Inflation pressure persists in the US leaving the Fed little room to lower rates at the coming meetings. Insurance, housing, food, electricity costs are all making consumers less able to afford what would have been considered basics. Going to McDonald’s, Starbucks, Pizza Hut or KFC with the family is now more expensive. Consumers are frustrated by the higher prices and they now eat there less often. These stocks have all been hit as consumers hold back spending due to their budget squeeze. Household savings are lower now than in 2008 and are at a miniscule 2% level.

Some of the new data points that are concerning include:

• Unit Labour costs rose 4.7% in Q1/24 (the most in a year) and were much higher than the 0.4% in Q4/23. Non-Farm Productivity fell to a meak 0.3% way below the  3.5% of Q4/23.
• The April NonFarm Payroll report showed a rise of 175K new jobs but was below the forecast of 210K. Average hourly earnings rose 3.9%, a too hot number for the Fed. The Unemployment rate rose to 3.9% from 3.8% as more people tried to enter the workforce. Think ‘undocumented illegal immigrants’ able to find work under Biden administration approvals. All the job gains appear to have been in part-time employment. Foreign born workers are taking the jobs that are out there but data shows that total Americans unemployment hit a new high.
• Powell said he ‘doesn’t see the stag or the flation’ in US data but the US Treasury Secretary uses the stagflation word regularly.
• Debt issuance by the Treasury will be over US$2T this year and crowding out is likely. Bond vigilantes will want yields over inflation so future data will be watched carefully and bonds can move quickly to new data points. China and Japan, the largest holders of US debt are now sellers as they need the funds to stabilize their own currencies and now buy gold as their reserve backstop. They want to get away from unrelenting deficit spending and who will govern after the upcoming Presidential election.
• Debt fueled spending continues in the US with school loan forgiveness by the President (to get youth votes in November) and “pork” in the recent budget deal (by both parties to get votes).
• Defense spending (war spending) is holding back consumer weakness. War economies with the resultant inflation pressure (in those sectors) are occurring in the US, the UK, Russia, Iran, China, Israel, North Korea and Taiwan.
• Cynics of US government data criticize how they calculate CPI as they have multiple times in the last four years changed the inputs to artificially lower the reported inflation. What do you see as your personal inflation? Do you buy into inflation being under 4%?
• The Fed, under pressure from the Treasury that is finding it harder to find buyers for its record funding this year, has agreed to lower its quantitative tightening by letting its books fall by US$25B of Treasuries versus US$60B monthly beginning in June.

On the wars front:

• The US is pushing for a ceasefire in Gaza accompanied by the release of hostages. Hamas was to offer 40 against multiples from Israel but now they only want to release 33 and some of those will be of bodies that died under their control. For this Hamas wants a permanent ceasefire. Israel wants live hostages released as well as the bodies of the fallen and no permanent ceasefire.
• President Biden to increase the pressure on Israel has paused a shipment of 3,500 bombs that they expected Israel to use in its move to destroy Hamas in Rafah.
• Providing support for Palestinian civilians has been haphazard and less than needed. Those in the Rafah area are now caught up in a war zone with no easy escape to a safe zone. Gazans have been denied refuge in Egypt.
• Russia is drilling troops near Ukraine for the use of battlefield nuclear weapons in response to NATO countries talking of sending their troops into Ukraine to fight Russia. France and Poland have said they are considering such an option. If NATO wants WWIII then this move would start a conflagration. It is appearing like the neocon warmongers in the west want the war in Europe to spread to change the narrative from deficit spending and the immigrant crisis to fighting the Russian bear.
• The US has given Ukraine more offensive weapons to hit Russia and Crimea. New Army Tactical Missile Systems (ATAMS) with a 200 mile range. Biden is now providing weapons to Ukraine to hit farther into Russia. The first batch of F-16 jets are expected within weeks.

Market Update: The general stock market correction is underway. The Dow Jones Industrials Index peaked in late March at 39,900 and has fallen to 38,923 as we write this report. Our target of 36,000, that we have been writing about for some time, is within reach during this quarter. Having cash and underweight the MEME names (FAANG’s and AI stocks) has helped to not lose as much as the major index.

Energy stocks peaked in early April as crude reached its high of US$88/b on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A modest correction should occur and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to 296. A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% two weeks ago. The recent weakness has pulled this Index down to 78% today. Over 90% is an overbought reading. It  should decline below 20% to give off an oversold level and a BUY window once again.