OLEM - 'Seasonal Adjustments' Continue To Warp Key Statistics
Summary
- Like the bloated January jobs report, the retail sales report was also apparently distorted by seasonal adjustments.
- The Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing that the vast majority of FOMC voting members favored a 0.25% key interest rate increase, and just a few FOMC members favored a 0.5% increase.
- The Labor Department on Thursday announced that weekly unemployment claims in the latest week declined to 192,000, down from a revised 195,000 in the previous week.
Like the bloated January jobs report, the retail sales report was also apparently distorted by seasonal adjustments. If the number crunchers expect bad weather and it doesn’t come, all of a sudden the results are pushed artificially higher, since people are out there shopping when they are normally hibernating.
Food and energy inflation persists in the latest inflation numbers, which was re-confirmed in Friday’s Personal Consumption Expenditure (PCE) inflation report. The Commerce Department reported on Friday that the PCE surged 0.6% in January (up from 0.2% in December), so the annual pace accelerated to 5.4% (up from 5.3% in December). The core PCE, excluding food and energy, also soared 0.6% and inched up to a 4.7% annual pace (up from 4.6% in December). Overall, the PCE was a massive disappointment and provided evidence that the Fed will continue to raise key interest rates.
On Friday, the Commerce Department reported that personal income rose 1.8% in January, which is substantially higher than the economists’ consensus expectation of a 1.4% increase. This means that the January retail sales surge was not a fluke, but I still remain suspicious that retail sales rose 3% in January.
My favorite economist, Ed Yardeni, issued a “QuickTakes” bulletin last Tuesday that showed how rental inflation is on the verge of moderating. Specifically, owners’ equivalent rent has leveled off in the past five months through January. Why this moderation in owners’ equivalent rent has not shown up in the Consumer Price Index ((CPI)) yet is frustrating. As soon as we have evidence of moderating rental and home prices, inflation should start cooling off fast, which could trigger a big stock market rally!
The biggest economic surprise came on Friday, when the Commerce Department reported that new home sales surged 7.2% in January to a 670,000 annual pace, which is the highest annual pace in a year. December’s new home sales were also revised higher to a 620,000 annual pace. Sales in the South soared 17.1% in January, helping to offset a 19.4% slump in the Northeast. Median home prices declined 0.7% in January to $427,500, which represents the first price decline since August 2020.
Tensions With Russia Escalate – Even Before the Dreaded “Second Invasion”
I should add that Friday marked the one-year anniversary of Russia’s first invasion of Ukraine, which has turned into a proxy war with NATO. President Biden’s visit to Kyiv on Monday and his subsequent meeting with Poland are raising eyebrows over the escalation of the West’s proxy war with Russia. Naturally, President Biden is promising more money, including funding some Ukrainian pensions. Wars are very expensive, and it will be interesting to see how long Congress will fund this war in Ukraine.
All this spending is bloating the federal budget deficit and putting upward pressure on Treasury yields. Naturally, the federal government’s debt ceiling will have to be lifted; but since the Treasury Department is implementing extraordinary measures to avoid hitting the debt ceiling, it will be interesting to see when Congress and the Biden Administration decide to debate the subject, or if war spending will be curtailed.
One thing I can tell you is that Vladimir Putin was not pleased with President Biden’s visit to Poland and Ukraine last week. On Tuesday, Putin suspended Russia’s participation in the New SMART treaty to control nuclear weapons. Due to this suspension, Russia can now resume testing its nuclear weapons to torment the West. Putin said NATO and the U.S. “want to inflict a ‘strategic defeat’ on us and try to get our nuclear facilities at the same time.” Ouch! Clearly Putin is trying to torment the West with a nuclear threat. We are not on the road to World War III yet, but we are getting dangerously close.
The Wall Street Journal reported that the U.S., the European Union, and G7 nations are all prepared to use sanctions, export controls, and other tools to give companies doing business with Russia a stark choice. Treasury Deputy Secretary Wally Adeyemo put it like this: “To do business with a coalition representing half of the global GDP, or to provide material support to Russia.” Adeyemo said the U.S. would confront Chinese companies and banks to make clear that they will face sanctions for providing support to Russia, adding that the U.S. will spotlight cases where they see Chinese firms helping Russia evade sanctions.
Interestingly, China’s President Xi Jinping is now preparing to visit Moscow in the upcoming months and push for Russia to end the war due to mounting Western sanctions. China’s top diplomat, Wang Yi, was reported visiting Moscow on Tuesday in preparation for President Xi’s visit. A position paper is being prepared by China to try to influence Putin. This delicate mission by China has the potential to be the biggest news story of the year, especially if China can convince Putin to end his invasion of Ukraine.
In the meantime, global energy production and demand both remain at a record level, but Russia is anticipated to increasingly go off-line as Western sanctions bite further. Russia’s energy business is in chaos and its pipelines are backing up, which is expected to cause Russia to shut down many of its wells.
Already Russia’s crude oil production has been reduced by approximately 1.5 million barrels a day (vs. a year ago). Due to wellheads and pipelines freezing in the Arctic, another 3 to 5 million barrels a day could disappear soon. Not surprisingly, crude oil prices are firming up as tensions in Russia escalate.
FOMC Voting Members Currently Lean Toward a Smaller (0.25%) Rate Hike
The Federal Open Market Committee ((FOMC)) minutes were released on Wednesday, revealing that the vast majority of FOMC voting members favored a 0.25% key interest rate increase, and just a few FOMC members favored a 0.5% increase. Although Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard have been outspoken in calling for the larger interest rate hike, neither vote on the FOMC. The FOMC minutes said, “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures,” in conjunction with their reason for a key interest rate hike. Right now, the doves are outnumbering the hawks on the FOMC, so another 0.25% key interest rate hike at the March FOMC meeting is anticipated.
Inflation is coming down enough to justify the smaller hike. The Financial Times reported that lithium prices have fallen 29% to $61,795 per ton in China in the past three months as demand for electric vehicles (EVs) has slumped. CATL, the world’s largest battery producer, has been signing contracts with Chinese EV manufacturers at discounted prices. Interestingly, EV demand has also dropped in Germany and Norway due to subsidy cuts. Lithium prices in Europe and the U.S. have fallen less, about 10%, to $70,050 per ton due to stronger demand. In the past two years, lithium prices have more than tripled from $20,000 per ton, but clearly prices are temporarily settling down until EV demand resurges in China.
The National Association of Realtors on Tuesday announced that existing home sales declined 0.7% in January to a 4 million annual pace, which is the 12 th straight monthly decline as well as the slowest annual pace since October 2010. Interestingly, economists were expecting existing home sales to rise 1.2% in January, so this was a major disappointment and proof that economists cannot hit the broad side of a barn!
Compared to a year ago, existing home sales declined 36.9% as mortgage rates declined. I wondered on Fox Business about “how many industries does the Fed need to destroy?” since there are now growing problems with subprime loans and car loans in addition to housing woes. Ed Yardeni likes to call the current economic environment a “rolling recession,” which I believe is an excellent description of the conundrum we are now facing as the Fed continues to raise key interest rates – perhaps too far.
The Labor Department on Thursday announced that weekly unemployment claims in the latest week declined to 192,000, down from a revised 195,000 in the previous week. Continuing unemployment claims in the latest week declined to 1.654 million, down from a revised 1.691 million in the previous week. Overall, the labor market appears healthy, especially if unemployment claims continue to decline.
Finally, Nvidia ( NVDA ) surged in the wake of its fourth-quarter results based on its guidance and emergence as the AI leader. Specifically, Nvidia is helping Mercedes ( MBGAF ) to emerge as the autonomous driving leader due to its Level 3 system via Nvidia chips. The Mercedes system also uses Lidar, so companies that make Lidar sensors have also firmed up. Tesla ( TSLA ) abandoned expensive Lidar systems in favor of cameras only, but now Mercedes and Nvidia are leading the race to develop the safest autonomous driving system. Other auto manufacturers are also using Nvidia’s AI chips and systems, so its auto business remains very promising.
Navellier & Associates owns Nvidia Corp. ((NVDA)), and a few accounts own Tesla ((TSLA)), per client request in managed accounts. We do not own Mercedes-Benz Group ADR. Louis Navellier and his family own Nvidia Corp. ((NVDA)), via a Navellier managed account. He does not own Tesla ((TSLA)), or Mercedes-Benz Group ADR, personally.
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'Seasonal Adjustments' Continue To Warp Key Statistics