ACTV - Chairman Powell Confirms That Inflation Is Near His Target 2%
2023-12-19 07:45:00 ET
Summary
- CPI rose by 0.1% in November and 3.1% in the past 12 months. Excluding food and energy, the core CPI rose 0.3% in November and 4% in the past 12 months.
- The Fed will keep rates steady until inflation approaches 2%.
- The ECB followed the Fed’s lead last week by not changing its key interest rate.
The Labor Department announced last Tuesday that the Consumer Price Index ((CPI)) rose by 0.1% in November and 3.1% in the past 12 months. Excluding food and energy, the core CPI rose 0.3% in November and 4% in the past 12 months. Food prices rose 0.2%, and energy prices declined 2.3%, due largely to a 6% decline in gasoline prices. Natural gas and propane prices rose 2.8% in November, due largely to colder weather. Owners' equivalent rent (shelter costs) rose 0.4% in November and 5.5% in the past year. This was a bit disappointing, so the Fed will keep rates steady until inflation approaches 2%.
On Wednesday, the Labor Department announced that the Producer Price Index ((PPI)) was unchanged in November and rose only 0.9% in the past 12 months. Excluding food, energy and trade, the core PPI rose just 0.1% in November and 2.5% in the past 12 months. Wholesale food prices rose 0.6%, and energy prices declined 1.2% in November. Wholesale service costs rose 0.2%, while goods rose 0.1%. The PPI report was positive, reflecting inflation well under the Fed’s 2% target rate, balancing out the higher CPI.
After these two reports came out, at the December Federal Open Market Committee ((FOMC)) meeting on Wednesday, the Fed revealed that the "dot plot" from all 17 FOMC voting members foresees three rate cuts in 2024. Furthermore, three to four more rates cuts are anticipated in 2025, until the Fed Funds rate hits 3.5-3.75%. In total, the FOMC dot plot revealed six to seven key interest rates cuts planned for the next two years. However, if the Fed wants to stay out of the 2024 political arena, perhaps the FOMC might want to start earlier and make the most of these interest rates cuts before the November Presidential election. Also notable is that Treasury yields plunged after that FOMC announcement, so the 10-year Treasury bond now yields just 3.93%, down over 100 basis points from a peak of 4.99% on October 19 th .
In his press conference after the FOMC statement, Chairman Powell said he would not even wait until the Fed’s favorite inflation indicator (the PCE Index) hits 2%, for fear of "overshooting" on the downside and risking deflation, so the Fed may cut rates sooner. The monthly CPI increases were the largest last year from January to May 2023 - at 0.41%, 0.45%, 0.38%, 0.41% and 0.44%, respectively. Once these large gains are past, gains ranged from 0.18% to 0.32% in the second half, so 12-month gains will be lower.
Fed Chairman Jerome Powell’s press conference on Wednesday was closely scrutinized, but for once Mr. Powell stuck to the FOMC script and strived to reassure his audience that inflation was cooling off fast.
Also, in a Wall Street Journal interview last Tuesday, Treasury Secretary Janet Yellen argued for a "soft landing," which she described as, "The economy continues to grow, the labor market remains strong and inflation comes down." Regarding inflation, Yellen added, "I see no reason, on the path that we’re currently on, why inflation shouldn’t gradually decline to levels that are consistent with the Fed’s mandate and targets." I should add that my favorite economist, Ed Yardeni, last week praised Yellen for managing the recent Treasury auctions better, allowing the long-term Treasury bond yields to continue to decline.
The European Central Bank (ECB) followed the Fed’s lead last week by not changing its key interest rate. However, the HCOB Flash Eurozone Composite PMI Output Index, which is a gauge of activity in the eurozone manufacturing and services sectors, fell to 47.0 from 47.6 in November, the seventh straight monthly decline. Since any reading below 50 signals a contraction, the eurozone economy is sputtering.
In other economic news, the Commerce Department announced on Thursday that retail sales rose 0.3% in November, substantially more than the consensus estimate of a -0.1% decline. Excluding vehicle and gasoline sales, retail sales rose by a more impressive 0.6%, which is way above the 0.1% increase in October! In the past 12 months, retail sales have risen 4.1%. Spending at bars and restaurants surged 1.6% in November, which is always a good sign, demonstrating that consumers are getting out and about.
I expect some upward GDP revisions due to rising November retail sales. Sure enough, the Atlanta Fed revised its fourth-quarter GDP estimate up to a 2.6% annual pace (from 1.2%, previously estimated).
Global News Reflects Dramatic Changes in Several Nations
We’re seeing several dramatic changes in Argentina, Ukraine, the Middle East, Canada and Venezuela.
Argentina’s new President, Javier Milei, was sworn in and promised deep spending cuts. He promised to avoid pursuing vendettas, and said he would welcome "with open arms" anyone who shared his vision of rebuilding Argentina under a new social contract where "the state does not direct our lives," and instead "looks after our rights." The Argentina business community has welcomed Milei. As Milei took his oath of office, the legislature shouted, "Freedom!" But former President Fernandez de Kirchner raised her middle finger to Milei’s supporters as she entered into the legislature for the swearing-in ceremony.
The first decisive action by Milei is that his government devalued the Argentina peso by 54% on Tuesday. The central bank will continue to devalue the Argentina peso by 2% per month. Milei also announced massive spending cuts to curb government spending to 2.9% of its GDP. These austerity measures were praised by the International Monetary Fund, which, in the past, has often had to rescue Argentina.
In Ukraine, President Volodymyr Zelensky visited Washington, DC after attending Milei’s inauguration in Argentina. Obviously, he is looking for more U.S. aid, since Congress has become wary of further aid to Ukraine due to growing concerns about the theft of U.S. aid. The Biden Administration wants to provide Ukraine, Israel and other national security interests with an additional $110 billion in aid, but Republicans in Congress are insisting on improving our border security too before passing additional international aid.
Additionally, the U.S. military has refused to be audited by an inspector general regarding its Ukraine aid, despite a bipartisan Senate request. As a result, Zelensky will likely be disappointed and may be forced to agree to a temporary cease fire, even though Russia may not accept a long-term cease fire agreement.
Likewise, the European Union cannot agree on a $54 billion aid package to Ukraine, so both American and EU funding for Ukraine seem in jeopardy. To appease Ukraine, the EU agreed to start membership talks with Ukraine. EU negotiations typically take years and could be derailed at any time along the way. Also, a country cannot join the EU unless its borders are defined, so Ukraine may have to forfeit some of its Eastern and Southern land to Russia. Clearly, Ukraine is desperate, so its future remains uncertain.
Turning to the Middle East, there have now been over 100 attacks on U.S. military facilities and ships in the region around Israel since the initial Hamas attack on October 7 th . The Iran-backed Houthi rebels in Yemen have been aggressive, trying to hit the USS Carney and USS Mason.
COP28 wound down in Dubai with attendees struggling for days to debate the wording of a joint statement. Extremists, including the Pope, call for a complete ban on fossil fuels, but big emerging market economies, like Brazil, China and India, continue to emit more carbon dioxide and seem addicted to fossil fuels. As a result, a "watered-down" COP28 draft called for "reducing consumption and production of fossil fuels." This compromise is due to the fossil fuel industry dominating the annual climate conference, which is frustrating for John Kerry, Al Gore and others critical of the energy industry.
Furthermore, the OPEC+ countries at COP28, led by Saudi Arabia, refuse to sign any phase-out of fossil fuels. As a result, the final COP28 joint statement merely said that countries will transition away from fossil fuels in a "just and orderly" fashion - two key words - because as long as fossil fuels are cheaper than green alternatives, any transition will be slow, taking longer than most of our lifetimes.
Canada has said it will impose a cap-and-trade system to curb emissions on its domestic oil and natural gas industry. Specifically, Canada’s "draft framework" (to be finalized in 2025), will allow oil and gas production output to be capped at a level between 35% and 38% below 2019 levels, beginning in 2030. The government will then keep lowering allowances in stages until the industry reaches net zero by 2050.
I think it is safe to say that Canada’s Prime Minister Justin Trudeau is not very popular in energy-rich Alberta, so when the next election is declared, Alberta and other Western provinces will fiercely oppose Trudeau’s party. Canada is also shrinking in population as many of its citizens move to other countries. Immigrants to Canada have also complained about the cost of living and are increasingly leaving Canada.
In other energy news, Ford ( F ) cut its 2024 production targets for its F-150 Lightening electric vehicle (EV) to 1,600 per week, down from its previous plan to make 3,200 EVs per week at its plant in Dearborn, Michigan. The company also reduced the production of its Mach-e in Mexico, and downsized its new Michigan battery plant by approximately 50%. Ford’s proposed battery plant in Kentucky is now at half production. In a statement, Ford said, "We will continue to match production to customer demand."
The Energy Information Administration ((EIA)) reported on Wednesday that crude oil inventories declined by 4.3 million barrels in the latest week, which is much larger than the consensus estimate of a 2.7-million barrel decline. Gasoline inventories rose by 400,000 barrels and distillates (diesel, heating oil, jet fuel) inventories rose by 1.5 million barrels in the latest week, so the prices at the pump are expected to remain low for the foreseeable future. Normally, the Strategic Petroleum Reserve ((SPR)) should be refilled in the winter months, when crude oil prices are seasonally low, but the federal budget battles are not allocating sufficient money to significantly refill the SPR after it was depleted by 40% before the mid-term elections.
Venezuela President Nicolas Maduro and Guyana President Irfaan Ali met on Thursday, and both counties agreed to avoid using arms against each other as talks continued. Their next meeting will be in Brazil within two months. Ali said that major oil companies operating in Guyana’s waters were "moving ahead aggressively" with their production plans. Guyana’s government said it would award new offshore oil blocks by the end of the year. Maduro said some of those blocks are in waters belonging to Venezuela. Clearly, Venezuela seeks Guyana’s crude oil revenue, so the Brazilian round of talks will be interesting.
In closing, I noticed that the SEC is now asking investment advisors how they utilize AI and oversee AI. Specifically, the SEC wants information on algorithmic models as well as marketing materials. SEC Chairman Gary Gensler has repeatedly warned that AI could lead to a financial crisis, create instability and "drive us off an inadvertent cliff." Hmmm. I suspect that Gensler is worried that many AI models do not properly account for the fact that market liquidity can disappear, so he may be rightly concerned that AI models may try to sell stocks when there are few or minimal buyers, which could trigger a flash crash .
I would concur with his concerns, and we have written about this danger in the past - with or without AI, due to high-frequency trading (HFT). My associate Jason Bodner has written two or three special white papers addressing this risk, but the investment lesson is that markets generally bounce back after a "flash crash," so they can provide buying opportunities with no long-term damage during a strong bull market.
Navellier & Associates owns Ford Motor Co. ((F)) in managed accounts. Louis Navellier and his family do not own Ford Motor Co. ((F)) personally.
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Chairman Powell Confirms That Inflation Is Near His Target 2%