SPTS - The Fed Governors Are Waging A War Of Words... Again
2023-07-11 06:35:00 ET
Summary
- Since there is an outspoken minority of doves on the Fed, I think the July FOMC decision will rest on the June inflation reports, especially the Consumer Price Index (CPI).
- As CPI surged 1.2% in June 2022, I am expecting that its annual pace this month will decelerate to an annual pace of 3% or less (by cutting off June 2022).
- In the wake of the dismal ISM manufacturing report released last week, it would be very unwise for the FOMC to hike key interest rates at its late July meeting.
Last Wednesday, the FOMC minutes from the June 2023 meeting were released, revealing that, “ Some participants indicated that they favored raising the target range for the Fed funds rate 25 basis points in June, or that they could have supported such a proposal.” The key word is “some,” which is not indicative of a majority. These minutes also cited a “tight” labor market and signaled “upside risks” to inflation.
Meanwhile, Fed Chairman Jerome Powell at a conference in Madrid hosted by the Bank of Spain said, “A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year.” Hmm. The FOMC minutes say “some,” while Jerome Powell said it was “a strong majority.” Frankly, since there is an outspoken minority of doves on the Fed - including those from Atlanta, Chicago, Minneapolis, and San Francisco - I think the July FOMC decision will rest on the June inflation reports, especially the Consumer Price Index ((CPI)). Due to the fact that the CPI surged 1.2% in June 2022, I am expecting that the annual pace of the CPI this month will decelerate to an annual pace of 3% or less (by cutting off June 2022), which will hopefully cause the doves on the FOMC to be more outspoken at the July meeting and convince the rest of the FOMC to pause one more time.
Last week, the Institute of Supply Management (ISM) announced that its manufacturing index declined to 46 in June, down from 46.9 in May. This was the eighth straight month in which the ISM manufacturing index has been mired below 50, signaling a contraction, and 46 is the lowest monthly reading in the past three years (since the depth of the COVID lockdown in May 2020)! The new orders component improved to 45.6 in June, up from 42.6 in May, but the production component plunged to 46.7 in June, down from 51.1 in May. Of the six largest manufacturing industries surveyed, only one, namely transportation, expanded in June. Only four of 15 industries surveyed reported expanding in June, a big disappointment.
In the wake of this dismal ISM manufacturing report, it would be very unwise, in my opinion, for the Federal Open Market Committee ((FOMC)) to hike key interest rates at its late July FOMC meeting.
The two employment reports released last week may give the Fed “permission” to raise rates again, but that will be old news by late July, so much bigger weight will be given to the inflation reports by then.
Another piece of good news - which means “bad news” as far as the interest rate outlook is concerned - is that the ISM service (non-manufacturing) index rose to 53.9 in June, up sharply from 50.3 in May. The business activity component surged to 59.2 in June, up from 51.5 in May, while the new orders index rose to 55.5 in June, up from 52.9 in May. Fully 15 of the 18 service industries that ISM surveyed reported expansion in June, so the service sector is exhibiting accelerating growth, reflecting the ADP jobs data.
After the ISM service news, the Atlanta Fed raised its estimate of second-quarter GDP growth to a 2.1% annual pace, up from its previous estimate of 1.9%, and this faster growth rate implies more Fed action.
The Latest Energy and EV Developments
Crude oil prices meandered higher last week due to both Russia and Saudi Arabia reaffirming August production cuts of 500,000 to 1 million barrels per day, respectively. A pipeline burst in Russia’s Komi Republic (a northwestern province), disrupting production. Other infrastructure woes may continue to curtail Russian crude oil production in the upcoming months due to Western sanctions. Most major oil companies are exploring for crude oil offshore to boost profits as well as replace Russian crude oil long term, since it is perceived that Russia’s oil production will steadily decline without Western expertise.
The U.S. Navy announced last Wednesday that it intervened to prevent Iran from seizing two oil tankers in the Gulf of Oman. Iran has seized six oil tankers this year, since the U.S. Navy is now stretched too thin and can’t protect all trade routes. The Navy said, “Since 2021, Iran has harassed, attacked or seized nearly 20 internationally flagged merchant vessels, presenting a clear threat to regional maritime security and the global economy.” But then, the White House National Security Council said, “The United States will respond to Iranian aggression, together with our global allies and our partners in the Middle East region to ensure the freedom of navigation through the Strait of Hormuz and other vital waterways.”
In other energy news, the quest for green hydrogen is running into many obstacles, mostly high costs and a lack of water. Essentially, desalination plants powered by wind and solar are required to make green hydrogen. Most hydrogen is made from natural gas. Much “peak electricity” required for air conditioning during the summer is provided by natural gas peak power plants that turn on during peak load demand.
The war against natural gas in California, New York, Washington, and other states is essentially illogical, since natural gas in the U.S. is a waste byproduct from crude oil production, so if there is no demand for natural gas, it will be burned anyway. Ironically, the quest to ban natural gas will curtail electricity supply during peak demand, hinder hydrogen production, and cause more natural gas to be flared.
The UAE, which hosts the COP28 climate summit this year, pledged to invest $54 billion in renewable energy in a quest to reach net zero by 2050. Obviously, this looks good before the UAE hosts the COP28 climate summit. Due to the fact that the UAE already has 70 desalination plants, it may be positioning itself to be a provider of green hydrogen, so it will be interesting to see what technologies are pushed there.
China dominates the global production, refining, and processing of many critical raw materials, including gallium and germanium, which are byproducts from the processing of commodities such as zinc, coal, or bauxite. Although the U.S. and its allies depend on China for these critical minerals, China also needs Western technology such as lithography machines to produce high-performance chips; so in that light, it is interesting to note that China does not like the fact that the Biden Administration is considering a wider semiconductor chip ban, so China decided to ban the export of gallium and germanium, which are used in semiconductors, 5G base stations, and solar panels. The ban will begin on August 1 st to “safeguard national security and interest.” Interestingly, this announcement came before Treasury Secretary Janet Yellen’s scheduled trip to China to “facilitate better economic relations,” so it appears that China implemented this rare earth mineral ban because they want to challenge Secretary Yellen.
After China’s proposed ban on the export of gallium and germanium, the Biden Administration is looking to restrict China’s access to cloud computing to protect access to artificial intelligence, which is increasingly moving to the cloud on faster servers with Nvidia’s ( NVDA ) advanced A100 chips. This move is perceived to be a “tit for tat” countermove for Secretary Yellen and U.S. negotiators with China. So far, the Biden Administration has not removed any of the tariffs that the Trump Administration imposed on China and seems eager to onshore many of the commodities and products that China manufactures.
Turning to EVs, Tesla’s ( TSLA ) second-quarter sales surged 83% to 466,000 vehicles, so its recent price cuts seem to be stimulating sales. Another electric vehicle (EV) success story is BYD ( BYDDF ) in China, whose sales soared 98% to 700,244 in the second quarter. BYD sold 352,163 EVs last quarter, and the rest of its sales were hybrids. Sales were best in its Seagull model, which costs only $11,000 and has 251 miles of range.
BYD is making its own iron-phosphate (LFP) batteries. Most Chinese-made Teslas also use LFP batteries, which are substantially cheaper than lithium-ion batteries. It is clear to me that if companies want to win the EV price wars, they must switch to LFP batteries on less-expensive models, which Ford ( F ) and VW Group ( VWAGY ) are doing, so we’ll see if their market share grows with cheaper EV models in upcoming quarters.
Last Tuesday, Toyota ( TM ) said that its objective is to cut the current weight of batteries in half. Keiji Kaita, the President of Toyota’s research and development center for carbon neutrality, said, “For both our liquid and solid-state batteries, we are aiming to drastically change the situation where current batteries are too big, heavy and expensive.” Kaita added that, “In terms of potential, we will aim to halve all of these factors.”
Regarding solid-state batteries, Toyota initially said that it wanted to start selling hybrid cars with solid-state batteries before 2025. Additionally, Kaita said that Toyota discovered ways to address the durability problems from about three years ago and now has enough confidence to mass-produce solid-state batteries in EVs by 2027 or 2028. Panasonic ( PCRFY ) is working with Toyota on solid-state batteries and is expected to be a major winner if Toyota leads the adoption of solid-state batteries in hybrids and EVs.
Navellier & Associates owns Panasonic Corp. ((PCRFY)) and Nvidia Corp. ((NVDA)) in managed accounts and a few accounts own Tesla ((TSLA)) per client request in managed accounts. We do not own Toyota Motor Corp. ((TM)). Louis Navellier and his family own Panasonic Corp. ((PCRFY)) and Nvidia Corp. ((NVDA)) via a Navellier managed account. He does not own Tesla ((TSLA)) or Toyota Motors ((TM)) personally .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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The Fed Governors Are Waging A War Of Words... Again