The Market Treads Water As Investors Wait For The FOMC Statement

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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

Market on Standby

The stock market is resting today. There was some weak economic news from Europe which is knocking oil prices down. It’s also knocking Treasury yields down. It is raising speculation that the European Central Bank might only hike a quarter percent instead of 50 basis points.

But the market is treading water anyway because we are all waiting for the FOMC statement tomorrow. The markets have air pockets from time to time and there’s just a lot of economic uncertainty. The Fed is obviously trying to engineer a soft landing, but that’s very difficult to do.

Dovish FOMC

The Fed knows that it cannot control food and energy inflation.  Furthermore, since the Fed’s key interest rate remains above Treasury yields, the Federal Open Market Committee (FOMC) statement on Wednesday should clarify that they are near the end of the faster interest rate increases in the past 40 years.  As a result, the uncertainty surrounding Fed policy is expected to diminish. 

The consensus is the Fed will raise key interest rates 25 basis points on Wednesday, which I think is a mistake, especially in the wake of First Republic Bank being taken over by the FDIC and then acquired by J.P. Morgan.

I believe that we are going to get a dovish statement tomorrow, regardless of what the Fed does simply because we are having these banking problems. The inverted yield curve does hurt the banks and the banks shouldn’t push their luck. Ultimately, the Fed is in charge of the banks.

Destroying Industries

The Fed can continue to raise rates if they want to destroy the economy. They are definitely destroying the auto market right now. Most auto dealers are very distressed because their car loans are way up in price. The Fed has hurt the housing market and they have to make a decision on how many industries they want to kill. 

Additionally, there’s an election year coming up and they definitely don’t want to kill the economy going into the presidential election year since they already got a lot of heat last time Chairman Powell is in front of Congress. So, I do think that we would get a very dovish FOMC statement tomorrow and we should rally on that news. 

The Institute of Supply Management (ISM) announced that its manufacturing index rose to 47.1 in April, up from 46.3 in March. 

The new orders component rose to 45.7 in April, up from 44.3 in March, while the production component rose 48.9 in April, up from 47.8 in March.  Despite these improvements, any reading below 50 signals a contraction. 

Of the 16 manufacturing industries that ISM surveys, only 5 industries reported growth in April, while 11 industries contracted.  This is the sixth straight month that the manufacturing sector has contracted.

I realized that the manufacturing sector remains in a recession and almost all GDP growth is attributable to the U.S. consumer.  Since the 2024 Presidential election is heating up and there may be some debates in the upcoming months, our elected leaders are supposed to start sucking up to voters. 

I am keenly aware that many voters do not like the candidates and think that they are too old, but the candidate with the most energy that sucks up the most should help to lift consumer confidence.

PCE Index Rises 0.2 Percent

The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index rose 0.2% in March and 4.2% in the past 12 months (down from a 5.1% annual pace in February).  Energy prices surged 3.7% in March, while food costs declined 0.2%. 

The core PCE, excluding food and energy, rose 0.3% in March and 4.6% in the past 12 months (down from a 4.7% annual pace in February). 

There is no doubt that the core PCE is running hotter than the Fed wants.  The only silver lining is that service costs rose 0.2% in March, which is a bit cooler than previous months.  Overall, the March PCE just illustrates that inflation, especially energy costs, remains stubbornly high.

Higher interest rates are curtailing consumer spending and even Enphase Energy warned of slower solar and powerwall installations due to pinched homeowners.  Tesla has also warned that higher interest rates are curtailing its electric vehicle sales. 

However, existing and new home sales have gradually started to improve in recent months due to lower interest rates.  As soon as interest rates “crack” and the Treasury yield un-inverts, consumer spending is expected to perk up.

The Deficit Ceiling

The next big concern for investors that like to worry is the deficit ceiling, which will have to be raised by Congress. Treasury Secretary Janet Yellen said that the Treasury Department needs the deficit ceiling lifted by June 1st, since its emergency measures to circumvent the deficit ceiling could no longer be implemented. 

Specifically, in a letter to House Speaker Kevin McCarthy, Yellen said “It is impossible to predict with certainty the exact date when Treasury will be unable to pay the government’s bills.”  President Biden has invited Congressional leaders to meet on May 9th to discuss the deficit ceiling. 

House Speaker McCarthy has accepted President Biden’s invitation after trying to belittle President Biden for refusing to meet for almost 100 days.  Speaker McCarthy is striving to get President Biden to agree to some spending cuts before agreeing to lift the federal government’s deficit ceiling. 

In the end, the federal government’s deficit ceiling will get lifted, even if there is a partial government shutdown, which has happened in the past.

Big Energy Bet

Overall, as Memorial Day approaches, my big energy bet is expected to increasingly pay off as fossil fuel demand soars.  Bloomberg reported that crude oil prices are expected to rise in the upcoming years due to a lack of investment in new fields as well as the Permian Basin peaking. 

Interestingly, Bloomberg is also a big fan of electric vehicles (EVs) and likes to report on climate change.  However, the inventory of unsold EVs is rising fast. 

Carguru is reporting that nationwide there are lot of unsold new EVs for sale, like 5,724 VW ID.4s for sale, followed by 5,166 Hyundai IONIQ 5s, 4,294 Mercedes EQS models, 3,277 Ford Mach-e SUVs, 2,127 Kia Niros, 1,613 Hyundai IONIQ 6s, 970 Mercedes EQE SUVs, 769 Audi Q4 e-trons, 466 Audi GTs, and 344 Audi e-trons. 

In addition to all this new EV inventory, there are 3,111 used Tesla Model 3s for sale, followed by 2,191 Model S models, 1,349 Model Xs and 1,281 Model Ys. 

This growing inventory of unsold EVs bodes poorly for both Rivian and Lucid since these EVs demand premium prices above established brands like Audi and Mercedes.  I should add that Audi is starting to offer 0.99% financing to move its growing inventory of EVs.

Coffee Beans: Scary Surprise

A school principal in West Virginia received a scare Monday morning when he unlocked a dumpster outside of the building and came face to face with a bear. The bear is believed to have squeezed past the dumpster latch to get into the container and then found itself unable to escape once the lid closed behind it. Source: UPI. See the full story here.