monsitj
May 9, 2023
Last Wednesday, ADP reported that private payrolls rose by 296,000 in April, substantially more than the economists’ consensus expectation of 133,000 and the highest monthly gain since July 2022. March private payrolls were revised slightly lower to 142,000, down from 145,000. Leisure and hospitality led the job increase categories with 154,000, followed by education and health services with 69,000 new jobs. The construction industry also added 53,000 jobs in April, followed by natural resources and mining with 52,0000 new jobs. Manufacturing led job losses with 38,000 and the financial sector lost 28,000 jobs.
Then, on Thursday, the Labor Department reported that weekly unemployment claims rose to 242,000 in the latest week, up from a revised 229,000 in the previous week. Continuing unemployment claims declined to 1.805 million, down from a revised 1.843 million in the previous week. This drop in continuing claims was good news, since in the previous week, it was at the highest level in 16 months.
On Friday, the major jobs report from the Labor Department reported that 253,000 payroll jobs were added in April. Like the ADP report, this was substantially higher than the economists’ consensus estimate of 185,000. However, March’s payroll was revised down to 165,000 (from 236,000 previously reported) and February payroll was revised down to 248,000 (from 326,000). After factoring in all these revisions, the unemployment rate declined to 3.4% in April, down from 3.6% in March. Wage inflation picked up at the fastest pace in almost a year, rising by 0.5% (or 16 cents) to $33.36 per hour in April. Overall, due to a lower unemployment rate and rising wages, the payroll report was indicative of a stronger economy.
The ISM numbers were also positive. The Institute of Supply Management (ISM) manufacturing index rose to 47.1 in April, up from 46.3 in March. The “new orders” component rose to 45.7 in April from 44.3 in March, while the production component was 48.9 in April, up from 47.8. Despite these improvements, any reading below 50 signals a contraction. Of the 16 manufacturing industries ISM surveys, only five grew in April, and this marks the sixth straight month that the manufacturing sector has been below 50.
The U.S. service economy dwarfs manufacturing, so it was encouraging to see that ISM announced on Wednesday that its non-manufacturing (service) sector rose to 51.9 in April, up from 51.2 in March, the fourth straight month that the ISM service index rose, after hitting 49.2 in December. Any reading above 50 signals an expansion, so the service economy only contracted in one month. New orders rose sharply to 56.1 in April, up from 52.2 in March, while the business activity component declined to 52 in April, down from 55.4 in March. Fully 14 of the 17 service industries surveyed reported growth in April.
Another piece of good news is that the Atlanta Fed is now estimating second-quarter GDP growth at a +2.7% annual pace, more than double the 1.1% gain in the first quarter. Furthermore, first-quarter GDP growth is expected to be revised higher due to the fact that the March trade deficit declined sharply as imports declined 0.3% to $320.4 billion and exports surged 2.1% to $256.2 billion, led by vehicles, crude oil, refined products, and natural gas. Interestingly, the trade deficit with China is now at the lowest level in three years as imports of consumer goods have declined. Furthermore, due to tariffs and trade tensions with China, the U.S. is now importing more goods from India, Malaysia, Taiwan, Thailand, and Vietnam.
Overall, Wall Street was depressed last Tuesday, expecting slower economic growth, which caused crude oil prices to fall dramatically. However, due to this string of positive economic indicators released from Wednesday through Friday, by Friday in the wake of the April payroll report, Wall Street was expecting robust economic growth, so crude oil prices erased the price declines earlier in the week. Any recession fears seem to have dissipated and hopefully, Wall Street will become less bi-polar in the upcoming weeks!
Facing a Banking Crisis and Debt Ceiling Debate, the Fed Should At Least “Pause” in June
The Federal Open Market Committee (FOMC) statement on Wednesday, in my opinion, was a “weak” statement, since it neglected to state clearly that the Fed was done raising key interest rates, even though its previous language of a future rate hike was removed. Specifically, the phrase “some additional policy firming may be appropriate” was removed. Furthermore, since the Fed’s key interest rate remains above current Treasury yields, the Fed knows the banking system will be super-restrictive and curtail credit.
Fed Chairman Jerome Powell’s press conference was also full of weak comments, since he would not commit to curtailing future rate increases. As usual, he is waiting for the “data” to come in. Fortunately, Powell said that the Fed is now “at the level” that should help inflation migrate to the 2% level. Overall, Powell does not inspire confidence, since he is very “matter of fact” and always waits to see the next tea leaves unfold. However, I did appreciate his comment that the Fed has been “sufficiently restrictive.”
The European Central Bank (ECB) also raised its key interest rate by 0.25% last Thursday. At her press conference, ECB Chair Christine Lagarde implied that the ECB was still on a “journey” to combat inflation and that more interest rate hikes would likely be forthcoming. Interestingly, at Lagarde’s press conference, she received a question about U.S. bank failures, so clearly Europeans are worried about the stability of the U.S. banking system, which will likely continue to undermine the value of the U.S. dollar.
The Fed’s favorite inflation indicator – the Personal Consumption Expenditure (PCE) index – rose 0.2% in March and 4.2% in the past 12 months (down from a 5.1% annual pace in February). Energy prices surged 3.7% in March, while food costs declined 0.2%. The core PCE, excluding food and energy, rose 0.3% in March and 4.6% in the past 12 months (down from 4.7% in February). There is no doubt that the core PCE is running hotter than the Fed wants to see. The only silver lining is that service costs rose 0.2% in March, cooler than in previous months. Overall, the March PCE just illustrates that inflation, especially energy costs, remains stubbornly high. The Fed knows that it cannot control food and energy inflation.
In the continuing U.S. bank crisis, PacWest Bancorp (PACW) announced last week that it is in talks with several potential investors after its stock plunged. Western Alliance (WAL) is another regional bank that is exploring “strategic options,” including a potential sale of all or part of its business. Banks are starting to resemble dominoes, and they are losing deposits as investors seek higher yields. Contagion fears are spreading, and the banking crisis is being exasperated by an inverted yield curve. Furthermore, opportunistic investors, like Bill Ackman, are now fueling fears that regional banks will continue to falter. Ackman tweeted that “At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and ‘pursuing strategic alternatives’ means an FDIC shutdown over the coming weekend. And there is no incentive to bid until Sunday after the failure.”
Navellier & Associates Inc. does not own PacWest Bancorp (PACW), or Western Alliance (WAL). Louis Navellier does not own PacWest Bancorp (PACW), or Western Alliance (WAL) personally.
The next big concern for investors that like to worry is that the debt ceiling will have to be raised by Congress. Treasury Secretary Janet Yellen said that the Treasury Department needs the debt ceiling lifted by June 1st, since its emergency measures to circumvent the ceiling could no longer be implemented after that date. Remaining vague in her letter to House Speaker Kevin McCarthy, Yellen said, “It is impossible to predict with certainty the exact date when the Treasury will be unable to pay the government’s bills.”
President Biden has invited Congressional leaders to meet today (May 9th) to discuss the debt ceiling. House Speaker McCarthy accepted President Biden’s invitation after trying to belittle President Biden for refusing to meet for almost 100 days. McCarthy is striving to get the President to agree to some spending cuts before agreeing to lift the federal government’s debt ceiling. In the end, the federal government’s debt ceiling will get lifted, even if there is a partial government shutdown, which has happened before.
Most GDP growth is attributable to the U.S. consumer. Since the 2024 Presidential election is heating up and there may be some debates in the upcoming months, our elected leaders usually start sucking up to voters. I am keenly aware that many voters do not like the current leading candidates or think they are too old, but the candidate with the most energy and the most positive spirit should lift consumer confidence.
Energy Prices Swing Wildly with Changing Growth Expectations
Diesel prices have declined below gasoline prices in the U.S. Slowing freight traffic is being cited as the primary cause. Despite the plunging inventory of crude oil and refined products in the past several weeks, crude oil prices fell sharply last week on global economic growth concerns as central bankers met to discuss additional key interest rate hikes. Higher interest rates are curtailing consumer spending and even Enphase Energy (ENPH) warned of slower solar and powerwall installations due to pinched homeowners. Tesla (TSLA) has also warned that high rates are curtailing its electric vehicle sales, but energy recovered Friday.
Ironically, as Memorial Day approaches, I expect that my Big Energy Bet could pay off as fossil fuel demand soars. I should also add that my energy stocks continue to announce better-than-expected earnings in the past several days. Bloomberg also reported that crude oil prices are expected to rise in the upcoming years due to a lack of investment in new fields as well as the Permian Basin peaking.
The U.S. Navy reported on Wednesday that Iran seized a second oil tanker, which apparently was not carrying much, if any, crude oil. Specifically, the Niovi, a Panama-flagged oil tanker, was sailing from Dubai to the port of Fujairah in UAE, but it was seized by the Islamic Revolutionary Guard in the Gulf of Oman. The Niovi is a very large crude carrier (or VLCC) that can carry over 2 million barrels, but had been in drydock getting maintenance in Dubai and was headed to Fujairah, a fueling hub for VLCCs.
The Navy said, “A dozen IRGCN fast-attack craft swarmed the vessel in the Strait (of Hormuz),” and “forced the oil tanker to reverse course” towards Iranian territorial waters. Roughly a third of all oil tankers travel through the Strait of Hormuz. The other tanker (Chevron chartered) that Iran seized is being held at the Iranian port of Bandar Abbas. Iran’s ultimate goal for these tanker seizures remains unknown.
Russian oil data is now showing that the number of inactive wells is at the highest level in 10 months. In March, 18.1% of Russia’s wells were inactive, up from 15.6% in February. Russia exported more than 4 million barrels a day of seaborne crude oil at the end of April. India and China have geared up to export refined products, like diesel. Latin America has also become a big market for Russian diesel exports.
Bloomberg is a big fan of electric vehicles (EVs), and they like to report on climate change, but the inventory of unsold EVs is rising fast. CarGurus has reported a nationwide glut of unsold new EVs for sale, like 5,724 VW ID.4s, 5,166 Hyundai IONIQ 5s, 4,294 Mercedes EQSs, 3,277 Ford Mach-E SUVs, 2,127 Kia Niros, 1,613 Hyundai IONIQ 6s, 970 Mercedes EQE SUVs, and a variety of other models for sale, plus used models. This growing inventory of unsold EVs, bodes poorly for both Rivian (RIVN) and Lucid (LCID), since these EVs demand premium prices above established brands like Audi and Mercedes. I should add that Audi is starting to offer 0.99% financing to move its growing inventory of EVs.
Last Tuesday, Ford (F) announced up to an 8% price reduction on its standard range Mach-E, since this version is switching to cheaper iron phosphate (LFP) batteries. This is Ford’s second price reduction this year for the Mach-E. Ford’s Mach-E sales have declined about 20% this year compared to a year ago, but the company is trying to boost Mach-E production at its Mexican plant, so its order banks are expected to reopen now that Ford has secured LFP batteries from CATL. The long-range Mach-E models will continue to utilize lithium-ion batteries. Frankly, the glut of EVs is getting scary for auto dealers. Ford lost $722 million in the first quarter on its EVs, so if a legacy auto manufacturer cannot make money in EVs, it may be impossible for startups like Rivian and Lucid. As a result, a big EV shakeout could arrive soon.
Navellier & Associates does not own Ford Motor Co. (F), Chevron (CVX), Rivian Automotive (RIVN), or Lucid Group (LCID). Louis Navellier does not own Rivian Automotive (RIVN), Ford Motor Co. (F), Chevron (CVX), or Lucid Group (LCID) personally.
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Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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