June Inflation Will Drive Pace of Rate Hikes

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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

In the wake of the disappointing June ISM manufacturing report, in my opinion, it would be very unwise for the Federal Open Market Committee (FOMC) to hike key interest rates at its July FOMC meeting. 

However, on Wednesday, the FOMC minutes from the June meeting were released and revealed that “Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal.” 

The key word is “some,” which is not indicative of a majority.  The FOMC minutes also cited a “tight” labor market and signaled “upside risks” to inflation.

The July FOMC Meeting Will Rest On The June Inflation Report

At a conference in Madrid hosted by the Bank of Spain, Fed Chairman Jerome Powell recently said “A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year.”  Hmm. The FOMC minutes says “some,” while Jerome Powell said “a strong majority.” 

Frankly, since there is an outspoken minority of doves on the Fed from Atlanta, Chicago, Minneapolis and San Francisco, I think the July FOMC meeting will rest on the June inflation report, especially the Consumer Price Index (CPI).

Due to the fact that the CPI surged 1.2% in June 2022, by cutting off that 1 month, I am expecting that the annual pace of the CPI will decelerate to an annual pace of 3% or less, which will hopefully cause the doves on the FOMC to be more outspoken at the July meeting and convince the rest of the FOMC to pause again.

There is one glitch that may cause the Fed to raise key interest rates at its July FOMC meeting, which is strong payroll growth. ADP reported on Thursday that 497,000 private payroll jobs were created in June, which is the largest monthly gain since February 2022.  Companies with fewer than 50 employees created 299,000 jobs, while mid-sized companies (51 to 500 employees) created 183,000 jobs and large companies (over 500 employees) created only 8,000 jobs. 

Strong ADP Payroll Data

Interestingly, these job gains were widespread, except the manufacturing sector, which lost 42,000 jobs.  Additionally, every region reported job gains, except the South.  ADP reported that wages rose at a 6.4% annual pace in June for workers who did not change jobs, but for those workers that changed jobs, wages rose at an annual pace of 11.2%. 

Believe it or not, this was the slowest pace in wage growth since 2021, so maybe that will help convince the Fed that wages are cooling somewhat.

In the wake of the strong June ADP report, market rates have risen to the highest level since October 2022, after the 10-year Treasury bond yield surged above 4%. Complicating matters further is that the 2-year Treasury note yield also surged above 5% in the wake of the strong ADP payroll data.  As I have repeatedly said, the Fed does not fight market rates, so if Treasury yields remain high, the Fed is much more likely to raise key interest rates at its July FOMC meeting.

The U.S. Navy announced on Wednesday that it intervened to prevent Iran from seizing two oil tankers in the Gulf of Oman.  Iran has seized six oil tankers this year due to the fact that the U.S. Navy is now stretched thin and can no longer protect all free trade routes. 

However, the White House National Security Council said, “The United States will respond to Iranian aggression together with our global allies and our partners in the Middle East region to ensure the freedom of navigation through the Strait of Hormuz and other vital waterways.”  The Navy said that “Since 2021, Iran has harassed, attacked or seized nearly 20 internationally flagged merchant vessels, presenting a clear threat to regional maritime security and the global economy.”

China To Ban The Export Of Gallium And Germanium

China apparently does not like the news that the Biden Administration is considering a wider semiconductor chip ban and decided to ban the export of gallium and germanium, which is used in semiconductors, 5G base stations and solar panels. The ban will commence on August 1st to “safeguard national security and interest.” 

Interestingly, this announcement came before Treasury Secretary Janet Yellen’s scheduled trip to China to facilitate better economic relations, so it appears that China implemented this rare earth mineral ban because they want to negotiate with Secretary Yellen. 

After China’s proposed ban on the export of gallium and germanium, the Biden Administration is now looking at restricting China’s access to cloud computing to protect access to artificial intelligence, which is increasingly moving to the cloud on faster servers with Nvidia’s advanced A100 chips. 

This is widely perceived to be a “tit for tat” posturing for U.S. negotiators with China.  The Biden Administration has not removed any of the tariffs that the Trump Administration imposed on China and seems eager to onshore many of the commodities and products that China manufactures.

China dominates the global production, refining and processing of many critical raw materials, including gallium and germanium, which are byproducts from the processing of commodities such as zinc, coal or bauxite. Although the U.S. and its allies depend on China for these critical minerals, China needs Western technology such as lithography machines to produce high-performance chips. 

Coffee Beans: Guns N’ Who?

Wildlife rescuers in Britain said two baby owls were rescued from under Glastonbury’s famous Pyramid Stage after a Guns N’ Roses set. The rescuers said the owls’ parents apparently built their nest under the stage, but they abandoned it due to the loud music coming from above. Source: UPI. See the full story here.