8-20-24: Central Banks Could Announce a “Round of Cuts” This Week in Wyoming

by Louis Navellier

August 20, 2024

At the Kansas City Fed’s annual conference in Jackson Hole later this week, central bankers from around the world will meet and may signal that further key interest rates cuts will be forthcoming. Export nations like Germany are expected to benefit if their key interest rates drift lower, since that should stimulate domestic demand. The most favorable outcome from the Jackson Hole meeting will be if central banks signal more key interest rate cuts to stimulate their respective economies. Naturally, it would also help if central banks also signaled that inflation has been defeated, which seems likely after last week’s news.

Last Tuesday, the Labor Department announced that the Producer Price Index (PPI) rose 0.1% in July, which was below economists’ consensus estimate of 0.2%. In the past 12 months, the PPI has risen 2.2%. The core PPI, excluding food and energy, was unchanged in July and rose 2.4% in the past 12 months. Wholesale service costs declined 0.2% in July, which was a positive development, since service costs had risen in previous months. However, wholesale goods prices rose 0.6% in July, due largely to an increase in gasoline prices. Overall, the PPI report was very positive and indicative that inflation continues to cool.

Then, on Wednesday the Labor Department announced that the Consumer Price Index (CPI) rose just 0.2% in July and 2.9% in the past 12 months. The core CPI, excluding food and energy, also rose 0.2% in July and 3.2% in the past 12 months. Nearly 90% of the July CPI increase was attributable to owners’ equivalent rent, which rose 0.36% in July, up from 0.27% in June, even though home prices are now (in August) being cut at the fastest pace in two years, especially in the popular Sunbelt region, but that data was not reflected in the July report. (Ten-year Treasury yields fell a slight five basis points last week).

The U.S. Commerce Department announced that retail sales rose by a robust 1% (month over month) in July, which was well above the economists’ consensus estimate of 0.4%. In the past 12 months, retail sales have risen 2.7%, which is roughly in-line with inflation. Vehicle sales surged 3.6% in July, since dealers had mostly postponed June sales into July due to the CDX software crash. Eleven of the 14 categories the Labor Department surveyed reported growth in July, reflecting robust consumer spending!

On Thursday, Wal-Mart raised its 2024 sales guidance to 4.75%, up from 4%, since the company is attracting more value-oriented consumers. Helping to drive Wal-Mart’s sales growth is a 22% increase in e-commerce sales in the past year.  Despite this report and better-than-expected July retail sales, the Atlanta Fed on Thursday lowered its third-quarter GDP estimate to a 2.4% annual pace, down from its previous estimate of 2.9%.  Then, it reduced its quarterly estimate even further, to 2.0% on Friday.

Also on Thursday, the Labor Department announced that new unemployment claims rose by 227,000 in the latest week, down from a revised 235,000 reported in the previous week. Cisco Systems is the latest technology company to announce layoffs. Specifically, Cisco Systems will reduce its workforce by 7%, or about 6,000. Continuing unemployment claims declined to 1.864 million, down from a revised 1.871 million in the previous week. Although continuing unemployment claims improved slightly, the four-week moving average was still rising and should encourage the Fed to cut key rates on September 18th.

Finally, the Commerce Department announced on Friday that new housing starts declined 6.8% in July to a 1.2 million annual pace. Single-family homes had their biggest monthly decline since April 2020. Building permits declined 4% to a 1.4% annual pace and single-family home permits are now at their lowest level since May 2023. It appears that, as inventories increase, builders have had to discount prices. The good news is that, due to the Treasury bond rally, mortgage rates are now at their lowest level in a year. Unfortunately, economic uncertainty still lingers in the air, so prices may continue to decline.

The U.S. Is Still the Global Oasis, Especially Compared to China and Europe

There is mounting evidence that China’s economic woes are still increasing. This is especially hurting Germany, since China is its biggest export market for vehicles. Germany’s ZEW Indicator of Economic Sentiment, which tracks analysts’ economic expectations for the next six months, plunged to 19.2 in August, which is substantially below the economists’ consensus estimate of 29. The current economic situation component in the ZEW index plunged, perhaps influenced by severe flooding in recent months. That has hindered many manufacturers of aluminum and specialty components for the auto industry.

The new European Union (EU) tariffs on Chinese electric vehicles (EVs) caused sales for BYD and SAIC (which sells MG branded EVs) to decline 45% in June. A rush to buy these Chinese EVs in May, before the new tariffs kicked in, may have exacerbated the sales decline, but Chinese EVs remain the cheapest in the EU, even with the new tariffs, so VW will be selling an Xpeng EV with a VW badge in Europe soon.

The new threat is that energy prices may revive soon, since Ukraine is making some surprising advances against Russia. Ukraine actually crossed into Russian territory in Kursk as well as occupying several other villages and severely disrupting Russian supply lines. Additionally, Ukraine blew up a Russian natural gas rig in the Black Sea, west of Crimea, that was reported to hold 40 Russian military personnel. Reportedly, this natural gas rig was packed with “reconnaissance equipment.” Russia also set Ukraine’s Zaporizhzhia nuclear power plant on fire, with black smoke pouring out of one of the two cooling towers.

The fear is that Russia’s crude oil exports will continue to decline, and that Ukraine may hit Russia’s Arctic pipeline, which would be devastating and potentially send crude oil prices to $100 per barrel.

Eli Lilly (LLY) has emerged as the new market leader as it blew by Novo-Nordisk (NVO) to become the new leader in weight loss drugs; this also helps to reduce the stock market’s obsession with the “Magnificent 7” stocks. In the second quarter, Eli Lilly’s sales rose 36% to $11.3 billion, and its earnings surged 68% to $2.97 billion. The company’s sales were 13.3% better than analysts’ expectations and earnings were 43.1% better than analysts’ consensus estimates. Lilly also raised its guidance well above estimates.

Until Labor Day, we will remain in the dog days of summer, where stock trading volume is expected to remain weak. I have noticed that many small capitalization stocks continue to meander higher, which is a positive development as the stock market’s breadth and power improves.

Navellier & Associates owns Nvidia Corp (NVDA), Eli Lilly (LLY), Novo Nordisk (NVO), and Volkswagen AG Unsponsored ADR (VWAGY), in managed accounts, some accounts own Cisco Systems (CSCO), and Walmart (WMT), by client request.  Louis Navellier and his family own Nvidia Corp (NVDA), Eli Lilly (LLY), Novo Nordisk (NVO), and Volkswagen AG Unsponsored ADR (VWAGY),via a Navellier managed account, and Nvidia Corp (NVDA), in a personal account. He does not own Cisco Systems (CSCO), and Walmart (WMT), personally.