors to harmful pollutants in neighborhoods with poor air quality.” This brewing war against iconic pizza joints is not going over well. Since New York Mayor Eric Adams asked residents to eat less meat and dairy to reduce carbon emissions, I suspect that restaurants and pizza joints will not get any sympathy from City Hall.
As a result, I predict that the next New York City mayor could be a pizza loving Italian!