In his podcast addressing the markets today, Louis Navellier offered the following commentary.
If you wish to listen to this commentary, please click here.
Due to strong consumer spending, U.S. GDP growth appears to be accelerating in the third quarter. The Commerce Department on Tuesday announced that retail sales rose 0.7% in July, which was substantially higher than analyst expectations of a 0.4% increase. This was the fourth straight month that retail sales have risen and the pace of consumer spending continues to accelerate. Online sales surged 1.9% in July and was led by Amazon’s Prime Day.
Spending at bars and restaurants rose 1.4%, which is a clear sign that consumers are out and about spending. However, consumers were not spending on big-ticket items, since auto sales declined 0.3% in July, furniture sales dropped 1.8% and electronics and appliance sales declined 1.3%. Excluding auto sales, retail sales rose an impressive 1% in July.
In the wake of a poor 30-year Treasury bond auction last week, Treasury bond yields remain high. The short end of the Treasury yield curve has also risen, so it appears that interest rates may remain uncomfortably high. This means the upcoming Kansas City Fed conference in Jackson Hole 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.
Crumbling Ruble
The Russian ruble has been very weak after declining 27% this year and recently fell below 100 relative to the U.S. dollar, which is the lowest level in 17 months. As a result, the Bank of Russia on Tuesday had an emergency meeting and increased its key interest rate by 3.5% to 12% to shore up the ruble. The central bank data reported that Russia’s crude oil and natural gas exports declined to $6.9 billion in July, down sharply from $16.8 billion in the same month a year ago.
Clearly, the invasion of Ukraine is having dire economic consequences for Russia. Due to a weak ruble, the cost of imported goods naturally rises and the standard of living in Russia continues to decay. Inflation in Russia has been averaging a 7.6% annual pace in the past three months and the Bank of Russia has a target inflation rate of 4% in 2024.
EV Price Wars In China
China had been one of the keys to Tesla’s 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 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.
The Bank of China on Tuesday cut its key short-term interest rate by 0.1% to 2.65%, while its 1-year medium lending rate was cut 0.15% to 2.5%. The Wall Street Journal on Tuesday reported that China is now hiding key economic data to mask its economic problems. As an example, China’s statistics bureau announced that it is suspending data on youth unemployment.
Chinese authorities have also made it more difficult for foreign institutions to access certain economic and financial data in recent months. Although China’s GDP apparently rose 0.8% (3.2% annual pace) in the second quarter, in the current quarter, the Chinese economy may be contracting, so China’s GDP forecasts are being slashed by independent economists.
Japan Is The New China
Japan has been a beneficiary of China’s woes and reported on Tuesday that its GDP surged 1.5% (6% annual pace) in the second quarter. Japanese exports rose 3.2% in the second quarter compared to the first quarter. As an example, Subaru’s global car sales rose 20% in the second quarter. Although global export demand remains strong, Japan’s two largest trading partners, namely China and the U.S., are importing less from Japan.
The real key to Japan’s export boom is emerging market economies, which bodes well for worldwide GDP growth. Since Japan is an aging society, its domestic demand remains weak and private consumption declined 0.5% in the second quarter. Also notable is that Japan’s imports declined 4.3% in the second quarter compared to the first quarter. Japan is the third largest economy in the world.
Food Inflation
Last year was essentially a perfect growing season for crops, so Canada and other nations were able to offset Ukraine’s wheat production. This year it is abnormally dry, so the worldwide production of corn, soybeans, and wheat is down substantially. Food inflation is a growing problem, especially in poor nations that traditionally relied on Ukrainian crops.
With the Baltic Sea transportation now curtailed as Russia tries to intimidate cargo ships after firing a warning shot, Ukraine is trying to sell its crops to its neighbors, but even Poland does not want Ukrainian wheat, because it wants to protect its domestic wheat production.
The West has to decide how long it wants to tolerate higher food and energy prices due to the fighting between Russia and Ukraine. Both countries and now much of the rest of the world are suffering, so it will be interesting if a ceasefire will ensue in the upcoming months. In the meantime, we can profit from acute commodity shortages, especially in the energy sector.
Speaking of energy, seasonal demand for crude oil is expected to peak around Labor Day, so I will be monitoring inventories very carefully. If 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.
Coffee Beans: Rock-a-Buy
In 2022, R&B and hip-hop had market shares of 28.7% and 28% in audio and video streaming, respectively. In terms of album sales, however, they’re beaten by a genre that’s been around for a couple of decades longer – 45.4% of the market share in physical album sales belongs to rock music. Source: Statista. See the full story here.
