CPI, PPI and Retail Sales – A Big Week For Economic Week

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

Telling Week

This is a big week for economic news, namely the Consumer Price Index (CPI), the Producer Price Index (PPI) and Retail Sales.  The big thing associated with the CPI is that we want to see the real estate component, namely Owner’s Equivalent Rent, finally moderate due to falling home prices and a soft rental market. 

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The PPI contracted in February, so we want to see if that trend continues in March, plus it would help if wholesale service prices moderated.  Finally, we want to see if consumers were still spending in March, since after an explosive January, retail sales dipped in February. 

Ironically, due to a manufacturing recession, based on the ISM manufacturing survey for the past five months, the only way for the U.S. economy to grow is if consumer spending via retail rales remains strong.

The Atlanta Fed raised its first-quarter GDP estimate to a 2.2% annual pace, up from its previous estimate of a 1.5% annual pace.  The reasons for this upward revision were the March payroll report and a wholesale trade report.  The bottom line is the U.S. remains in a consumer-driven economy, so Friday’s retail sales report will be closely scrutinized.

The financial media has been warning that the first quarter earnings may be decelerating, but I do not see that from the analyst community covering my stocks.  There seems to be a big disconnect between top-down strategists versus the actual analyst community that covers individual stocks.  Bank earnings will be released this week.

The Fed has opened its discount window for a year to help any troubled banks and it appears that many banks have taken advantage of the discount window.

Bloomberg had a great article this week about money supply contracting in Britain, the European Union and the U.S.  This article was critical that central banks may have gone too far and “need to restore positive money growth.” 

Although Monetarism is not currently influencing central banks, when the money supply is reduced, economic activity naturally contracts.  This Bloomberg article implied that central banks have to cut interest rates to restore money supplies, so it will be interesting how fast central banks move as evidence of inflation cooling emerges in the upcoming months.

ICE Death Blow

The EPA is supposed to announce new emission regulations this week.  Specifically, EPA Administrator Michael Regan is supposed to announce on Wednesday in Detroit new EPA emission limits that would require as much as 67% of new vehicles sold by 2032 to be fully electric. 

These new stricter regulations are expected to be effectively a death blow to internal combustion engines and even more restrictive that the current regulations mandating EPA emissions.  It will be interesting the reaction from Detroit and other automotive manufacturers.

The New York Times on Tuesday had an article that questioned if automakers can possibly comply with the new EPA rules that will force all vehicles to be electric within a decade.  The NYT article said the new EPA rules are expected to force that EVs make up 54% to 60% percent of new vehicles sold in the U.S. by 2030, and 64% to 67% by 2032. 

The NYT article cited that currently the world only makes 10% of the lithium that the EPA will require under these new emission rules.  Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) is the second-largest lithium mining company in the world and should benefit from the new EPA rules. 

However, shortages of lithium, nickel and cobalt have made EVs more expensive than vehicles with internal combustion engines and are preventing new EV manufacturers, like Lucid and Rivian, from reaching profitability.

Currently, there seems to be a glut of electric vehicles building worldwide after China and Germany recently ended their tax incentives to build electric vehicles (EV).  Tesla Inc (NASDAQ:TSLA)’s inventories at its Berlin plant are apparently growing and the company announced more price cuts last week. 

In Tesla’s defense, the prices of lithium, nickel and cobalt have all moderated as electric vehicle demand in China has softened.  However, long-term demand for battery components is expected to soar due to more EV models in the pipeline as well as electricity storage demand.

Interestingly, Tesla announced that it is building a new factory in Shanghai, China to build its large-scale battery for electricity storage called the Megapack.  Australia has been shutting down all its coal plants and has been expanding its electricity storage. 

California is another big market for Tesla’s Megapacks, which are made with cheaper iron phosphate (LFP) batteries sourced from CATL.  It will be interesting just how fast electricity storage facilities expand across the U.S., since it typically causes electricity rates to rise.

US/France Rift

French President Emmanuel Macron is getting diplomatic heat after saying that Europe should distance itself from the brewing tensions between China and the U.S. regarding Taiwan.  In the wake of massive Chinese military maneuvers this week, Macron’s comments were considered ill-timed by many diplomatic experts. 

In a Politico interview when Macron was asked if the confrontation between China and the U.S. made it see Europe as “a chess piece between two blocs,” Macron responded by saying “Is it in our interest to accelerate on the subject of Taiwan? No. 

The worst thing would be to think that we Europeans must become followers on this topic and adapt to the American rhythm and Chinese overreaction.”  Furthermore, Macron also warned of a “trap for Europe” if it got “caught up in a crisis that are not ours.” 

It is obvious that the U.S. is no longer respected in the world, so this rift between the Biden Administration and French President Macron may soon spill over to Ukraine since France has been making recent overtures to its business interests in Russia.

China’s recent military exercises designed to intimidate Taiwan and the U.S. are interesting.  However, the easiest way for China to take over Taiwan is to merely influence the upcoming Taiwan Presidential election and to install a pro-China president. 

This is how China was able to take over Hong Kong via its pro-China mayor.  One thing is that China is very patient and pragmatic.  China is very good at fighting economic wars and taking over industries. 

Since Taiwan dominates semiconductor manufacturing, China would like to dominate that industry as well, so it will be interesting if the U.S. can offshore enough semiconductor manufacturing in the upcoming years, since currently the U.S. and the rest of the world are dependent on Taiwan.

Coffee Beans: Split on Taxing the Rich. 

U.S. adults were divided on the topic of whether their government should or should not redistribute wealth by heavy taxes on the rich in Gallup’s latest survey wave, conducted in July 2022. Where 52% of voters were in favor of bringing in higher taxes, 47% opposed the idea.

Data from a recent YouGov survey carried out in September 2022 supports the Gallup findings. Source: Statista. See the full story here.