Rising inflation pressure globally and decent economic growth are making it harder for the Fed to reduce interest rates. Investors have an expectation that the first of three 25 BP cuts will occur in June. With the rise in crude prices to US$82/b (nearly US$12/b over the last two months) and gasoline prices having risen to US$4.00/gal (from US$3.00 gal earlier this year), we expect that the Fed will be boxed in and will not lower rates in June and maybe even not this year.

Mixed economic data in the US continues with some data showing a slowing economy but others indicating inflation reversings to the upside. This stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance.

• One of the crown jewels of the FAANG’s and related names and of AI stocks has been TESLA. The stock rose to US$265 in late 2023 and in mid-March fell to US$160 per share or down by nearly 40% as sales and production fell sharply in China and Germany as they started to have production problems due to supply chain issues. The most serious problem is the sales collapse in China as their local competitors come out with new models at cheaper price points and longer ranges.
• Apple, another market darling, has fallen in price from US$199.37 in Dec 2023 to $168.49 or down by over 15% as they saw sales in the important China market fall 33% in February 2024 as China directs buyers to Chinese manufacturers. Apple phones are no longer allowed at government buildings and government owned companies. With little new exciting products for tech mavens, Apple may have lost its luster. A breach of US$167 per share could drive it down to US$123 per share, the low of early 2023.
• Fed watchers are now waiting to see if the Fed holds rates steady to the mixed inflation data and the unwillingness to interfere during an election year but they may decide to slow their QR efforts of selling bonds and mortgages and draining the economy of liquidity. A deceleration in the pace of QT would be seen as a stimulus by market bulls.
• The Swiss National Bank cut its key rate by 25 BP to 1.5%. This was done not for inflation or economic issues but due to the rapid strength of the franc. The franc has risen 10% against the US dollar this year.
• Retail entities are seeing lower demand for high end products around the world as the squeeze on household spending worsens. Lululemon fell 12% last week on the day they announced lower net revenue and EPS for their first quarter. Gucci had an even worse sales drop from its key Asian markets.
• Observers of the US Labour market are noting that in the February jobs data, that average weekly hours in manufacturing fell and are declining at a fast pace. Historically companies have cut hours first and then cut the bodies. If this continues with the March data out next Friday then we may not be heading to a soft landing but a recession.
• Core US Durable Goods Orders rose 0.5% in February (forecast 0.4%) as auto sales were strong on markdowns by manufacturers.
• Speculative juices remain for the US markets as Bitcoin rose to over US$73,800 a coin and option markets are seeing record buying of short term call options on favored stocks (mainly AI related).
• US Corporate profits for Q1/24 start in a few weeks and if they disappoint or have negative guidance then the market bubble could burst.

On the wars front:

• Ukraine used more drones to attack additional Russian energy infrastructure (four key refineries in western Russia, nine in total affecting 11% of their refining capacity). This has impacted Russia’s exports by over 500,000 b/d and Russia has now banned sales outside Russia as they need all the supplies for the domestic market and don’t want their consumers to see a big price rise.
• Russia is planning for a large spring offensive as it is creating two new large armies before the end of 2024. This may be to counter NATO or for more offensive in Ukraine if Trump wins the US Presidential election.
• Russia in return is sending massive waves of missiles and drones to knock out the electrical system in Ukraine amidst the ongoing cold winter weather. Quite the tit for tat! Some of the attacks are hitting Kiev and Lvov, two major population centers. The largest hydroelectric plant at Dnieper has been shut down as a result of these attacks.
• Russia is supplying crude and products from eastern Russia to North Korea in trade for artillery shells and munitions. Thousands of North Koreans are now building kits for Russia. In return North Korea is getting food and basic supplies that they need; all in contravention of UN sanctions.
• The US is now pressuring Ukraine to end these refinery strikes as they worry about rising energy prices in the US just before their Presidential election.
• China has become more aggressive in its back yard against Taiwan and the Philippines as it wants more territory. China has increased its defense spending by 16% to US$223B. They added 4000 fighter aircraft, more landing craft and 20 more warships so that their navy exceeds that of the US. They have stated that reunification of Taiwan will happen quicker and they are gaming different approaches that force Taiwan to react. A maritime blockade and air blockade are the most talked about.
• The US has now stationed US marines on Kinmen island just 1 mile from the China mainland. The island, a military outpost for the South Korean military, is being expanded with US help. How would the US feel if China or Russia stationed troops and offensive weapons in Cuba or Venezuela? There was almost a WW in October 1962, which was averted when Russian President Kruschev blinked and withdrew the weapons and manpower. This situation is more dangerous, and China is feeling threatened directly on its border by the US.
• The US military is overstretched and undermanned. It has military bases in 80 different countries and troops stationed in 178 different countries.
• If the US were to broker a ceasefire and hostage release in the coming weeks we could see the crude war premium shrink US$6-9/b.