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Fed Chairman Jerome Powell met with President Joe Biden and Treasury Secretary Janet Yellen at the White House on Tuesday. Although the executive branch is not supposed to influence the Fed, President Biden is obviously looking for some good news on inflation. Due to a strong U.S. dollar, U.S. inflation may have peaked in March or April, but prices have obviously not declined enough. As we are entering peak U.S. summer driving season, I do not expect we’ll see any energy price relief until after Labor Day.
Clearly, President Biden is looking for someone to blame for inflation, and after the Tuesday White House meeting, it looks like Treasury Secretary Yellen drew the short straw, since she did a media tour and took full responsibility for surging inflation. Specifically, Yellen said, “I think I was wrong about the path that inflation would take.” Yellen further said on a CNN interview, “As I mentioned, there have been unanticipated and large shocks to the economy that boosted energy and food prices, and supply bottlenecks, that have affected our economy badly that I, at the time, didn’t fully understand.”
The good news is that President Biden said that tackling inflation is his “top domestic policy.” The bad news is that the burden of fighting inflation falls mostly on the Fed raising key interest rates, which could depreciate asset values like homes and stock prices. The Biden Administration likes to say that inflation is a worldwide problem, but so far, he has refused to significantly boost domestic energy production, even though he allows drilling activity in marginal fields that need higher crude energy prices to be profitable.
Why European Inflation is Soaring Even More Than in America
European inflation soared to a record high annual rate of 8.1% in the eurozone in May, up from a 7.4% annual pace in April. A weak euro is one of the primary culprits. The other is the soaring cost of energy, as the European Union (EU) is still trying to wean itself off Russian energy by the end of the year.
Although a couple of EU countries close to Russia – namely Hungary and Slovakia – want extra time to switch their oil refineries away from heavy Russian crude oil, the biggest economies in the EU are cutting their Russian ties after decades of promises. Interestingly, the EU is also planning to ban insurance on EU ships that transport Russia crude oil, which triggered comments from Cyprus, Greece, and Malta.
On Thursday, Saudi Arabia said that it is ready to produce more crude oil if Russian output declines under the EU ban. Before the invasion of Ukraine, Russia accounted for approximately 10% of global crude oil production. Furthermore, Saudi Arabia, the United Arab Emirates (UAE), and other OPEC members on Thursday agreed to boost crude oil production by 650,000 barrels per day in July and August, well above its previous plan to add about 400,000 barrels per day. This increase for two months during the peak summer driving season may not impact crude oil prices by very much, but every little bit helps.
Some nations are using a third party to buy Russian oil. India is a major buyer of Russian crude oil and is boosting its refining capacity. India is essentially positioning itself to become a major exporter of refined crude oil products, but it’s still Russian oil, one step removed. Whether or not the EU can import oil refined in India to circumvent the EU ban on Russian crude oil remains uncertain. In the meantime, Saudi Arabia and other OPEC members are trying to make sure that the EU will not run out of crude oil.
The “ESG” Double Standard on Solar Panels vs. Fossil Fuels
The Commerce Department has been conducting an investigation into solar panel imports that could lead to heavy tariffs on Chinese solar panels. As of late Sunday night, the Biden Administration said they will not lay tariffs on Chinese solar panels, but I feel they must be very careful in their promotion of “green energy” or else the world will discover the dirty secret of China’s Uyghur slaves making these panels.
A related problem is that the ESG (Environmental, Social and Governance) investment standards are controversial and changing so fast that they hardly make sense anymore. Tesla (TSLA) was recently booted from the S&P 500 Global ESG index for what? Making electric cars and batteries to run them? But solar panels made by Uyghur slave laborers seem to be acceptable! There is no way that the Biden Administration can promote solar energy until new international suppliers and the fledging domestic production of solar panels picks up. I should add that California and Hawaii both mandate solar energy on new home construction, but they have been largely silent on the fact that the vast majority of solar panels are made with Uyghur forced labor. ESG standards are very baffling to me and tend to give me “brain freeze”!
Speaking of Tesla, Elon Musk told his top managers at Tesla in an e-mail on Thursday that he has “super bad feelings” about the economy, and, because of that, they need to cut their staff by about 10%. Earlier, on Tuesday, Musk demanded that all Tesla employees must work at least 40 hours per week at the office and cease remote working at home, so it is possible that he wants to use that office mandate as a test to flush out the Tesla workers that are unwilling to go back to working at the office full-time.
Musk’s Thursday e-mail was titled “pause all hiring worldwide.” Considering that Tesla has new plants in Austin and Berlin that are not operating at full capacity, plus a record order backlog, any hiring freeze at this time seems a bit contradictory, especially after Ford (F) announced on Thursday that it was adding 6,200 new workers in Michigan, Missouri, and Ohio to boost its electric vehicle (EV) production. Perhaps Tesla is continuing to have acute supply problems (especially from its Chinese suppliers), plus the high cost of lithium, nickel, and cobalt for batteries, which may partially explain Musk’s “super bad feeling.”
Jobs Continue to Grow Rapidly – Averaging Over 400,000 Per Month (Since March)
In contradiction to Musk’s Thursday memo to “pause all hiring worldwide,” the Labor Department on Friday announced that 390,000 payroll jobs were created in May, well above the economists’ consensus estimate of 328,000. The unemployment rate remained unchanged at 3.6%, which is historically in the super-low “full employment” range. Average hourly earnings in May rose 10-cents (+0.3%) to $31.95 per hour. In the past 12 months through May 31, average hourly earnings rose 5.2%, down from 5.5% in April, while the Labor Force Participation rate rose slightly to 62.3%, up from 62.2% in April.
Updating past monthly data, the March payroll report was revised down to 398,000 from 428,000 jobs previously estimated), while the April total was revised up to 436,000 (from 428,000 previously), so there was a net downward revision of 22,000 jobs in the previous two months. That still yields an average gain of 408,000 jobs per month from March through May. What I found most notable in the May jobs report was that leisure and hospitality added 80,000 jobs, while transportation and warehousing added 47,000.
In other good news, consumer confidence was higher than most economists had estimated. Last Tuesday, the Conference Board announced that its consumer confidence index declined only slightly, to 106.4 in May, from a revised 108.6 in April. The “present situation” component declined to 149.6 in May from 152.9 in April, due primarily to a tightening labor market, and the “expectations” component declined to 77, from 79 in April. Also, consumers bought fewer big-ticket items like cars, homes, or large appliances.
Interestingly, home price appreciation has not yet started to slow, according to the S&P CoreLogic Case-Shiller National Home Price Index, which announced on Tuesday that home price appreciation slowed to a still-torrid +20.6% rate in the past 12 months, as of March 31. Tampa passed Phoenix to score the top home appreciation rate, at +34.8%, while Phoenix posted the second-fastest home appreciation at 32.4%.
On Wednesday, the Institute of Supply Management (ISM) announced that its manufacturing index improved to 56.1 in May, up from 55.4 in April. This came as a big surprise, since economists were expecting a decline to 54.5. The new orders component rose to 55.1 in May (up from 53.5 in April) and the production component rose to 54.2 (up from 53.6 in April). The fact that manufacturing activity is resurging bodes well for second-quarter GDP, but the Atlanta Fed on Wednesday reduced its estimate for second-quarter GDP growth to a +1.3% annual rate, down from its previous estimate of a +1.9% pace.
On Friday, ISM dropped the “other shoe,” when the Institute of Supply Management (ISM) announced that its non-manufacturing (service) index, representing far more jobs than manufacturing, slipped to 55.9 in May, down from 57.1 in April. Although this is the lowest reading in 15 months, any reading above 50 signals an expansion, and fully 14 of the 17 service industries they surveyed reported expanding in May.
Finally, the Labor Department on Thursday announced that its weekly unemployment claims declined to 200,000 in the latest week, compared to a revised 211,000 in the previous week. Continuing unemployment claims declined to 1.309 million, compared to a revised 1.343 million in the previous week, meaning that continuing unemployment claims are now running at their lowest pace since 1969!
Combined with the Friday jobs report, this weekly jobless claim report shows that almost anyone who wants a job can find one. That’s why I’m mystified at the low numbers on the ADP private payroll jobs report. On Thursday, ADP announced that only 128,000 private payroll jobs were created in May, well below economists’ consensus estimate of 299,000. This represents the smallest monthly gain since the pandemic began. Especially alarming is that small businesses with fewer than 50 employees lost 91,000 payroll jobs (78,000 of these jobs were with small businesses with less than 20 employees). The April ADP private payroll report was also revised lower, down to 202,000 jobs, vs. the 247,000 previously estimated. I’m beginning to wonder if this report is lagging in data retrieval, since more small businesses are now hiring.
Navellier & Associates owns Ford Motor Company (F), a few clients own Tesla (TSLA), per client request in managed accounts. Louie Navellier and his family personally own Ford Motor Company (F), via a Navellier managed account, but do not own Tesla (TSLA).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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