11-12-24: Did We Just See the Fed’s Final Rate Cut?

by Louis Navellier

November 12, 2024

The Fed’s 0.25% rate cut last Thursday may be its last cut in this cycle, since the Fed does not like to fight market rates. My favorite economist, Ed Yardeni, is now calling for the Fed to pause its rate cuts.

The Fed’s Federal Open Market Committee (FOMC) statement, last Thursday, said the U.S. economy was expanding at a “solid pace,” even though labor markets “generally eased.” The FOMC statement also said, “The committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.” Translated from Fedspeak, “roughly in balance” means that the Fed may start curtailing its rates cuts at its December FOMC meeting and in 2025, depending on what the FOMC “dot plot” says.

Fed Chairman Jerome Powell’s press conference after the FOMC statement was closely scrutinized. In it, Chairman Powell largely stuck to the FOMC’s talking points, but he confirmed that Fed policy was “still restrictive” and the FOMC would be moving to a “neutral” level, implying that the Fed would still cut rates at least one more time. Whether that cut would come in December or in 2025 is not yet clear. Powell also stated that he will not resign if President-elect Trump asked him to step down, saying “no” twice.

Ironically, many of the bond vigilantes who anticipated the Trump win are trading from Europe, where the “Trump trade” was initiated, soon after the Fed’s September rate cut. So, what did Europe see that we couldn’t yet see so clearly in the U.S.?  Primarily, Europe has already seen a dramatic right-wing shift from the farmer protests that were caused by the European Union forcing farmers to comply with the Paris Climate Accord by forcing them to: (1) retire 30% of farmland to its natural state, (2) cull herds of cattle to reduce carbon dioxide, and (3) shift from chemical to organic fertilizers. The primary reason that European farmers protested these measures is that it is hard for them to make money under these rules, as they could not compete against imported crops from countries that did not comply with these strict rules.

Europe (Especially Germany) is Falling into Chaos

While optimism is rising in America, storm clouds have appeared over Europe, especially in Germany, where the German statistics agency, Destatis, announced that industrial production declined 2.5% in September, much worse than economists’ consensus estimate of a 0.9% decline. Furthermore, Germany’s exports declined 1.7% in September, so its trade surplus declined by 17 billion euros ($18.24 billion).

Germany’s chaos is also political, as Chancellor Olaf Scholz’s ruling coalition collapsed on Wednesday after Scholz’s Finance Minister, Christian Lindner, was dismissed, so a snap election is now anticipated, since Lindner’s Free Democrats party has effectively left Germany’s three-party ruling coalition.

Scholz’s SFD party and the Green party now make up the remaining two-party coalition government, but both did poorly in recent regional elections, with only 16% and 10% of the vote, respectively. As a result, Scholz is expected to be ousted as Chancellor after Parliament holds a “no confidence” vote. Scholz favors a new election in March, but leaders in Parliament are now pushing for a January election instead.

Germany’s Green Party has been increasing electricity prices, undermining Germany’s industrial output and global competitiveness, but with a Trump 2.0 administration threatening higher tariffs on Germany’s auto exports – unless they lower their tariffs on U.S. vehicles – German business confidence is sinking.

Another big European economy in trouble is Britain, so the Bank of England cut key interest rates 0.25% last Thursday, the same day our Federal Reserve cut rates by 0.25%. These central bank rate cuts are occurring before new government budgets are drafted and passed. While the U.S. and much of Europe is shifting right, Britain is shifting left, proposing big tax hikes, which may hinder its economic growth.

The EV transition in Europe is also hurting automotive manufacturers, as VW Group is about to shut down manufacturing plants, instituting mass layoffs and pay cuts. As a result, more and more European Union (EU) citizens are questioning EU regulations emanating from Brussels. In Europe, nationalistic right-wing parties have been on the rise, so European bond traders saw the U.S. going through a similar transition and bid up bond rates. Similar to European farmers revolting against EU regulations, Donald Trump was re-elected last week because workers and business owners alike questioned many of the regulations emanating from Washington DC, as well as foreign policy mistakes igniting major wars.

Can Trump Revive the Manufacturing Sector – Plus GDP Growth?

If Trump 2.0 can help the manufacturing sector expand, partly via tariffs against unfair competitors in Europe and Asia and lower interest rates (with the Fed’s help), plus cheaper energy prices – giving the U.S. a natural advantage – then in theory the U.S. should experience a manufacturing boom next year, especially if the natural gas industry booms and helps expand the U.S. utility grid over the next decade.

As a result, I expect that the manufacturing sector will dramatically improve in the upcoming months. Furthermore, a domestic energy boom would also help onshore manufacturing, as well as fuel the AI cloud computing boom. That makes 4% annual GDP growth possible, if manufacturing can recover.

The U.S. manufacturing sector has been in a recession for over two years. The Institute of Supply Management (ISM) recently announced that its manufacturing index declined to 46.5 in October, down from 47.2 in September, as six 11 of the 16 manufacturing industries reported contracting in October. Any index number under 50 connotes contraction, and manufacturing has been contracting since 2022.

Right now, the utility grid needs to double over the next decade – just to meet rising domestic demand, including the extra power to fuel AI and cloud computing. Although Amazon, Google and Microsoft are seeking “zero carbon” sources of electricity, like hydroelectric and nuclear, the fastest and easiest way to expand electricity output is simply to fire up more natural gas turbines to generate electricity.

Since the U.S. is currently flaring a lot of natural gas (like in North Dakota, with no major natural gas pipeline) and allowing methane to leak from capped natural gas wells on federal land (like in the New Mexico Permian Basin), it makes sense to utilize this natural gas that is currently just being wasted.

One other development that is necessary to fuel GDP growth is to resolve the conflicts in the Middle East and Ukraine so that the U.S. and the rest of the world can experience a “peace dividend,” which fueled the Clinton boom in the 1990s. We are already moving toward war’s end in Ukraine. At the recent BRICS Conference in Russia, Vladimir Putin was embarrassed by pressure from China and other BRICS nations to end the war in Ukraine as well as in the Middle East. If the U.S. re-engages a “peace through strength” policy and helps to police the seaways and trade routes, then even 5% annual GDP growth is possible.

In the meantime, the U.S. economy is being powered by a strong service sector. The Institute of Supply Management (ISM) announced on Tuesday that its non-manufacturing (service) index rose to 56.0 in October, up from 54.9 in September, which was well above economists’ consensus estimate of 53.7. This was the fourth straight monthly rise in the ISM service index. The suppliers’ deliveries component surged to 56.4 in October, up from 52.1 in September, which indicates rising backlogs, and 14 of the 16 service industries ISM surveyed reported an expansion in October, up from only 12 industries in September.

Many pundits are predicting a potential rise in inflation due to Trump’s tariff threats, but I recommend that you not worry about U.S. tariffs, which the Biden administration actually increased. Any new tariffs would mostly be designed to try to level the playing field and treat our trading partners like they treat us.

For instance, if the U.S. imposes higher tariffs on Germany and other EU countries that impose high tariffs on U.S. exports, then these trading partners may move their manufacturing to the U.S., since the U.S. has much cheaper electricity and abundant labor. Furthermore, since each state is an innovative economic laboratory, they will compete for this new business, boosting U.S. productivity in the process.

So, essentially, the time has come for investors to stop worrying and hold out some hope!  Thanks to AI, I believe the U.S. is leading a worldwide productivity boom. Unlike the rest of the world, the U.S. is food and energy independent and has several other natural advantages as well. A resurgence in the U.S. energy sector is now likely. The bottom line is that the time has arrived for a “new sheriff” to take over and inspire more innovation without being impeded by government roadblocks. The fact that Elon Musk is willing to lead a federal government efficiency purge is just one indicator of how fast things are changing.

Navellier & Associates owns Microsoft (MSFT), Alphabet Inc. Class A & C (GOOGL), and Amazon (AMZN in some managed accounts. We do not own Volkswagen AG Unsponsored ADR (VWAGY). Louis Navellier and his family own Microsoft (MSFT), via a Navellier managed account, and Amazon (AMZN), in a personal account. He does not personally own Alphabet Inc. Class A & C (GOOGL), or Volkswagen AG Unsponsored ADR (VWAGY).