Crude oil prices are expected to soar due to all the uncertainty surrounding new developments within Russia. Prior to the Wagner Group’s advance toward Moscow, Russia restored its domestic crude oil processing to 5.49 million barrels a day in the week ending June 14, down from a peak of 5.78 million barrels in the first week of April. The reason is that it is easy to sell refined products, like diesel, jet fuel, and gasoline to circumvent sanctions. China and India are aggressively refining Russian crude oil to help Russia circumvent sanctions. Latin America is also a big buyer of Russia’s refined products, especially diesel, which is indicative that the U.S. no longer has any meaningful influence over Latin America.
Ukraine’s attempt to dislodge Russian troops in former Ukrainian regions is progressing, but the deeper they go, the more resistance they encounter. Russia maintains air combat superiority, so the Ukrainian offensive was stalling. The Ukrainian dam break dislodged Russian troops, cut Crimea off from water, and is expected to cut crop production by approximately 25%. Naturally, Ukraine seeks superior Western aircraft. Even though the Biden Administration finally provided F-16s, Ukrainians must be trained to fly these sophisticated combat aircraft. In the meantime, the fighting has essentially devolved into a slugfest.
Due to its 16-month war effort, Russia has run out of able-bodied workers to maintain its infrastructure and fledging industries. To protect their domestic farmers, five eurozone countries (Bulgaria, Hungary, Poland, Romania, and Slovakia) now refuse to buy Ukrainian wheat, corn, rapeseed, and sunflower seeds, so protectionism persists, meaning that support for Ukraine is waning. That makes it imperative that a ceasefire be reached, since the war between Russia and Ukraine is becoming increasingly futile.
The Global Economy is Slowing… and Out of Synch
The global economy is slowing and out of synch. By that, I mean the People’s Bank of China is cutting key interest rates, the Fed has stopped raising rates, while the European Central Bank is still raising rates.
The Bank of England voted 7 to 2 on Thursday to raise key interest rates by 0.5% to 5% in a surprise move which appeared to be an act of desperation to fight Britain’s hideously high inflation, now running at an 8.7% annual pace. There are a lot of variable mortgages in Britain, so the Bank of England’s rate hike is extremely unpopular. Prime Minister Rishi Sunak’s government is already helping homeowners that cannot pay their electricity bills, but it may now have to add mortgage payments to that bailout list.
Unlike the U.S., if a homeowner cannot cover the mortgage debt after foreclosure, the bank loses money. In Britain, the homeowner is responsible for the mortgage debt, even if the home falls below the mortgage value. As a result, both inflation and rising interest rates are now reducing the quality of life in Britain, so the UK’s “misery index” is at a record high and everyone seems angrier than ever.
Speaking of misery, the eurozone’s Purchasing Managers’ Index (PMI) in June declined to 50.3, a sharp deceleration from 52.8 in May and substantially below the economists’ consensus estimate of 52.5. Any reading below 50 signals a contraction. Even though the eurozone has seen its GDP contract in the past two quarters, there was hope that the summer months would stimulate economic activity, but the June PMI readings showed that economic activity plunged in France as well. As a result, it appears that the eurozone may not be able to pull out of its recent economic contraction anytime soon.
The eurozone is clearly in recession, with once-powerful Germany and Ireland contracting due partly to overzealous green energy goals shutting down farmland, killing cows, and restricting chemical fertilizer usage. With China’s imports and exports declining, the U.S. is the only major economy still expanding, thanks to a resilient consumer, but the manufacturing sector has been in recession for seven months.
In the midst of all this chaos, the U.S. is unquestionably the world leader. The U.S. is energy-independent, agriculturally independent, and has better demographics than China and Europe, meaning that the U.S. can generate more organic internal growth. The amount of trade the U.S. is now doing with Southeast Asia, India, South Korea, and Japan is steadily growing at the expense of China as businesses seek to shore up supply chains. As a result, the dollar should get stronger as U.S. growth outpaces the rest of the world.
A strong U.S. dollar is helping to attract more buying pressure at recent Treasury auctions. For example, the 20-year Treasury bond earned an incredible 2.87-to-1 bid-to-cover ratio, which is simply outstanding and caused Treasury bond yields to drift lower. All the cash on the sidelines also helped the Treasury sell record amounts of new debt. Due to this robust demand, the Treasury Department needs to sell more short-term debt to try to un-invert the yield curve, which is currently in excess of 100 basis points.
Turning to energy investments, Stellantis NV (STLA), the owner of Jeep and Ram vehicle brands, is restricting the sales of gasoline vehicles in California and 13 other states to comply with stricter emission standards. Customers in these 14 states can still order the restricted gasoline vehicles, but Stellantis is restricting the allocations available, so customers may have to wait to receive certain brands. In the past, Stellantis NV paid Tesla (TSLA) over $2 billion for emission credits so that it could sell its gasoline and diesel vehicles.
Stellantis now has its own EVs, so it is no longer buying Tesla emission credits, so it will be interesting to see how legacy auto manufacturers make a transition to EVs and who will be the winners and losers.
Loose Words in High Places Don’t Help Trade Relations
Secretary of State Antony Blinken traveled to Beijing last week, becoming the highest-ranking U.S. official to visit China in the past five years. As the U.S. continues to diversify its supply chains away from China, Blinken said, “My hope and expectation is that we’ll have better communications, better engagement going forward.” Interestingly, China blamed the U.S. for all the hostilities after the U.S. shot down the Chinese spy balloon. The next U.S. official that is expected to visit China is Treasury Secretary Janet Yellen. Clearly, the U.S. is trying to re-engage with China, especially since it needs China’s supply chains to continue its electric vehicle (EV) and solar energy push. But then… President Biden spoke!
At a campaign event in California on Tuesday, President Joe Biden called Chinese President Xi Jinping a “dictator.” Chinese Foreign Ministry spokeswomen Mao Ning called President Biden’s comments “irresponsible” and added, “It is against the basic facts and diplomatic protocols, seriously violates China’s political dignity and amounts to public political provocation.” Ouch! Whatever Secretary of State Blinken was trying to achieve with China a few days earlier was suddenly undone by President Biden. As a result, the relationship between China and the U.S. remains strained and future meetings with Treasury Secretary Janet Yellen and other Biden Administration officials will likely be postponed.
I should add that Chinese banks on Tuesday trimmed their benchmark prime rates by 0.1% to businesses and households, so 1-year and 5-year interest rates are now lower. This is likely to be the first is a series of rate cuts to stimulate the Chinese economy. With both the U.S. and Europe trying to diversify their respective supply chains, China continues to lose market dominance as its economy continues to sputter.
Speaking of loose words, in his prepared testimony before Congress, Fed Chairman Jerome Powell said that, “Nearly all (FOMC officials) expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” In his best double-speak, however, Powell added, “But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the committee to assess additional information and its implications for monetary policy.”
Translated from Fedspeak, Powell admitted that the Fed has to evaluate more data. Since the PPI has been negative for three of the past four months, plus the CPI is expected to plunge in July when the June CPI is announced, I expect that the Fed will continue to hit the “pause” button. Nonetheless, Powell admitted under Congressional testimony that an additional two key interest rate hikes may be forthcoming.
Speaking more bluntly at the Wall Street Journal’s Global Food Forum in Chicago, Chicago Fed President Austan Goolsbee on Wednesday said, “We are in this weird foggy environment where it is hard to figure out where the road is,” adding that, “I have not decided what should be the rate decision in a meeting more than a month from now.” Goolsbee knows that a big drop in inflation is forthcoming.
Furthermore, Atlanta Fed President Raphael Bostic, in an essay on Wednesday, said that the Fed has “done plenty,” and it is time to see whether the prior tightening will do its job and bring inflation down to the 2% target. The bottom line is that Fed’s doves are becoming more outspoken, so despite Fed Chairman Powell hinting at two more interest rate hikes, I stand by my prediction that the Fed will not increase key interest rates further, due to rapidly decelerating inflation, plus the Fed doves becoming more outspoken.
My favorite economist, Ed Yardeni, has also changed his tone from calling this year a “rolling recession” to calling the current environment a “rolling recovery.” One example of “green shoots” in U.S. economic statistics is that housing starts surged 21.7% in May to a 1.63 million annual pace, the strongest monthly surge since 2016. Building permits also rose 5.2% in May to a 1.49 million annual pace.
In the wake of the May housing starts report, the Atlanta Fed revised its second-quarter GDP estimate up slightly to a 1.9% annual pace, up from its previous estimate of a 1.8% annual pace.
Navellier & Associates, a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Stellantis (STLA). Louis Navellier does not own Tesla (TSLA) or Stellantis (STLA).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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