The Eurozone just entered a recession as the region posted two consecutive quarters of negative economic growth. The manner in which it entered a recession is a bit quirky. GDP shrank by 0.1% in the first quarter of 2023. But, it was a revision from positive to negative growth in the fourth quarter of 2022, which triggered the recession. Further confirming the weakness, Germany, the Eurozone’s largest economy, shrunk by 0.3% in the most recent quarter. That follows a 0.5% decline in the fourth quarter of 2022. Regardless of the revision and debates about whether or not the Eurozone is an official recession, economic growth in the Eurozone is stagnant.
The ECB has been combatting stronger and more persistent inflation than in the United States, as shown below. Further, the region is more negatively affected by the Russian-Urkainian conflict. Despite the two-quarters of negative GDP growth and the possibility the Eurozone is in a recession, the ECB will have to keep a hawkish monetary policy due to inflation. Monetary policy is not an effective economic tool when inflation is high. Hence, more economic pain may occur before the ECB can lower rates.
What To Watch Today
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Economy
Market Trading Update
The rotation into out-of-favor stocks halted yesterday, with the major technology stocks again picking up the inflows. Such is unsurprising as many investors that missed the runup are now looking for any investment opportunity. However, as shown below, the tech-heavy Nasdaq is still overbought and extended, and more of a correction is needed short-term to set the stage for a further advance. Be patient for now, as an opportunity to “buy the dip” will likely present itself sooner than later.
As shown, the QQQs are trading 3-standard deviations above the 50-DMA, and the MACD buy signal is beginning to weaken from a very elevated level. The three previous similar instances have led to a short-term correction that provided a better entry point for the next run higher.
Jobless Claims Stair Step Higher
In the latest week, initial jobless claims jumped to 261k from 235k. Claims have been rising in a stair-step fashion for the last nine months. They bottomed at 181k in September 2022, grew to 200-220k afterward, and plateaued in that range for a few months. Claims then jumped again to 230-250k in March and stayed rangebound at the higher level. The latest increase appears to be another step higher. This indicator is the only real-time employment gauge, so any changes from recent ranges should be followed.
The graph below shows that claims are up about 35% over the last six months. Similar changes preceded each of the previous eight recessions. However, claims come from a historically low level which skews the percentage change upward. Is this time different from other periods?
Warren Buffett Loves Accumulating OXY Below $65
The graph below charting Occidental Petroleum (OXY) shows the stock has languished over the last year. The circled Ps on the graph represent each price point that Warren Buffett and Berkshire Hathaway bought OXY. On May 19, 2023, Berkshire purchased 3.5 million shares of OXY, which brings the company’s total ownership of OXY to nearly 25%. At the latest Berkshire meeting, Buffett said they are not looking for control of the company.
In addition to its traditional energy assets, Warren Buffett likes that OXY is an industry leader in carbon capture technology. Captured carbon can be used for its chemical production plants, which account for about 20% of OXY’s revenue. They also benefit from selling the associated carbon dioxide removal tax credits. Warren Buffett is a long-term investor and likely not phased by the stock’s recent performance. He likely sees the lower price as an excellent opportunity to buy OXY shares at what he considers a cheap valuation.
Heavy Weight Truck Sales Defy Recession Calls
Prior, we discussed how the jump in jobless claims is on par with prior increases that preceded recessions. Now we present another good leading economic indicator that defies other leading indicators. Heavy weight truck sales continue to increase. This leading recession indicator tends to peak about a year before recessions, yet it is still rising and stands at historically high levels. The important caveat to this data point is inflation. How much of the uptick in sales is a function of higher heavy weight truck prices versus the sales volume? For example, retail sales year over year is down over 4% adjusted for inflation yet up half percent nominally.
