SHEL - The Fed Signals Another Rate Increase In 2023 (And No Cuts)
2023-09-25 21:35:00 ET
Summary
- The Federal Open Market Committee (FOMC) statement seemed dovish, at first, but then the FOMC signaled that one more Fed rate hike was not only possible, but likely.
- Crude oil prices have risen 30% since June, as fears of further supply shortages persist.
- In its second week, the United Auto Workers (UAW) decided on Friday to expand its strike to 38 more GM and Stellantis facilities, while sparing Ford.
The Federal Open Market Committee ((FOMC)) statement seemed dovish, at first, but then the FOMC signaled that one more Fed rate hike was not only possible, but likely.
A survey of the FOMC members revealed that seven members did not want to increase key interest rates anymore, but they were over-ruled by 12 FOMC members who were open to another interest rate hike.
The FOMC statement said that they were “highly attentive to inflation risks.” The bottom line is that the Fed remains data-dependent, but that means any good news (like rising GDP or higher energy prices) could mean another rate increase.
I remain in the camp that energy is an inflation outlier, so the Fed should not increase key interest rates further. The housing component (owner’s equivalent rent) in the Consumer Price Index and wholesale service costs in the Producer Price Index rose only 0.3% and 0.2%, respectively, in August. The primary reason why the CPI and PPI rose in August was that gasoline prices rose 10.5% and 20%, respectively.
There is nothing the Fed can do about the President’s energy policies, so I expect that the core rate of inflation will continue to moderate, giving the Fed no rational reason to keep raising key interest rates.
The other reason why I do not expect the Fed to raise key interest rates is that it risks squelching the “soft landing” scenario it proudly engineered.
One example of high rates hurting growth is that credit card companies are now reporting a 3.63% default rate, up from 2.13% two years ago (in September 2021). Goldman Sachs is now forecasting that credit card losses will rise to 4.93% in late 2024 or early 2025.
In other words, consumer credit is expected to continue to deteriorate heading right up through the November 2024 Presidential election. Several credit card companies are based in Delaware and have supported Joe Biden for decades.
The fact that Capital One ( COF ) has backed Joe Biden in the past bodes poorly for his re-election prospects, since Capital One has historically had the highest default rates.
Across the pond, the European Central Bank ((ECB)) has raised its key interest rate 0.25% to 4%, the euro’s highest level ever. In doing so, the ECB signaled that fighting inflation is more important than stimulating economic growth.
Italy and Germany are big export economies, but due to China’s economic woes, they are contracting this quarter and will likely drag the entire eurozone into a recession.
Inflation in the eurozone has dropped from a peak of 10.6% last year to 5.3% in August. Food and energy inflation there is much more acute than in the U.S., but there is little that the ECB can do to combat food and energy inflation, so I think the ECB may have made a mistake with its latest rate increase.
Speaking of tight money, Poland abruptly ceased all military aid to Ukraine to rebuild their own readiness, as Poland seems increasingly worried that Russia could invade Poland next, if the Ukrainian defenses fail.
High rates are impacting several U.S. industries, including real estate. Last Tuesday, the Commerce Department reported that housing starts declined 11.3% in August to an annual pace of 1.28 million, the lowest level since June 2020.
And the National Association of Realtors reported that existing home sales declined 0.7% in August to an annual pace of 4.04 million, the fifth consecutive monthly decline.
There is now only a 3.3-month supply of homes for sale. Existing home sales are low because most homeowners do not want to give up their low fixed mortgages. Overall, there seems to be no doubt that, due to high mortgage rates and tight inventories, existing home sales will continue to suffer.
Crude Oil Prices Are Likely to Stay High
Crude oil prices have risen 30% since June, as fears of further supply shortages persist. Last Tuesday, the American Petroleum Institute reported that U.S. crude oil inventories declined by 5.25 million barrels in the latest week.
For example, Shell ( SHEL ) halted work at its largest refinery in Europe, in Rotterdam, last week. This will likely exaggerate the diesel shortage that has sent European prices soaring. U.S. refineries will also shut down for a while to convert to oxygenated winter gasoline blends from current summer blends.
The most likely big supply disruption in the next few months – other than another hurricane in the Gulf of Mexico – may be a problem with Russian production in the Arctic, since those pipelines tend to freeze if they lack oil.
Russia has diverted many of its able workers to support the war efforts in Ukraine, so there are concerns that its oil infrastructure is being neglected.
Russia’s three big Arctic wells were all developed with Western energy companies, like Exxon Mobil ( XOM ), so without continuing oil service expertise, its crude oil infrastructure is at risk, and these supply disruption fears tend to keep crude oil prices high.
In its second week, the United Auto Workers ((UAW)) decided on Friday to expand its strike to 38 more GM ( GM ) and Stellantis ( STLA ) facilities, while sparing Ford ( F ), even though the UAW walked out of Ford’s Bronco plant in Michigan a week earlier, on September 15 th .
UAW President Shawn Fain said talks with Ford have seen “some real progress” and applauded that automaker for officially reinstating a cost of living allowance, which it suspended in 2009.
However, regarding GM and Stellantis, Fain said, “We will shut down parts distribution until those two companies come to their senses and come to the table with a serious offer.”
The news media also reported that the UAW's demand for a 32-hour work week is apparently off the table. Unionizing the new Big 3 battery plants that are really operated by CATL and LG Energy Solutions has been a big sticking point, since the EV transition is otherwise going to cause thousands to lose their jobs. Clearly, the UAW’s targeted strikes are increasingly impacting other plants, due to part shortages.
Meanwhile, China’s exports of EVs to Europe surged by 112% in the first seven months this year. Also, Tesla ( TSLA ) is exporting many of its Model 3 EVs made in Shanghai with LFP batteries to continue to capture market share.
Since LFP batteries are cheaper, China is capturing more energy level EV purchases. Right now, BYD ( BYDDF ) and CATL in China dominate LFP battery manufacturing.
Furthermore, China is building double the battery plants they need for domestic EV production, so it is clear that China intends to dominate the EV auto and battery businesses, and currently has a massive price advantage.
Interestingly, candidate Donald Trump is planning a major speech to union workers in Detroit instead of participating in the second Republican primary debate on Wednesday, September 27 th at the Ronald Reagan Presidential Library.
In a recent interview with NBC’s Kristen Welker, Trump said that the UAW leadership has failed its members. Furthermore, Trump warned U.S. workers’ jobs would move to China amidst the Biden Administration’s EV push.
Additionally, Trump said he was, “On the side of making our country great” in the UAW standoff, and called for vehicle “choice” versus the EV mandate. Clearly, this speech will be very entertaining, and it will be interesting if many union workers attend the Trump rally.
As if the Biden Administration did not have enough problems with the UAW strike, Bloomberg reported that the White House got a letter from six U.S. governors, including those in Connecticut, Massachusetts, New Jersey and New York, which implored the President to boost spending on fledgling offshore wind projects, due to concerns that surging costs imperil the multibillion-dollar wind turbine projects planned in coastal Atlantic waters.
Specifically, this letter said, “Absent intervention, these near-term projects are increasingly at risk of failing” adding that, “Without federal action, offshore wind deployment in the U.S. is at serious risk of stalling because states’ ratepayers may not be able to absorb these significant new costs.”
So, just like Europe is experiencing problems auctioning off new wind turbine tracts due to the poor economics of electricity generated by wind turbines, offshore wind projects in the U.S. may soon be dead on arrival.
Here in the U.S., low natural gas prices are very attractive for utilities for power generation, so if offshore wind projects were to continue, corresponding electric bills would likely increase substantially.
Last Tuesday, President Biden talked about the climate crisis at the United Nations ((UN)). Interestingly, British Prime Minister, Rishi Sunak was absent at the UN, as he is preparing delays of his previous measures to propose a zero-carbon economy by 2050.
Essentially, the problem is that Britain embraced green energy faster than other European economies and now Britain faces higher electricity prices.
A significant proportion of British households cannot pay their electric bills and need government aid, so The Financial Times reported that Sunak is planning to postpone the ban on gasoline and diesel vehicles to 2035 (from 2030) and postponing the installation of new household gas boilers to 2035.
Officially, the net zero carbon goal of 2050 will remain in place, but Sunak will be “kicking the can down the road.”
Navellier & Associates owns Exxon Mobil Corporation ((XOM)), Shell Plc Sponsored ADR ((SHEL)), and Ford Motor Co. ((F)) in some managed accounts, and one client holds Tesla ((TSLA)), per client request in managed accounts. We do not own Stellantis ((STLA)), CATL, LG Energy Solutions, or General Motors ((GM)). Louis Navellier owns Exxon Mobil Corporation ((XOM)), and Shell Plc Sponsored ADR ((SHEL)), via a Navellier managed account does not personally own Tesla ((TSLA)), General Motors ((GM)), Stellantis ((STLA)), CATL, LG Energy Solutions, or Ford ((F)) .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The Fed Signals Another Rate Increase In 2023 (And No Cuts)