Richard Drury
Everyone is cutting rates, it seems – even China. At the start of last week, the People’s Bank of China cut its seven-day repo rate to 1.7% for the first cut in a year. This cut follows a Chinese Communist Party (CCP) document upholding President Xi’s plan to put technology at the center of China’s future, while tolerating slower economic growth, near-term. The expectations for more monetary easing in China remain high, so the Chinese yuan is expected to remain weak, which should help boost China’s exports.
On Thursday, the People’s Bank of China followed up by unexpectedly cutting its one-year lending rate by 0.2% to 2.3%, the biggest cut since April 2020. In response, China’s 10-year government bond yields hit a record low of 2.17% on Friday. This tells us that market rates can force central bankers to respond. As in China, lower U.S. market rates will eventually force the Federal Reserve to cut key interest rates.
Due to a slowing economy in Europe, I expect another European Central Bank (ECB) interest rate cut soon. The Eurozone’s S&P Global Purchasing Managers’ Index (PMI) just dropped to 50.1 in July, down from 50.9 in June. Germany’s PMI fell below 50 (the line separating growth from contraction) for the first time in three months, an indication of a contraction in the Eurozone’s biggest economy.
I should add that Germany has experienced extreme flooding, so Porsche (OTCPK:POAHY) announced that its vehicle production would be reduced for several weeks due to parts shortages. In fact, Porsche said that a shortage of aluminum parts could force it to stop production of some models. Also, high electricity prices continue to suppress growth in Europe, especially Southern Europe, which is experiencing an abnormally hot summer.
The U.S. economy is also slowing, giving the Fed reason enough to cut rates this week. Last Thursday, the Commerce Department announced that June durable goods orders plunged 6.6%. That came as a big surprise since economists were expecting a large increase after the previous four months of increases. The culprit was a 20.5% plunge in transportation orders due to weak orders for commercial planes. Excluding the volatile transportation sector, however, durable goods orders rose by a more respectable 0.5% in June.
Turning to the Fed’s favorite inflation indicator, we have even a firmer case for cutting rates now. The Personal Consumption Expenditure (PCE) index rose just 0.1% in June. The core PCE, excluding food and energy, rose 0.2% in June and 2.6% in the past 12 months. All of these numbers are in line with the economists’ consensus expectation, so Treasury yields declined a bit in the wake of the PCE report.
This improvement in the PCE is expected to cause the Fed to at least issue a dovish Federal Market Open Committee (FOMC) statement on July 31st and a key interest rate cut on September 18th – at the least. With the 10-Year Treasury rate at 4.193% and the 2-year at 4.385%, there is no reason to keep the Fed funds rate a full point higher – in a range of 5.25% to 5.50% – for the last full year, since July 26, 2023.
Two major Fed officers – one a former Fed New York President, one a current Chicago Fed President – came out last week in favor of cutting rates sooner rather than later. First, the former New York Fed President Bill Dudley came out on Wednesday with a powerful Bloomberg Opinion article entitled, “I Changed My Mind. The Fed Needs to Cut Rates Now,” in which he said, “The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policymaking (FOMC) meeting.”
Dudley elaborated, saying that, “wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates. But the rest have generally depleted what they managed to save from the government’s huge fiscal transfers, and they’re feeling the impact of higher rates on their credit cards and auto loans. Housing construction has faltered, as elevated borrowing costs undermine the economics of building new apartment complexes. The momentum generated by Biden’s investment initiatives appears to be fading.” Dudley also cited several reasons why the labor market is deteriorating as reasons why the Fed should cut rates at the FOMC meeting on July 31st.
Echoing Dudley, Chicago Fed President Austan Goolsbee said that the June inflation statistics make him more confident that price pressures are easing in a way that supports the Fed lowering key interest rates.
Specifically, Goolsbee said, “You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me.” Goolsbee also asserted that unemployment is higher, new hiring is cooling and delinquencies on certain consumer debts are rising, which argue for rate cuts.
Consumer inflation is cooling off in large part because shelter costs, based on owners’ equivalent rent, finally decelerated to a 0.2% annual pace. Last Tuesday, the National Association of Realtors reported that median home prices are still rising, reaching a median of $426,900 in June, up 4.1% in the past 12 months.
Rising prices tend to limit sales, so existing home sales declined 5.4% in June to an annual pace of 3.89 million. There were 1.32 million homes for sale at the end of June, up 3.1% from May and up a whopping 23.4% from a year ago. The inventory of existing home sales now represents a 4.1-month supply, the highest level in over four years (since May 2020). This should slow home price growth.
Another indicator of slowing home sales is the Commerce Department’s report that new home sales declined 0.6% in June, following a nearly 15% decline in May. Single-family home sales are now running at a 617,000 annual pace. The inventory of unsold new homes has risen to 476,000, which represents a 9.3-month inventory at the current annual sales pace.
This is the largest inventory of new homes for sale since 2008, so some price discounts are anticipated in the upcoming months. The Federal Reserve can obviously provide some welcome relief to buyers and sellers alike with an interest rate cut this week.
The Wall Street Journal recently reported that tenant evictions in the past 18 months are up over 35% in six major urban areas, according to Princeton’s Eviction Lab Research unit. Also, the Philadelphia Fed reported on Thursday that 60-day past due credit card balances rose to 2.6%, up from a low of 1.1% back in 2021. The 30- and 90-day past due amounts are at their highest level since 2012, at 3.56% and 1.89%, respectively. I suspect that these statistics are getting the Fed’s attention, as they cry out for a rate cut.
The auto market is also suffering from repossessions due in part to high interest rates. Cox Automotive reported that vehicle repossessions are up 23% over last year. That is a substantial jump in repossessions and clearly a sign that many families are struggling to make ends meet. High interest rates are suppressing both new and used vehicle sales. Until there is interest rate relief, vehicle sales will be under pressure.
As renter evictions and mortgage defaults rise, the Fed needs to step in and start cutting key interest rates sooner rather than later! Last Wednesday, the Blackstone Mortgage REIT (BXMT) cut its dividend by 24% due to higher defaults, as borrowers struggle to make payments and/or refinance their loans. BXMT had held its quarterly dividend at 62 cents since 2015, but it will now slash its dividend to 47 cents.
The Treasury yield curve is now the least inverted it has been in two years, as a flight to quality has pushed down short and intermediate Treasury yields, so now seems to be the time for the Fed to act.
Most November Votes Come Down to Policy Differences
The upcoming Chicago Democratic National Convention (DNC) could be interesting. President Joe Biden reluctantly announced that he will be stepping down after calls from within the Democratic Party leaders intensified and the polls showed that he could not get re-elected, so Biden endorsed Kamala Harris as his replacement.
The Harris campaign quickly announced that they have a majority of delegates to secure the nomination, but 400+ Super Delegates have more voting power at the DNC, so if Harris polls turn sour by mid-August, it remains uncertain whether or not she will win over the powerful DNC Super Delegates.
A case in point happened when Israeli Prime Minister Benjamin Netanyahu addressed Congress last Wednesday, but no one from the Biden Administration was present to greet him. Since Israel is the most important U.S. ally in the Middle East, the absence of Kamala Harris could hurt her with Jewish voters.
Thanks to Trump’s selection of J.D. Vance as Vice President and Elon Musk’s endorsement, Silicon Valley is warming up to the Trump/Vance ticket after overwhelmingly supporting Democrat candidates in recent election cycles.
The fact that Vance worked for some Silicon Valley elites like Peter Thiel helps, as does the fact that the Trump Administration did not aggressively sue big technology companies, which the Biden Administration is now doing. Even Mark Zuckerberg, who helped finance Biden’s 2020 victory, said that Donald Trump’s immediate reaction after being shot was “badass” and inspiring.
The energy sector is one of the biggest divides between Kamala Harris and Donald Trump. Unleashing the U.S. energy sector is expected to mark the first 90 days of a new Trump Administration. Part of their policy differences involves Trump freeing up fossil fuel exploration vs. Harris’s over-emphasis on green sources. Another factor is ending the wars in Ukraine and the Middle East, freeing up those energy areas.
Russian oil exports from its two main ports of Primorsk and Ust-Luga have declined 41% in the past month. These Russian cuts may be an attempt to comply with recent OPEC+ production cuts. However, Russian crude oil exports have fallen 620,000 barrels per day since April and are now running at the slowest pace in seven months.
Britain recently sanctioned tankers that move oil from Russia, including some that are part of its “shadow fleet.” As a result, over 60 tankers that carry Russian crude are now sanctioned. These new sanctions have caused refineries in India to refuse deliveries of Russian crude oil.
Candidate Trump wants to end Biden’s electric vehicle (EV) mandate, partly to save Detroit’s Big 3, which have struggled to make money on EVs. The on-shoring of battery plants has also stalled, especially since there is a glut of cheap LFP batteries from China.
LG Energy Solution is slowing the construction of its third battery plant with GM (GM) in Michigan. Specifically, Bloomberg reported that LG Energy Solution sent a text message that said it is “adjusting the speed of overall investment” and “seeking ways for the flexible operation” of its battery plants.
Also notable is that SK On, which is South Korea’s third largest battery manufacturer and a supplier to Ford and Hyundai, declared a substantial quarterly loss. SK On has two battery plants in Georgia in conjunction with a joint venture with Hyundai (OTCPK:HYMTF), plus it had plans to build three more battery plants with Ford (F) in Kentucky and Tennessee.
Since the money to build these plants will utilize funds from Biden Administration subsidies, I suspect that due to a global battery glut and the probability of a Trump victory this year, SK On will not build these additional battery plants in the U.S.
Speaking of EVs, Tesla (TSLA) announced its second-quarter results on Tuesday. Even though its sales were better than analyst expectations, the company missed analyst estimates by 16.1%, its fourth straight quarterly miss.
CEO Elon Musk told analysts on a conference call that new competitors “have discounted their EVs very substantially, which has made it a bit more difficult for Tesla.” Interestingly, Tesla posted record regulatory tax credits of $890 million last quarter, which is nearly triple what these tax credits were a year ago.
Finally, Tesla said that it was on track to produce new vehicles, including more affordable models, in the first half of 2025. In the end, Tesla stock was hindered by another delay in the Robotaxi and concerns about the competitiveness of its new low-cost EVs in 2025. Last week, I wrote an article and commented on this “Elon Musk has his Mojo back. Tesla needs some of that in its earnings.”
In conclusion, the stock market still has a lot of momentum from the strongest earnings for the S&P 500 in over two years, plus improving market breadth. If I were running the Fed, I would cut key interest rates on July 31st and also on September 18th.
However, the Fed will most likely issue a dovish FOMC statement, in order to set up an impending key interest rate cut on September 18th. After the November Presidential election, I expect another Fed rate cut on November 7th. These key interest rate cuts will essentially represent a “turbo boost” for the overall the stock market, to propel it significantly higher.
If Trump scores an overwhelming electoral college victory, he will have a pro-business mandate that should help the stock market surge in anticipation of robust economic growth in 2025 and beyond.
Navellier & Associates, a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Ford Motor Co. (F), General Motors (GM), or Hyundai (HYMTF). Louis Navellier and his family do not own Ford Motor Co. (F), Tesla (TSLA), Hyundai (HYMTF), or General Motors (GM), personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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