Last Tuesday, Fed Chairman Jerome Powell said in his Senate appearance that he was encouraged by evidence of cooler inflation and that more “good data” would help get the Fed to where it wants to be. Specifically, Powell said that the inflation numbers “have shown some modest further progress” after some hotter readings in the first quarter, “and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.”
Powell also said the environment for rate cuts is approaching and said that the job market is also slowing down and attracting more attention from policy-makers.
Interestingly, Powell also said that “the most recent labor market data sent a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago,” adding that, “this is no longer an overheated economy.” After that, we all awaited the latest official inflation data.
On Thursday, the Labor Department reported that the Consumer Price Index (CPI) declined by -0.1% in June and rose 3% in the past 12 months. This was the first monthly decline for the CPI since May 2020. The core CPI, excluding food and energy, rose 0.1% (actually 0.065%, or just 0.8% annualized) in June, and 3.3% in the past 12 months.
The CPI and core CPI were substantially below economists’ consensus estimates of 0.1% and 0.2%, respectively. Food prices rose 0.2% and energy prices declined 2% in June. Even shelter costs, the stickiest point in the CPI, rose only 0.2% in June, the smallest monthly increase since 2021. This was a stunningly positive CPI report that caused Treasury yields to decline significantly.
Friday’s Producer Price Index (PPI) rose 0.2% in June and 2.6% in the past 12 months. Economists were expecting only a 0.1% increase in the June PPI, so this was a disappointment. The core PPI, excluding food, energy and trade margins, was unchanged in June and rose 3.1% in the past 12 months. The good news is that wholesale goods prices declined -0.2% in June after plunging -1.4% in May.
A strong U.S. dollar continues to put downward pressure on wholesale goods prices. Another good sign is that Treasury bond yields did not rise in the wake of the PPI report, so a Fed rate cut on September 18th is likely. However, if I were running the Fed, I would cut key interest rates at the July 31st FOMC meeting.
On Friday, The Wall Street Journal’s Heard on the Street column was titled, “It’s Time for the Fed to End the Waiting Game.” The Journal said that the “reasons to wait until September are mostly procedural, not economic.” I mentioned on Fox Business with Maria Bartiromo on Friday that the Fed follows market rates, so as Treasury yields decline, the Fed will have to cut rates just to catch up with market rates.
The Market Senses More Certainty Coming with a Trump Win
Wall Street hates uncertainty and, fortunately, everything is all of a sudden now much more certain, with a likely Trump win. We also know that the Fed will be following other major central banks if it starts cutting key interest rates no later than September 18th.
Under Trump, current and future U.S. tax cuts are also expected to improve the “velocity of money,” which is how fast money is changing hands. The U.S. dollar has also been amazingly strong, since the U.S. is expected to lead a worldwide economic recovery.
In addition, during the first Presidential debate, Trump also said that he would end the fighting between Russia and Ukraine. In fact, Hungarian President Viktor Orban, who is the new EU President, has already met with Vladimir Putin in an attempt to set the foundation of a cease-fire and eventual peace agreement.
The populist wave in Europe that reshuffled the European Commission is now seeking lower food and energy prices, as well as an end to a seemingly endless war in Europe. This would boost economic growth.
A strong U.S. dollar can hinder multinational companies like the big stocks that dominate the S&P 500, however smaller, more domestic companies are poised to prosper! Expectations for second quarter earnings remain very high, with 8.8% forecasted annual earnings growth for the S&P 500. I should add that these are the highest forecasted earnings growth since the first quarter of 2022.
Although the stock market got narrower in the second quarter, it is expected to broaden in the upcoming months, especially after the Fed starts cutting key interest rates. These Fed cuts are essentially the “turbo boost” that the stock market has been waiting for.
The historical pattern in a Presidential election year is that the stock market rallies right up to the election. Immediately after the election, if a President-elect Trump can get Russia to agree to a cease fire, the world will celebrate, since over 700,000 have been killed in a seemingly senseless war that has devastated Ukraine.
Before the conflict started, former British Prime Minister Boris Johnson talked Ukrainian President Zelensky out of signing a peace agreement with Russia. At that time, both French President Macron and President Joe Biden sided with Boris Johnson.
But now, all three Western leaders that encouraged Ukraine to fight Russia have suffered political setbacks and can no longer aid Ukraine like they have in the past. As a result, Zelensky is working on a “comprehensive plan” for how he believes the war with Russia should end and has been reaching out to presumed winner Donald Trump. Due to all these developments, I expect more peace and prosperity in 2025. The stock market is now sensing that these positive events will unfold in the upcoming months!
Russia’s energy exports in the first week of July slumped by almost one million barrels per day to 2.67 million per day – the lowest weekly crude oil shipments since January when storms disrupted shipping.
The four-week moving average of Russian crude oil shipments also dropped by 215,000 barrels to 3.27 million per day, which is the lowest level in 20 weeks. It remains unknown whether or not the Ukrainian attacks on Russia’s energy infrastructure are impacting its exports. In the meantime, Hurricane Beryl left well over two million people without electricity, so U.S. energy production has definitely been disrupted.
The NATO meeting in Washington, D.C. last week reinforced more military aid to Ukraine. However, in the wake of a Russian missile hitting a children’s hospital in Kiev, there is now no open effort to seek a ceasefire. Obviously, Putin can wait longer than NATO, but the economic pressure on Russia, especially if its energy exports remain low, may mount.
The other reason that the NATO meeting is being watched is that the world is wondering whether or not Biden has any new senior moments. Unfortunately, on Thursday evening, President Biden referred to Ukrainian President Volodymyr Zelensky as “President Putin.” Ouch!
Overall, a series of positive economic and worldwide events are expected to boost business, consumer and investor confidence in the upcoming months. First, due to weak economic news, inflation is expected to finally approach the Fed’s 2% annual target.
Second, the Fed will follow market rates and other central banks and cut key interest rates no later than September 18th. Third, the Democratic National Convention (DNC) in Chicago this summer should be fascinating due to all the infighting over Biden’s mental state.
Despite this chaos, America remains food and energy independent, has better demographics for organic growth and is naturally optimistic. The big populist shifts in Europe have similar roots to the American political shifts, since it is fueled by people that want law and order, lower food and energy prices, an end to seemingly endless wars, as well as hope for a better future.
I, for one, am excited about the future, and I am excited to see positive changes unfold in the upcoming months and years. Naturally, our fundamentally superior stocks are poised to benefit from these positive developments.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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