ECB May Have Made A Mistake By Raising Rates

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

If you wish to listen to this commentary, please click here.

ECB Mistake?

The European Central Bank (ECB) on Thursday raised its key interest rate 0.25% to 4%, which is the highest level ever. The ECB signaled that the fight against inflation is more important than stimulating economic growth. Italy and Germany are big export economies and 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 dramatically from a peak of 10.6% last year to 5.3% in August. Food and energy inflation in the eurozone is much more acute than in the U.S., but there is little that central banks can do to combat food and energy inflation, so I think the ECB may have made a mistake with its latest key interest rate increase.

Distorted PPI

I like the details in the PPI report on wholesale goods and services, but surging energy prices distorted the overall PPI data. The Labor Department announced that the Producer Price Index (PPI) rose 0.7% in August, which was substantially higher than analyst consensus estimate of 0.4%. In the past 12 months, the PPI has risen 1.6%, up from 0.8% in July and 0.1% in June. Excluding food and energy, the core PPI rose 0.2% in August and 2.2% in the past 12 months.

Wholesale gasoline prices surged 20% in August, so wholesale energy prices rose 10.5%. Interestingly, wholesale food prices declined 0.5% in August. Wholesale goods costs rose 2% in August, but excluding food and energy, goods only rose 0.1%. The good news was that wholesale service costs decelerated to 0.2% in August, down substantially from 0.5% in July.

Anomalous Retail

The Commerce Department announced on Thursday that Retail Sales rose 0.6% in August, which was much better than economists’ consensus estimate of a 0.1% increase. Excluding gas station sales, retail sales rose 0.2%. Interestingly, July’s strong retail sales report was revised down to a 0.5% gain, down from 0.7% previously reported. Fully 9 of 13 retail categories reported an increase in August. Higher gas station sales accounted for a high proportion of retail sales, so this retail sales report will be dismissed as an anomaly by many economists.

The Labor Department on Wednesday announced that the Consumer Price Index (CPI) rose 0.6% in August and 3.7% in the past 12 months. The core CPI, excluding food and energy, rose 0.3% and 4.3% in the past 12 months. Food prices rose 0.6% in August, while energy prices surged 5.6%. Gasoline prices surged 10.5% in August.

The good news is that owners’ equivalent rent rose only 0.3% and 7.3% in the past 12 months, so it appears that shelter costs are finally moderating somewhat. Higher energy prices will be blamed for the August CPI, so I do not expect the Fed to increase key interest rates at its September Federal Open Market Committee (FOMC) next week.

The other big news will be whether or not the UAW goes on strike on Friday, which is expected to push the unemployment rate above 4%. Essentially, the Big 3 want to use their profits to make a transition to EVs, which are currently unprofitable. The UAW lowered its demand for a 40% pay increase over the next few years to 36% but remains far apart from the Big 3. UAW President Shawn Fain has repeated his mantra that “record profits mean record contracts.” Since both sides are far apart, a strike is now anticipated.

Coffee Beans: Paint the Town Red

The streets of a Portuguese town ran red when two vats at a local distillery burst and released nearly 600,000 gallons of wine. Local firefighters collected much of the escaped liquid and took it to a wastewater treatment plant. Source: UPI. See the full story here.