The ECB Will Continue To Raise Interest Rates

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

More ECB Hikes

While the Fed is nearing the end of its rate hikes, it is perceived that the European Central Bank (ECB) will continue to raise key interest rates to 4% by September. The Financial Times issued an opinion piece criticizing “American exceptionalism” and pointed out that a soaring budget deficit is making the U.S. one of the most fiscally irresponsible nations.

Specifically, FT pointed out that during the pandemic that the U.S. budget deficit tripled to more than 10% of GDP. FT is critical that the budget deficit is expected to average close to 6% of GDP in upcoming years, which is well above historical norms and 6 times the average of other developed nations. In other words, if the U.S. tried to join the European Union (EU), its application would be rejected for fiscal irresponsibility.

Commodity Inflation

Normally, a weak U.S. dollar fuels commodity inflation, but deflationary forces are still keeping some commodities in check. Citigroup, JP Morgan Chase, and Morgan Stanley all cut their China growth forecasts this week. Officially, China has a 5% GDP growth target, but how it can possibly make that target when its exports and imports are declining is questionable.

The Wall Street Journal reported that China’s economy only grew 0.8% (a 2.2% annual pace) in the second quarter and that more than 20% of Chinese between 16 to 24 years old are out of work. Complicating matters further, Germany and the U.S. are systematically uncoupling for China, since it is no longer viewed as a reliable trading partner. If China gets its “mojo” back, I expect commodity prices to firm up, but right now deflationary forces persist as China’s exports and imports struggle.

Decline In Wholesale Goods Costs

Interestingly, one of the reasons that wholesale goods costs declined 4.4% in the past year according to the June Producer Price Index (PPI), is that consumers are no longer buying as many goods, so imports from China, Japan, South Korea and Vietnam are all declining as The Wall Street Journal recently reported.

Specifically, China’s exports plunged 12.4% in June, while imports declined 6.8%. This is the biggest decline in exports in three years since after the start of the pandemic. China’s exports to the U.S. declined 24% in June, while its exports to the EU dropped 13%.

Germany has followed the U.S. and is now openly encouraging businesses to look for alternatives to importing from China due to an increase in hostility. Interestingly, China just passed Japan in vehicle exports as Chinese EV exports soar to Europe and other markets.

Climate Negotiations

The U.S. has dispatched John Kerry to China to attempt to restart climate negotiations. After Nancy Pelosi’s visit to Taiwan, China cut off any climate talks. Since China dominates the production of solar panels, lithium batteries, and electric vehicles (EVs), it is profiting from the green agenda, even though it is not following it and still building coal-fired power plants.

John Kerry’s main goal is apparently to convince China to transition away from coal for electricity generation. China has been a master of “kicking the can down the road to 2050 or later. So I suspect that China might agree to some concessions far in the future to preserve its worldwide dominance of solar panels, lithium batteries, and EVs.

Dedicated Diplomat

The other interesting diplomatic news is that 100-year-old Henry Kissinger met with China’s defense minister, Li Shangfu, in Beijing. According to the Chinese defense ministry, Li Shangfu said that they had a “friendly conversation” with Henry Kissinger.

The Chinese statement quoted Kissinger as saying “Neither the United States nor China can afford to treat the other as an adversary. If the two countries go to war, it will not lead to any meaningful results for the two peoples.”

Approximately, 52 years ago, Henry Kissinger had a secret visit to Beijing that paved the way for Richard Nixon to visit China and normalize relations. Kissinger has repeatedly warned of “catastrophic” consequences of a conflict between the U.S. and China. Kudos to Henry Kissinger for making the trip, which cannot be easy for a 100-year-old person.

Green Misery

Spain will have a general election on Sunday and there is a good chance that it will follow Italy and swing to the populist right after five years under a left-wing government. Nationalism has become a big theme in the EU, so the parties that promote their country’s traditions versus the EU mandates are increasingly rising to power.

The frustration over higher food and electricity prices remains acute in the EU, where green policies are increasingly being blamed for inflation. The fact that it is hot and the Spanish utilities can control the thermostats in many homes, just magnifies how the EU push to go green is making folks miserable.

The inflation rate in Britain according to the Office of National Statistics decelerated to a 7.9% annual pace in June, down from 8.7% in May, and is now at the lowest level in 15 months. The core inflation rate, excluding food and energy, declined to 6.9% and represented the first monthly decline in five months.

Overall, inflation was better than economists expected and is raising hopes that the Bank of England will stop raising key interest rates due to service prices cooling as well as market rates declining. As a result, the British pound is weaker due to the anticipation that the Bank of England might pause its interest rate hikes.

I should add that rental prices according to the Office of National Statistics rose to an annual pace of 5.1% in June, which is the highest rate ever recorded since the official record commenced in 2016. Clearly, the standard of living has declined in Britain as inflationary forces spread.

Coffee Beans: Hit the Jackpot

The national lottery Mega Millions reached its fifth-highest jackpot total in history, about $720 million after no one won Tuesday’s drawing and could reach the $1 billion mark with its next drawing set for Friday. Source: UPI. See the full story here.