In his podcast addressing the markets today, Louis Navellier offered the following commentary.
Scrutinizing Bid-To-Cover
The U.S. Treasury is auctioning $1.03 trillion in Treasuries securities this week, so the “bid-to-cover” ratios will be closely scrutinized. A bid-to-cover ratio below 2.2 is problematic since it typically causes interest rates to rise. On the other hand, a bid-to-cover ratio above 2.4 is great, since interest rates are stable.
However, during the last big Treasury auction several weeks ago, the 20-year Treasury bond had an impressive bid-to-cover ratio of 2.87 to 1, so interest rates declined. I do not expect such high bid-to-cover ratios to materialize this week, but we will soon find out if the Biden Administration and the Treasury Department have bitten off more than Treasury markets can handle this week.
Dangerous Deflation
China is now experiencing deflation as its economy struggles with declining exports and imports for the past few months. Specifically, in July exports declined 14.5%, while imports plunged 12.4%. This was the worst decline in exports since February 2020 during the Covid-19 crisis. Complicating matters further, China’s official purchasing manager index (PMI) has declined for four straight months and is now at its lowest level in a year.
A prolonged housing crisis from overbuilding is also contributing to the deflationary pressure in China. According to the Financial Times, “Chinese authorities are putting pressure on prominent local economists to avoid discussing negative trends such as deflation.” This growing self-censorship is expected to fail as many economists try to put a brave face on what appears to be becoming an increasingly dire situation.
The Chinese Nation Bureau of Statistics is expected to announce on Wednesday that consumer prices declined in July. Deflation is dangerous since it can cause consumers to postpone their purchases. Furthermore, unemployment for people 24 and younger is now at a record high.
The last time there was widespread unemployment among young people, the Tiananmen Square protests and massacre ensued in 1989. The whole world is now onshoring, since China proved during Covid-19 to be an unreliable trading partner, so the long-term economic outlook for China is becoming increasingly dire.
This Chinese deflation is expected to be exported to the U.S., especially in the Producer Price Index (PPI) that will be announced on Friday due to falling goods prices. The Consumer Price Index (CPI) will be announced on Thursday and might rise slightly due to higher energy prices.
Worry But Be Happy Anyway
The Commerce Department reported on Tuesday that the U.S. trade deficit declined 4.1% in June to $65.5 billion as exports dipped 0.1% to $165.1 billion and imports declined 1.2% to $253.3 billion. Imports are now at their lowest level in three years as U.S. consumers buy fewer goods.
The trade deficit should continue to narrow in July due to higher crude oil prices and natural gas prices boosting exports. A shrinking trade deficit boosts overall GDP growth, so some economists might revise their GDP estimates slightly higher.
Overall, the U.S. remains an oasis around the world. Deflationary forces from China are spreading to the U.S., especially in wholesale prices. Central bankers will be cutting key interest rates in the upcoming months as deflation spreads. My favorite economist, Ed Yardeni, said in his Morning Briefing that we essentially have two choices, namely #1, Don’t Worry, Be Happy, and #2, Worry, But Be Happy Anyway. I am in the latter camp.
All good stock markets climb a wall of worry, but central bank fears will be diminishing big time in the upcoming months, so in my opinion, investors should celebrate that interest rates will no longer be rising as deflationary forces spread.
Coffee Beans: Bear the Brunt
Hank the Tank, a large black bear responsible for at least 21 home break-ins in South Lake Tahoe, is on her way to a Colorado wildlife sanctuary after California officials captured her and three cubs. Wildlife officials hope to release them to the wild after rehabilitation at Sonoma County Wildlife Rescue in Petaluma. Source: UPI. See the full story here.
