In his podcast addressing the markets today, Louis Navellier offered the following commentary.
Listen to the Doves
One of the problems the FOMC has is that some of the economic data it is monitoring is masking the manufacturing recession that may get worse if the UAW strikes. The latest Federal Open Market Committee (FOMC) minutes were released on Wednesday and revealed that “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.” That was the hawkish comment.
The dovish comment was “A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.” I think that the FOMC should listen to the doves and hold its key interest rates steady until the economic and inflation outlook becomes clear.
Bond Limit
In the wake of a poor 30-year Treasury bond auction last week, Treasury bond yields continue to rise and are now at the highest level in over 15 years as the 10-year Treasury bond hit 4.3% intraday. The short end of the Treasury yield curve has also risen, so it appears that interest rates may remain uncomfortably high.
The fact that the federal government is spending up a storm to pay for a proxy war with Russia via Ukraine is clearly putting pressure on the Treasury Department’s ability to borrow. It is very evident that during last week’s Treasury auction, the U.S. government might be approaching its long-term bond borrowing limit.
Strong economic news is also contributing to driving key interest rates higher. The Atlanta Fed is now estimating 5.8% annual third-quarter GDP growth. As an example of how economic data can be distorted, the heat wave for much of the U.S. caused industrial production to surge 1% in July due to a 5.4% surge in utility bills for air conditioning.
Although vehicle production and parts also rose 5.2% in July, the UAW is now surveying its member in preparation for a strike, so the manufacturing sector may stall in the upcoming months.
This all means the upcoming Kansas City Fed conference in Jackson Hole next week may be pivotal, depending on what central bankers say. The Jackson Hole conference has traditionally been an international event for central bankers, so their prepared speeches will be closely scrutinized.
Berkshire Hathaway Lifts Homebuilding Stocks
The National Association of Home Builders announced this week that home builder confidence declined to 50 in August, down from a 13-month high of 56 in July. Prospective buyer traffic declined to 34 in August, down from 40 in July. The bottom line is the surge in Treasury bond yields has also caused mortgage rates to spike, which is undermining the home-building industry.
Homebuilder confidence is now slipping as mortgage rates are approaching 8%. Housing starts rose 3.9% in July to an annual pace of 1.452 million and are now up 7% year to date, despite higher mortgage rates. Single-family housing starts are even stronger and rose 6.7% in July to a 983,000 annual pace. I should add that single-family housing permits have risen every month this year, rose 0.7% in July (930,000 annual pace) and 24.3% year to date.
Much of the new home construction is to meet demand due to the fact that existing homeowners do not want to sell their homes with lower mortgage rates. The fact that it was recently disclosed that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) owns multiple homebuilders has helped to lift many homebuilding stocks.
Crude Oil Inventories Plunge
The Energy Information Association on Wednesday announced that crude oil inventories plunged 5.96 million barrels in the latest week. Gasoline inventories declined by 261,000 barrels, while distillate (i.e., diesel, heating oil and jet fuel) stockpiles rose by 296,000 barrels. As long as crude oil inventories remain low, it will be safe to continue to hold many refineries and integrated oil companies.
Right now, the world is ignoring the economic collapse in China and focusing on the economic recovery in the West. I should add that the seasonal demand for crude oil is expected to peak around Labor Day.
China had been one of the keys to Tesla’s (NASDAQ:TSLA) profitability since its Shanghai plant has been making more affordable electric vehicles (EVs) with CATL’s iron-phosphate (LFP) batteries. However, now approximately half of the Shanghai plant’s production is being exported due to the EV price wars in China.
Tesla cut the prices of its Chinese-made EVs again twice this week in another attempt to preserve market share. Since the Shanghai plant has been its most profitable, there are growing concerns that Tesla’s profitability could suffer as its operating margins continue to get squeezed with the ongoing EV price wars. Tesla also cut EV prices in the U.S. this week, so it is possible that EV inventories continue to rise.
Coffee Beans: Fried Fish
A large section of a New Jersey town was without power for several hours when a fish was dropped by a bird of prey on a transformer, causing it to explode. Source: UPI. See the full story here.
