by Louis Navellier

August 18, 2020

Dollar Bills Dollar Sign Image

The biggest economic news next year might be a weaker U.S. dollar fueling a new round of commodity price inflation over time. The Labor Department reported last Tuesday that the Producer Price Index (PPI) surged 0.6% (a 7.4% annual rate) in July. That was twice the economists’ consensus estimate of a 0.3% increase. Much of the PPI increase was due to wholesale gasoline prices surging 10.1% in July.

Additionally, there was a 0.5% monthly increase in the cost of services. The core PPI, which excludes food, energy, and trade margins, rose 0.3% in July, which marks the third straight monthly rise. Despite these recent increases, in the past 12 months, the headline PPI has declined 0.4%, while the core PPI rose 0.1%. Although wholesale inflation has not officially materialized yet on a 12-month basis, there is no doubt that the Fed is trying to reignite inflation, since deflation is the main enemy of all central bankers.

Last Wednesday, the Labor Department announced that the Consumer Price Index (CPI) surged at the same rate (0.6% in July), significantly higher than economists’ consensus estimate of a 0.4% rise. Energy prices rose 2.5%, while food prices declined 0.4%. The core CPI, excluding food and energy, also surged 0.6%, the largest monthly increase since January 1991, indicative of brewing inflation.

The key drivers of consumer inflation in July were airline fares (up 5.3%), vehicle prices (+2.3%), and medical services (+.5%). In the past 12 months, the CPI has risen 1%, while the core CPI rose 1.6%, so inflation remains within the Fed’s 2% target rate for now, but there is no doubt that inflation is brewing.

One of the consequences of rising inflation is that the 10-year Treasury bond yield has risen to 0.709% after hitting an intraday low of 0.503% the previous week. Interestingly, a lot of market pundits believe that the 10-year Treasury bond yield is losing its relevance. However, I believe that the 10-year yield may now be rising, since commodity inflation is being re-ignited. Furthermore, there was a disastrous 30-year Treasury bond auction last Thursday with a near-record low bid-to-cover ratio of just 2.136.

It is now becoming increasingly obvious that the U.S. is borrowing too much money, which is why the U.S. dollar is weak and international investors are fleeing the dollar. Furthermore, whether President Trump or Joe Biden wins, the U.S. budget deficit is expected to continue to spin out of control, so the Fed is pessimistic on rates, because they may have to keep injecting more money to control Treasury yields.

That is the bad news. The good news is that there was more positive economic news last week.

More Positive Economic News Released Last Week

The Labor Department announced last Thursday that new claims for unemployment declined to 963,000 in the latest week, down from 1.19 million in the previous week, substantially below economists’ consensus expectations of 1.08 million. I should add that this is the first time that unemployment claims have fallen below 1,000,000 after 20 straight weeks over one million!  Furthermore, the number of people continuing to collect state unemployment insurance declined to 15.49 million, a pandemic low. Including federal unemployment benefits, 28.26 million were receiving benefits through eight state and federal assistance programs in the latest week, down from 31.3 million in the previous week. So, despite ongoing coronavirus restrictions, the U.S. economy is continuing to slowly but steadily create new jobs.

On Friday, the Commerce Department reported that retail sales rose 1.2% in July, month over month. Excluding auto sales, retail sales rose 1.9%. Sales at gasoline stations rose 6.2% due largely to higher prices at the pump. Electronics & appliance sales surged 22.9%. June’s retail sales were also revised up to an 8.4% increase, from 7.5% previously estimated. Considering June’s upward revision, July’s retail sales were essentially in-line with economists’ consensus expectation. Amazingly, overall retail sales are now at a record high and have thus erased all the initial dip following the coronavirus attack.

The other interesting economic news released Friday was that U.S. productivity surged at an annual rate of 7.4% in the second quarter, substantially above economists’ consensus estimate of a 1.4% rise. This represents the largest quarterly productivity increase since 2009. Even though hours worked declined by a record 43% in the second quarter and economic output fell a record 38.9%, the fact that economic output declined less naturally boosted productivity!  It will be interesting to see if working from home will continue to boost productivity. If so, the flight from urban centers may become a more permanent trend.

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
A Weak Dollar is Generating a New Round of Inflation

Income Mail by Bryan Perry
It’s High Noon for High Yield Bonds

Growth Mail by Gary Alexander
Sleep Better with “Rip van Winkle” Investing

Global Mail by Ivan Martchev
Could Mortgage Rates Go Lower Than the Last All-time Low?

Sector Spotlight by Jason Bodner
Jesse’s Secret: Sitting on Your Winners

View Full Archive
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About The Author

Louis Navellier

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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