Eurozone Economy Contracts While U.S. Outspaces The World

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

Eurozone’s Economic Contraction

It appears that the eurozone may not be able to pull out of its recent economic contraction. The eurozone’s Purchasing Managers Index (PMI) in June declined to 50.3, which is a sharp deceleration from 52.8 in May and substantially below economists’ consensus estimate of 52.5. Any PMI reading below 50 signals a contraction.

Even though the eurozone has had its GDP contract in the past couple of quarters, there was hope that the summer months would stimulate economic activity. However, the June PMI showed that economic activity plunged in France.

The Bank of England voted 7 to 2 on Thursday to raise its key interest rates by 0.5% to 5%. This was a surprise hike and appeared to be an act of desperation to fight Britain’s hideous inflation, which is running at an 8.7% annual pace. There are a lot of variable mortgages in Britain, so the Bank of England’s rate hike is extremely unpopular.

Prime Minister Rishi Sunak’s government is already helping homeowners that cannot pay their electricity bills, but may now have to add mortgage payments to that list. Unlike in the U.S., if a home foreclosure cannot cover the mortgage debt, the bank loses money, in Britain, the homeowner is responsible for the mortgage debt, even if the home falls below the mortgage value.

As a result, both inflation and rising interest rates are now reducing the quality of life in Britain, so the U.K.’s misery index is at a record higher and everyone is angry.

The global economy is now out of sync. The People’s Bank of China is cutting key interest rates, the Fed has stopped raising key interest rates and the European Central Bank is still raising key interest rates. China’s imports and exports are declining.

The U.S. is still growing thanks to a resilient U.S. consumer, but the manufacturing sector has been in a recession for the past seven months. The eurozone is now in a recession as Germany and Ireland contract, but overzealous green energy goals are now shutting down farmland, killing cows, and restricting chemical fertilizers to reduce carbon dioxide emissions.

U.S. Outpacing the World

In the midst of all this chaos, the U.S. is unquestionably the world leader. The fact that the U.S. is energy independent, agriculturally independent and has better demographics than China and Europe, means that the U.S. can have more organic growth.

The amount of trade that the U.S. is now doing with Southeast Asia, India, South Korea, and Japan is steadily growing at the expense of China and businesses seek to shore up their supply chains. As a result, the U.S. dollar should get stronger as America’s GDP growth outpaces the rest of the world.

A strong U.S. dollar is helping to attract more buying pressure at recent Treasury auctions. As an example, the 20-year Treasury bond has an incredible 2.87 to 1 “bid to cover” ratio. This is simply outstanding and caused Treasury yields to meander a bit lower.

Of course, all the cash on the sidelines is also helping the Treasury Department to sell record amounts of debt. Due to this robust demand, the Treasury Department needs to sell more short-term debt to try to un-invert the yield curve, which is currently in excess of 100 basis points and concerning many investors.

In his prepared testimony before Congress, Fed Chairman Jerome Powell said that “Nearly all (FOMC officials) expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”

In his best double-speak, Powell added that “But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the committee to assess additional information and its implications for monetary policy.” Translated from Fedspeak, Powell admitted that the Fed has to evaluate more economic data.

Since the PPI has been negative for three of the past four months, plus the CPI is expected to plunge in July when the June CPI is announced, I expect that the Fed will continue to hit the “pause button.” Nonetheless, Powell admitted under Congressional testimony that an additional two key interest rate hikes may be forthcoming.

Outspoken Fed Doves

At The Wall Street Journal’s Global Food Forum in Chicago, Chicago Fed President Austan Goolsbee on Wednesday said, “We are in this weird foggy environment where it is hard to figure out where the road is” and added that “I have not decided what should be the rate decision in a meeting more than a month from now.” Goolsbee is unquestionably a dove and knows that a big drop in consumer inflation is forthcoming.

Furthermore, Atlanta Fed President Raphael Bostic in an essay on Wednesday said that the Fed has “done plenty” and it is time to see whether the prior tightening will do its job and bring inflation down to the 2% target.

The bottom line is that the Fed doves are becoming more outspoken, so despite Fed Chairman Powell hinting at two more key interest rate hikes, due to rapidly decelerating inflation, plus the Fed doves becoming more outspoken, I stand by my prediction that the Fed will not increase key interest rates further.

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