by Louis Navellier

September 19, 2023

The two major inflation indicators released last week were a bit “hotter” than expected, but that was mostly due to energy price increases. On Wednesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.6% in August and 3.7% in the past 12 months, but the core CPI, excluding food and energy, only rose 0.3%. Volatile food prices doubled August’s 0.3% overall gains at 0.6%, but energy prices surged 5.6% and gasoline prices rose by double digits, +10.5%. The good news is that owners’ equivalent rent rose only 0.3%, and 7.3% in the past 12 months, so it appears that shelter costs are finally moderating somewhat. Since higher energy prices are the major reason the CPI rose in August, I do not expect the Fed to raise rates at its forthcoming Federal Open Market Committee (FOMC) next week.

On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose 0.7% in August, substantially higher than the analysts’ consensus estimate of 0.4%, but in the past 12 months, the PPI has risen just 1.6%, well below the Fed’s 2% target rate. Excluding food and energy, the core PPI rose 0.2% in August and 2.2% in the past 12 months. Wholesale gasoline prices surged a whopping 20% in August, and overall wholesale energy prices rose by 10.5%. Meanwhile, wholesale food prices declined 0.5%.

The other good news was that wholesale service costs only rose 0.2% in August, down from 0.5% in July.

One other major report came out on Thursday, when the Commerce Department announced that Retail Sales rose 0.6% in August, which was much better than the economists’ consensus estimate of a 0.1% increase. Excluding gas station sales, however, retail sales rose only 0.2%, so retail sales were also warped by rising energy prices. Also, July’s strong retail sales gain was revised down to a 0.5% gain (from 0.7%).

After the retail sales report and inflation indicators came out, the Atlanta Fed lowered its third-quarter GDP estimate to a +4.9% annual pace, down from its previous estimate of a +5.6% annual pace.

The UAW Strike May Reward Foreign Auto Makers the Most

The other big news last week was that the UAW agreed to strike last Friday, which could push the jobless rate above 4% for September. The UAW lowered its demand for a 40% pay increase over the next few years to 36%, but that remains too high for the Big 3. UAW President Shawn Fain repeated his mantra that “record profits mean record contracts.” The UAW has never gone on strike with all of the Big 3, so the real winner in this fight could be Mexico, which will now likely generate more vehicle production.

In theory, a short strike – say two weeks or so – could help the Big 3 tighten their inventories and stop the excessive discounting of their massive inventories. At the end of August, Stellantis (Chrysler, Dodge and Jeep) had a 74-day inventory of vehicles, Ford had a 64-day supply and GM had a 50-day supply. (The industry average is 38 days.) Meanwhile, the UAW is prepared to expand its strike locations, depending on how the bargaining progresses. UAW President Fain said, “This strategy will keep the companies guessing. It will give our national negotiators maximum leverage and flexibility in bargaining. And if we need to go all out, we will. Everything is on the table.”  But any long strike would mostly help Mexico.

On Friday, President Biden called on the Big 3 to share more of their profits with the UAW. Specifically, he said, “Auto companies have seen record profits, including in the last few years, because of the extraordinary skill and sacrifices of UAW workers. Those record profits have not been shared fairly, in my view, with those workers.” It will be interesting to see how the Big 3 respond, since they are not making money on their EVs, which the Biden Administration is mandating they make. Something has to give, so I suspect the Biden Administration just threw a big wrench into the UAW negotiations.

The Wall Street Journal’s Editorial Board issued a scathing weekend opinion piece titled, “A UAW Strike Made in Washington,” subtitled: “The underlying cause of the auto walkout is the Biden Administration’s forced electric-vehicle transition.” In addition to Mexico profiting from this strike, since it is making the Ford Mach-e and Chevrolet Equinox EVs, Tesla is also a winner in the EV wars. The painful truth is that until the Big 3 can make money on EVs, the UAW is losing leverage. Since the Biden Administration is forcing the Big 3 to make unprofitable EVs, the UAW strike may be long and painful for all parties.

Compounding the problem of the mandated EV production – becoming a massive glut – the Financial Times had an interesting article entitled “The EV car crash is a warning for Europe’s industrial transition.”  Essentially, this FT article discussed how the Munich Motor Show was dominated by Chinese brands, which offered double the EV models they offered in 2021. FT also discussed how China is selling quality EVs and is ahead of its European rivals, so as the EV transition continues, European manufacturers risk being left behind. There is no doubt that Chinese EVs have a big price advantage and will continue to capture market share, especially for low-priced EVs. I should also add that Tesla is exporting many of its Model 3 EVs, made in Shanghai with LFP batteries, to China to continue to capture market share.

In the wake of the G20 meeting, there is also talk that Saudi Arabia wants to push crude oil prices up to $100 per barrel. Right now, global supply and demand are very fragile and any disruption, such as a Russian pipeline break or a hurricane in the Gulf of Mexico, could disrupt crude oil production and send crude oil prices up to $100. I should add that Arab light crude came close $100 per barrel last week.

After Germany’s August wind power auction only offered to develop 1.4 gigawatts of electricity, down from 1.6 gigawatts at its July auction, Britain failed to attract any bids on its latest offshore wind auction. Naturally, this is a massive setback for countries like Britain and Germany, which are striving to achieve net zero carbon emissions by 2050. Britain’s Ed Miliband, commonly referred to ad Labor’s “shadow climate secretary,” said that failing to secure any new offshore wind generating capacity is an “energy security disaster.”  The fact of the matter is that bidding on offshore wind projects remains weak, since the economics of wind energy are erratic, especially if there is a winter cold snap that damages wind turbines.

It appears that the ‘green police’ were not happy with the recent G20 meeting in India, since the Financial Times said that G20 leaders were “missing in action” on a timeline for ending fossil fuel use. The G20 nations account for about 80% of the world’s greenhouse gas emissions. They did agree on a goal to triple renewable energy sources by 2030, but as Britain and Germany’s wind auctions demonstrated, there is no reliable economic model to boost wind production, so the G20 may might not be able to meet such goals.

Other technologies will certainly be feasible in future decades, such as satellites with massive solar sails that will be able to transmit solar energy from space, but we might also have to still use fossil fuels by then. Confused?  We all are, since the planet, climate and space are all complex systems.

The Latest News from China and Europe

China’s industrial production rose 4.5% in August and was clearly boosted by higher vehicle production for export markets. The other surprising news from China was that retail sales rose 4.6% in August and were apparently aided by the summer travel season. Although some economic reports are not always reliable from China, economists were not questioning the data on industrial production and retail sales.

The big news from the G20 was that Italian Prime Minister, Giorgia Meloni, privately signaled that Italy is planning to exit the “Belt & Road” Initiative with China, which is a global infrastructure pact. Due to the fact that Chinese President Xi Jinping missed the G20, there were plenty of rumblings that China is disengaging with the world. President Joe Biden said that China will not be invading Taiwan any time soon, since President Xi Jinping has to solve his domestic problems, like high youth unemployment.

Inflation in the eurozone has dropped dramatically from a peak of 10.6% last year to 5.3% in August, but last Thursday, the European Central Bank (ECB) signaled that its continuing fight against inflation is more important than stimulating economic growth, since it raised its key interest rate 0.25% to 4%, the highest level in the 25-year history of the common European currency. Food and energy inflation in the eurozone are much more acute than in the U.S., but there is little their central banks can do to combat food and energy inflation, so I think the ECB may have made a mistake with its latest rate increase.

The economies of Italy and Germany are based largely on exports, and due to China’s recent economic woes they are contracting this quarter and will likely drag the entire eurozone into a recession. This euro rate increase will make that outcome more likely, so Europe is sinking into a recession while China seems to be avoiding a recession, although you can never know how far Beijing can kick that can down the road.

Navellier & Associates owns Ford Motor Co. (F), in some managed accounts. A few accounts own Tesla Inc. (TSLA) per client request. We do not own General Motors (GM), or Stellantis (STLA).  Louis Navellier does not own Tesla Inc. (TSLA), Ford Motor Co. (F), General Motors (GM), or Stellantis (STLA) personally.

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