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Core Inflation Is Steadily Declining

Core Inflation Is Steadily Declining
  • The core rate of U.S. inflation on both the consumer and wholesale level has been steadily declining since March.
  • In light of the Supreme Court’s recent decision to curb the EPA’s power, the SEC’s new climate disclosures are expected to be aggressively challenged in federal courts.
  • Right now, it is a close call whether or not the U.S. will officially be in a recession this year.

The core rate of U.S. inflation on both the consumer and wholesale level has been steadily declining since March. The fact that the U.S. dollar is strong is also helping to put downward pressure on commodity prices, like metals and lumber, which have declined substantially in recent months.

The other good inflation news is that U.S. crude oil production has risen to over 12.1 million barrels per day as of late June, compared with 11.2 million barrels per day in 2021 and 11.3 million barrels per day in 2020. Back in 2019, the U.S. produced 12.3 million barrels of crude oil a day, so moderating demand has helped make the U.S. energy independent once again. However, any excess crude oil and refined product in the U.S. is typically exported, so I expect crude oil prices to remain high through September.

There is, however, a supply disruption in Europe as the labor force at Norway’s Equinor ( EQNR ) temporarily went on strike last week, which cut off production of 89,000 barrels of crude oil per day. Normally, Norway supplies between 20% and 25% of natural gas to Europe, so LNG demand in Europe will remain strong due to the threat of further supply disruptions. Due largely to a strong U.S. dollar and fears of a global recession, crude oil prices “cracked” $100 per barrel on Tuesday, despite Norway’s supply disruption.

Crude oil prices remain above historic norms, so I expect most of our energy stocks to continue to post strong sales and earnings over the next three quarters due to favorable year-over-year comparisons.

I don’t expect we’ll see $200 oil, but JPMorgan recently predicted that global oil prices could reach almost twice that, a “stratospheric” $380 per barrel if Russia imposes retaliatory crude oil price cuts. Morgan analysts said that due to Russia’s robust fiscal position from high energy prices, they could cut their crude oil production by five million barrels per day without even damaging their domestic economy.

Excuse me, but unless JPMorgan has an informant in the Kremlin, I find a $380 per barrel prediction on crude oil prices ridiculous, even though it would certainly help my big bet in energy stocks. We now live in a world where outrageous predictions dominate the news and Internet, thanks to Google Analytics. I suspect that this outrageous $380 crude oil prediction was written merely to get “hits” on the Internet.

The other big news on the energy front was caused by the Supreme Court’s decision to curb the EPA’s authority over power plants since the Obama Administration’s Clean Power Plan was not approved by Congress. This is expected to be a major boon for domestic energy production, since curbing carbon dioxide was proving to be very difficult. Even in “green” Europe, Austria, Germany, and the Netherlands are now burning more coal due to high natural gas prices, so Europe’s green agenda is now largely dead.

Currently, energy stocks are less than 5% of the weight in the S&P 500. Since Environmental, Social & Governance ((ESG)) policies have suppressed institutional investors from investing in energy stocks, most ESG managers have had a truly horrible performance this year. However, with S&P Global kicking Tesla ( TSLA ) out of its S&P 500 ESG index and adding Exxon Mobil ( XOM ), the definition of what ESG is now changing.

The SEC had proposed new rules for companies to disclose climate risks and greenhouse gas emissions, but in light of the Supreme Court’s recent decision to curb the EPA’s power, the SEC’s new climate disclosures are expected to be aggressively challenged in federal courts. In other words, institutional investors are expected to increasingly add energy stocks due to (1) their record earnings, (2) changing ESG standards, and (3) the Supreme Court’s neutering of some leading U.S. regulatory agencies.

Last Tuesday, The Wall Street Journal had a great article about how the Fed is studying inflation anxiety. Essentially, the Fed wants to prick the inflation bubble, since if both businesses and consumers anticipate that inflation will persist, those expectations can become a drag on business and consumer confidence. Essentially, if the Fed can continue to “prick” the inflation bubble, then both business and consumer expectations should improve, which should help stimulate economic growth as confidence improves.

I will be carefully watching the analyst community since the “boots on the ground” analyst community continues to be more optimistic than the “chicken little” top-down strategists that keep calling for a recession. Recently, both Micron Technology ( MU ) and General Motors ( GM ) have provided lower guidance, so I will be on the alert if more companies and the analyst community continue to lower guidance.

Navellier & Associates; A few accounts own Tesla ((TSLA)) per client request only, in managed accounts. We do not own General Motors ((GM)), Exxon Mobil ((XOM)), or Micron Technology ((MU)). Louis Navellier does not own Tesla ((TSLA)), General Motors ((GM)), Exxon Mobil ((XOM)), or Micron Technology ((MU)) personally .

Ed Yardeni (and others) Now Predict a Recession

Right now, it is a close call whether or not the U.S. will officially be in a recession this year. My favorite economist, Ed Yardeni, is now forecasting negative annual GDP growth of 2% for the second, third, and fourth quarters – which amounts to a real recession. Furthermore, the Atlanta Fed is also forecasting a second-quarter GDP contraction at an annual rate of -1.2%, vs. its previous estimate of a -1.9% decline.

All I can tell you is that inflation peaked in March, long-term Treasury bond yields peaked in June, and the Supreme Court neutered the EPA and other federal agencies enacting policies not approved by Congress; so we may be able to dodge a recession with rekindled growth in the third quarter, which would also help the Democrats in November’s mid-term election. One big (and unexpected) trigger would be a ceasefire or peace agreement in the Ukrainian war, which would likely trigger a big rally in both stocks and bonds.

Another potential “spark” to ignite the stock market could come from earnings, or a new $2,000 folding 5G iPhone announcement, or the Fed cutting back expected rate increases, or President Biden cheering up! Worst case, we can wait until a change in Congressional power after the mid-term elections and the holidays to cheer us up. In the meantime, the velocity of money, which is how fast money changes hands, has slowed dramatically, so it is imperative that velocity perks up, otherwise economic growth will stall.

The Fed’s June Federal Open Market Committee ((FOMC)) minutes were released on Wednesday. They acknowledged that inflation represents a “significant risk,” and a recession was “certainly a possibility,” which would be dependent on factors beyond the Fed’s control, like the war in Ukraine, as well as China’s Covid lockdown policy. Specifically, the FOMC minutes stated, “Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public begins to question the resolve of the committee to adjust the stance of policy as warranted.”

The Fed minutes also discussed raising key interest rates to a “modestly restrictive level” of just under 3.5% by the end of the year, implying that the last rate increase may come at its December meeting.

Most Economic Statistics Are Turning Up

If we are in recession, you can’t tell it from the bulk of the economic statistics released last week.

On Tuesday, the Commerce Department announced that factory orders surged 1.6% in May, up from a 0.7% increase in April. This was a big surprise since economists were only expecting a 0.5% increase in May factory orders. Shipments of manufactured goods surged 1.8% in May, while inventories rose 1.3%.

On Thursday, the Labor Department announced that weekly jobless claims rose slightly to 235,000 in the latest week, compared to 231,000 in the previous week. Continuing unemployment claims rose to 1.375 million in the latest week, compared to a revised 1.324 million the previous week. The four-week average has been slowly rising since hitting a low in early April. Although the number of job openings recently declined, the jobless rate is expected to remain low since there are more open jobs than available workers.

The Commerce Department on Thursday announced that the U.S. trade deficit narrowed for the second straight month in May. Specifically, the trade deficit declined 1.3% in May to $85.5 billion, down from a revised $86.7 billion in April. Exports rose 1.2% in May to $255.9 billion due to higher exports of crude oil and natural gas, while imports rose 0.6% to $341.4 billion. The lower trade deficit is another reason why the U.S. dollar remains strong since a smaller trade deficit typically helps lift GDP estimates higher.

On Friday, the Labor Department announced that 372,000 payroll jobs were created in June, substantially more than the economists’ consensus estimate of 265,000. However, the April and May payrolls were revised down by a cumulative 74,000. The unemployment rate remained unchanged at 3.6%, which is historically low. The labor force participation rate declined slightly to 62.2% in June. Average hourly earnings rose by 0.3% ($0.10/hour) to $32.08 per hour and is up 5.1% in the past year.

Finally, colorful British Prime Minister Boris Johnson faced mass cabinet resignations last week as well as a possible “no confidence” vote from his own Conservative Party. As a result, Johnson resigned on Thursday. His eventual failing was ironically multiple “party” scandals at 10 Downing Street when the rest of Britain was locked up due to Covid-19. Furthermore, under Prime Minister Johnson, Brexit did not go smoothly due to fish rotting on docks, gas station lines due to a lack of truckers (and hiring foreign EU workers), and other trade glitches. Currently, hideous energy inflation in Britain, especially for electricity, was the final reason Johnson lost control of his party. It will be interesting to see if other politicians around the world will also lose control of their political parties due to inflationary pressures and angry constituents.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Core Inflation Is Steadily Declining

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