The Fed Remains Data-Dependent

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

Data-Dependent Fed

The Federal Open Market Committee (FOMC) statement was dovish, despite the fact that the FOMC signaled that one more Fed rate hike is possible. A survey of the FOMC members revealed that 7 members did not want to increase key interest rates, while 12 FOMC members were open to another key interest rate hike. The FOMC statement said that they were “highly attentive to inflation risks.”

The bottom line is the Fed remains data-dependent. In his press conference, Fed Chairman Jerome Powell mentioned that the recent inflation data has been favorable, which signals to me that there may be no more key interest rate hikes if the inflation continues to cool.

I remain in the camp that the Fed should not increase key interest rates further due to the fact that owner’s equivalent rent in the Consumer Price Index (CPI) and wholesale service costs in the Producer Price Index (PPI) rose only 0.3% and 0.2%, respectively, in August.

The primary reason that the CPI and PPI rose in August was due to gasoline price increases of 10.5% and 20%, respectively. There is nothing that the Fed can do about high food or energy inflation, so I expect that the core rate of inflation will continue to moderate.

No Labor Pains Yet

For now, there does not seem to be any further pressure on unemployment, but that is expected to change as the UAW strike expands. The Labor Department reported on Thursday that weekly unemployment claims declined to 201,000 in the latest week, down from a revised 231,000 in the previous week.

This is the lowest level for weekly unemployment claims since January, which is a bit surprising in light of the UAW strike that is causing other layoffs. The striking UAW workers are not eligible for unemployment benefits. Continuing unemployment claims declined to 1,678,881 in the latest week, down from 1,772,148 in the previous week.

The American Petroleum Institute on Tuesday reported that U.S. crude oil inventories declined 5.25 million barrels in the latest week. The Energy Information Administration on Wednesday announced a 2.14 million barrel drop in crude oil inventories. I should add that crude oil prices have risen 30% since June and fears of supply shortages persist.

Shell’s largest refinery in Europe, in Rotterdam had to be halted this week, which will likely exacerbate the diesel shortages that have sent prices at the pump soaring. Other refinery disruptions will be occurring at U.S. refineries shut down to convert to oxygenated winter gasoline blends from their current summer blends.

Other than a hurricane in the Gulf of Mexico, the most likely big supply disruption in the upcoming months may be a problem with Russia’s production in the Arctic, since if its pipelines freeze from a lack of oil, the pipelines will break and cease to operate. Russia has diverted many of its able workers to support the war efforts in Ukraine, so there are concerns that its infrastructure is being neglected.

Russia’s three big Arctic wells were all developed with Western energy companies, like Exxon-Mobil, so without continuing oil service expertise, its crude oil infrastructure is at risk. As a result, the fear of supply disruptions is keeping crude oil prices high.

EU-China Trade War?

Meanwhile, China’s exports of EVs to Europe surged 112% in the first seven months of this year. Furthermore, Tesla is exporting many of its Model 3 EVs made in Shanghai with LFP batteries to China to continue to capture market share. Since LFP batteries are cheaper, China is capturing more energy level EV purchases.

Right now, BYD and CATL in China dominate LFP battery manufacturing. Furthermore, China is building double the battery plants they need for domestic EV production, so it is clear that China intends to dominate the EV business and currently has a massive price advantage.

The EU recently announced an anti-subsidy probe in conjunction that Chinese EVs could swamp its automotive industry. The EU conducted a similar anti-subsidy probe to protect European solar panel companies. So it appears that the EU is getting ready to impose tariffs on Chinese EVs, which recently dominated the Munich Motor Show.

The Catch-22 for Europe is that BMW, Mercedes Benz, Porsche and Volkswagen have substantial exports to China, so retaliatory tariffs from China are possible if a trade war breaks out.

Coffee Beans: Double Trouble

A Pennsylvania school district is hailing the arrival of the “Twin-dergarten” school year, with 17 sets of twins starting kindergarten in the 2023-24 school year. Source: UPI. See the full story here.

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